How to analyse spot market prices for energy costs

How to analyse spot market prices for energy costs 

As energy trading matures with the upgrading of the grid, for example the integration of renewable energy, new methods of trading energy are emerging, and one of these is the spot market. But what is the spot market in energy trading? Spot trading is electricity sold a day ahead or on the day that it’s purchased, closer to the time it’s to be used. They utilise a marginal cost pricing system and are often used to set prices in long-term contracts. They contrast with markets such as future markets in the sense that future markets set delivery dates and prices for future transactions, rather than close to the day that’s being used. 

Why spot market prices matter for energy cost management 

Spot prices matter because they can also help businesses become more stable based on expected energy price rises and procurement risk management. 

Direct impact on short-term procurement costs 

Spot markets are good for those looking to impact short-term purchasing costs regarding energy, as they may be able to secure cheaper deals on energy closer to the date of procurement. This differs from future transactions, which are better for businesses looking for longer-term trends but not interested in owning assets.  

Use in benchmarking retail or contract offers 

The spot rate in contract offers is influenced by business demands procuring on the energy market—it’s also known as the benchmark rate. Energy commodities such as oil, gas, or propane may have spot rates and can go up or down depending on supply and demand. These spot rates, decided at or close to the time of purchase, are then used to determine the forward rate, which occurs in the future. 

Role in budget planning and variance analysis 

Businesses can use the spot market rate to forecast operational expenses. They do this by estimating how much energy the business currently needs might cost it in the future based on the spot market rate at that exact time.  

How to read and interpret spot price trends 

Interpreting spot price trends can be an important tool in managing price spikes and enjoying the financial benefits of spot markets. Key to this identification is being aware of peak vs. off-peak pricing: peak pricing occurs at a time when energy is particularly highly in demand, for example, between 8 a.m. and 8 p.m., whereas off-peak prices occur at a time when energy is less likely to be required, for example, between 8 p.m. and 8 a.m.  

The ability to spot price spikes and what they signal is beneficial when entering spot markets, and this involves recognising price curves and volatility. Using the spot market rate to budget and forward plan is a successful technique, as long as volatility is factored in. It’s unlikely that the current energy rate will remain exactly the same over a longer lifetime of a business, for example, 10 years. Therefore, it’s important to be able to spot price spikes, identify what they may signal - for example, a geopolitical influence - and adjust forward planning for business energy costs accordingly.  

Tools and techniques for energy price analysis 

Certain tools can be used to understand and predict market trends. Heatmaps can help procurers understand the liquidity and flow of the spot market, whereas rolling averages help smooth out data for easier trend prediction. Trendlines can help show trend direction. Software tools like Python, Excel, or business insight platforms can be used to develop apps or rules that can predict energy prices based on past or current energy data. 

Using spot market data to inform procurement strategy 

Spot data can help energy procurers determine the best method and time to buy energy, for example, whether to buy energy from the spot market vs contract. We take a look at two of the key ways businesses can do this.  

Hedging strategies based on observed trends  

Businesses can integrate hedging strategies based on the trends they’ve observed historically or currently in the market. This involves a supplier buying large amounts of energy in advance to avoid price spikes. However, due to risk structure, if bulk energy prices drop slowly, customers of these suppliers may take longer to receive the benefits of these price decreases, compared to price spikes, which customers will often experience very quickly.   

Using spot data for negotiating better PPA or supply contracts  

Spot data can be used to negotiate better Power Purchase Agreements (PPAs), as the price of energy is factored into longer-term contracts based on the market's behaviour at that time. Techniques such as integrating a spot rate cushion could also be undertaken, which involves implementing a buffer to account for potential volatility in the market. This is a good method to use for more risk-averse energy procurers.  

Spot vs forward market: when to use each 

What types of businesses benefit from forward markets and which benefit from spot markets? Closing a specific and appropriate methodology depends entirely on the singular requirements of each business. Factors such as risk tolerance, risk adversity and market outlook or performance will heavily influence which market methodology is right for your business. For example, businesses with a higher risk tolerance may favour pricing closer to on-the-day procurement, whereas more risk-averse businesses will favour longer-term outlooks. Blended approaches often work for businesses that are neither very risk-averse nor very risk-tolerant, using both spot and futures markets to take advantage of the most effective energy pricing.  

Common mistakes in analysing spot prices 

Failing to contextualise short-term price swings is one key area in which businesses can make mistakes when analysing spot prices. Movement in pricing is sometimes a temporary reaction to other influences in the market, and if long-term energy procurement decisions are made based on short-term price swings, then the benefits of good-value pricing might not be felt. The same can be said for misinterpreting volatility as a long-term trend. While data can often be a useful tool, over-reliance on historical data without market insight can also affect good pricing options, as historical data is based on previous market performance. As the energy market evolves and new technologies are integrated, historical data should be used as a guide and not as a verbatim forward projection. Ignoring non-price drivers can further compound this, as factors such as infrastructure and technology upgrades can affect this, as well as policy-led elements such as regulation changes.  

Understanding spot prices enables smarter energy strategies, better budgeting, and risk management—key for navigating today’s dynamic energy markets.