Intraday spreads and volatility: peak, off-peak and regional effects

In an environment where most variables, such as the amount of renewable energy generated during a certain period, are unpredictable, the ability to identify patterns is useful. The unpredictability of renewable energy has a marked effect on intraday trading, but many patterns are predictable, including U-shaped ones that are easy to identify. This U-shape is created by the majority of activity occurring during the day's opening and closing. But what causes these levels of activity to change? It’s often new information received by traders that prompts micro-changes in pricing, not market performance. But it's not just the intraday dynamics that take this form; bid-ask spreads are often similar, displaying a U-shaped pattern as well. Here, we will explain how intraday volatility manifests through time spreads and regional basis moves rather than flat price changes.

Why does volatility concentrate in specific hours?

We often see a high Hourly concentration of volatility in certain periods, mostly due to solar and wind generation. Solar energy is generated mostly during the daytime and early afternoon, dropping off once the sun goes down in the evening. Wind, on the other hand, can concentrate in the morning and during other periods throughout the day, depending on wind patterns. Micro adjustments in pricing occur throughout the day. Still, trading is not concentrated on energy delivery because all accurate information on generation has been received, and balancing will begin. This is called The Samuelson Effect. 

Peak/off-peak dynamics under renewable variability

To understand the dynamics of peak and off-peak periods, how and when they occur and their effect on intraday trading, it's important to consider how renewable variability comes into play. When a lot of energy is generated but demand is low, supply and demand imbalances occur, leading to price volatility and spikes or drops at peak times. The same thing happens when demand for renewable energy outstrips supply - this is referred to as off-peak.

Regional spread behaviour intraday

Renewable-driven spread widening occurs when restrictions are imposed on generation and purchasing. For example, regional spreads can occur when interregional communication across borders is limited, constraining the flow of energy and creating supply-and-demand problems. This can be composed by local, changing intraday prices compared to day-ahead pricing on a market basis. If cross-border flows are contested, it can lead to price spikes. If a shock affects the region, it can also affect the entire international market connected to it. 

Different regions behave differently. For example, in the DACH Region, which includes Germany, Austria, and Switzerland, intraday markets feature very short gate closures of around 5 minutes, enabling fast-paced, dynamic trading. Wind energy plays a big part in this dynamic, whereas in the Nordics, hydropower controls volatility at reservoir levels and rainfall, leading to stark regional price differences. In Bulgaria, Greece, and Romania, intraday market behaviour linked to energy imports at peak times of the day: this is also a pressure point for South West Europe. 

Flow constraints and basis volatility

Another key driver of intraday interconnector constraints is the need to move energy from low-cost to high-cost areas. Network constraints can limit the flow of energy between these two regions, leading to price volatility.  When a region cannot import from a cheaper region, it must rely on its own energy generation, which is often more expensive and less available, leading to price spikes in that region. This constraint between two regions is known as congestion, and the price difference between them is called basis volatility. Interconnection is typically seen as a stabiliser of pricing. Still, it can result in volatility. For example, when a renewable source outside the mainstream fossil-fuel market sees rapid changes, it can affect the entire market, including pricing from more stable sources such as fossil fuels. One method of addressing connection is through counter-trading, used by Transmission System Operators (TSOs). However, balancing costs can still increase even with these methods in place, as severe constraints can push them higher. 

Using spreads to manage intraday risk

While intraday trading is an unpredictable environment, certain types of trading systems can help manage the risk. One of these is spread-based trading logic. Hedging is a financial instrument traders can use to mitigate trading risk. In intraday trading, it is used to hedge against market risk. This is done by buying or selling various types of renewable energy, pitting them against each other to alleviate the price spikes and drops as each type changes in price on the market. Solar, for example, can be hedged against wind, as different factors affect the volatility of each type of renewable.

Along the same vein, different trading regions can be hedged against each other, with market participants trading across regions with different renewable types, operating conditions, restrictions, and geopolitics. This can help to avoid energy bottlenecks within a specific region. We call this Flow Constraint Mitigation. Traders can also leverage differences across market types through arbitrage. For example, the day-ahead market behaves very differently from the intraday market, and so traders can hedge against potential negative pricing between the two markets. 

Avoiding high balancing costs at the end of the day can also be achieved by executing many high-volume trades right before the close. Trading period. All renewable activity information is available towards the close of play, meaning all final trades can be executed close to delivery, avoiding as many of the balancing penalties as possible on that trading day. However, it can be difficult to avoid all penalties due to the unpredictability of renewable energy.