By Jason Deign
In an exclusive Q&A, Bo Palmgren of Danske Commodities talks about energy trading in Europe… and how the German market is leading the way.
Intraday trading is on the rise across Europe as providers of renewable energy sources (RES) switch from subsidised rates to free market opportunities. The trend is good news for beleaguered transmission system operators (TSOs), but not everyone is getting the full benefit. As Bo Palmgren, Head of Intraday at Danske Commodities and speaker at the upcoming Solar Asset Management Europe this October, explains in this exclusive interview, there is still a way to go for all European markets to provide optimum trading conditions. But at least a number are showing the way to go.
Q: How does renewable energy trading work in Europe?
Balancing power supply and demand had become more and more challenging for TSOs across Europe, and the growing penetration of RES in the electricity mix requires a fundamental rethinking of the market design. In order to improve the efficiency of the system, RES producers in many countries have been asked to take direct responsibility for the interaction of their plant with the grid, making the role of traders fundamental to help them manage the operational risk of these assets. We can say that traders offering scheduling services to renewable plants in Europe have gone far beyond traditional trading activities.
Regardless the specific market of operation, balancing a renewable portfolio means having a strong focus in collecting and analysing meteorological and market data to constantly update production forecasts and do risk assessment 24/7, all year long. Adjustments to production forecasts are made through a continuous buying and selling of power in the domestic market and possibly in other European countries. Even though IT systems and models are still the core tool of trading houses, it is now quite normal to meet meteorologists at trading desks to assist the decision making. For example at Danske Commodities, with one of the biggest intraday trading teams in Europe, we have two.
Q: What are the regulatory and market conditions that need to be in place for renewables energy trading to work effectively?
The ideal market for energy trading has the following characteristics:
A regulation that allows RES producers to directly or indirectly benefit of taking responsibility of the production of their assets.
Liquid and continuous intraday markets with market closure times very close to the physical delivery.
Stable regulatory frameworks in the mid-term, to regulate a constantly evolving market.
"In the German market, where the combination of these elements happened in ‘a perfect storm’ of policy implementation and market redesign, we have witnessed over 90% of wind producers and most large solar producers have switched to the liberalised market in three years."
Q: Which are the main markets for renewable energy trading in Europe, and why?
The need for traders to assist RES producers in the balancing of their assets has increasingly moved from Northern Europe to Southern markets, with Germany still being by far the key hub for renewable trading in Europe at the moment. From 2011, while the share of renewables in the German power mix has risen from less than 15% to 25%, generating extreme volatility in the energy market, the liberalisation of renewable trading has actually brought to a decrease of volumes needed in the reserve market.
"For those unfamiliar with the subject, this means that the increased volatility brought by non-predictable energy sources has been absorbed by the liberalised market, increasing the efficiency of the whole system."
This also means that large price spikes in Germany are now less frequent than they were a few years ago, reflecting an increased “maturity” of the market deriving from the expanded number of participants and market liquidity. As it often happens in the European energy sector, many other markets have been learning from the German experience, extending the interest for renewable energy trading products to other countries such as UK and Italy. In particular, the latter currently offers many opportunities to solar and wind producers that starting from last January were called to be responsible for the balancing of their plants.
Q: How do you see renewable energy trading evolving in Europe in the future?
The surge in renewables has transformed European power trading and we will continue to see more volumes being traded closer to physical delivery. Power exchanges have so far not succeed to establish a joint trading platform for intraday trading for Europe, this will however happened within the next few years. Thereby liquidity will rise outside Germany and offer even more opportunities for RES. Five power exchanges and 12 TSOs are working to create a joint intraday system for the whole of Europe, which will possibly be in place in 2017.
Q: Based on your pan-European presence, what challenges you expect for renewable producers in the years to come?
While many challenges are very much country specific, for example the introduction of negative prices in the Italian market starting in 2016, we can say that we expect more responsibility to be shifted from TSOs and, more in general, regulated actors towards renewable producers. A good example of this is the ‘market-based curtailment’ system for RES plants. This means that due to negative prices, a renewable producer or the energy trader on his behalf is allowed to voluntarily curtail the plant when the price for injecting the energy in the grid is higher than the subsidy they expect to receive for that amount of energy. Another general trend concerns long-term agreements: photovoltaic targets for reaching market parity in the next years will increase the need from financing institutions to ask traders for longer-term power-purchase agreements in order to assure the bankability of the projects.
· Renewable energy trading will be one of the topics under discussion at the Solar Asset Management Europe event this October in Milan, Italy. Register now and join 300+ investors, project developers, EPCs, AM and O&M managers and other solar stakeholders gathering in Milan this October.