Intraday volatility in power markets explained: the renewable effect

Technology, such as renewables vs fossil fuels, obviously has a profound effect on intraday volatility, but volatility can also differ by timing and geography. For example, timing can affect prices, with delivery time or gate closure causing price changes as market participants aim to adjust imbalances before the end-of-day gate closure. Geography can also impact by creating pressure around cross-border issues when one interconnected country experiences rice increases, which shakes the rest of the power market.

Intraday volatility must be clearly understood by intraday traders, portfolio managers, analysts, and risk managers, as it can have a measurable impact on the power markets they operate in. One key element to understand in intraday volatility are the core signals that traders monitor. The core signals that traders monitor include hydrological conditions, which can impact renewable generation, as well as infrastructure issues, power outages, and changes in energy generation costs.

In this foundational explainer, we’ll define intraday volatility in trading terms and show how renewable generation has structurally changed price behaviour between the day-ahead and delivery markets.

What intraday volatility means in power markets

Intraday volatility is often recognised as price movements after day-ahead clearing but before the actual delivery of energy. The volatility occurs because of continuous, small adjustments to pricing driven by changing core signals.

Intraday volatility matters more for profit and loss than just the accuracy of day-ahead visibility, because pricing directly affects how a portfolio is balanced overall, including costs such as imbalance penalties and losses from final trading positions.

It’s important to know the difference between normal intraday movement, such as routine fluctuations with predicted renewable behaviour, for example, solar variability, and regime-level volatility, such as unprecedented wind activity due to natural disasters or storms.

Why renewables fundamentally change intraday price behaviour

Fossil fuels are reliable in terms of power generation: they provide a steady output of power and can be switched on or off as demand changes. Renewables, on the other hand, are subject to unpredictability because they rely on natural causes to generate energy. The variability and limited controllability of wind and solar result in volatility in the intraday market, as it is more difficult to fulfil energy demand with their unpredictable output. It’s also difficult to forecast energy accurately, which can lead to forecast uncertainty near delivery and cause short-term pricing spikes in the lead-up to power delivery.

Fossil fuel plants rely on turbines to generate reliable energy; renewables, on the other hand, utilise inverters, which result in reduced inertia and increased reliance on flexibility that might utilise technologies such as battery storage to help stabilise output.

How volatility differs across hours, regions and seasons

The intermittency of renewable energy can cause prices to swing during certain periods, such as morning or evening. Morning swings can occur as industrial demand picks up first thing, while reducing solar output and increasing residential demand can impact evening pricing. The time of year can also have an effect, with pricing reducing to very low value in the summer, thanks to the overproduction of solar. In contrast, residential and commercial heating pressures in the winter, combined with solar and wind drops, can cause increases in pricing.

The type of renewable energy can also affect outcomes, depending on the region. Wind-heavy markets, for example the Nordics, experience price dips during low-wind periods and higher volatility during high-wind periods. Solar-heavy markets are more granular daily, with high volatility around midday and price spikes during the winter, when there is less sun.

Where intraday volatility shows up first

The first place we can see the impact of intraday volatility is in continuous intraday markets, where responses to fluctuating energy output are adjusted in real time. This is because the market trades continuously for 24 hours up until minutes before delivery, allowing new information to be acted on until the closing imbalances are adjusted for and ‘acted upon'. When we reach the end of the day, and the fluctuations can no longer be accounted for, balancing and imbalanced prices are used as confirmation. However, this can result in high balancing charges, which cause the price spikes that follow.

This uncertainty can cause liquidity providers to lose trust in markets, leading to spread widening and order-book fragility, in which volatility increases due to lower-than-expected buy or sell orders.

What traders and portfolio managers can do next

Traders must be nimble in their portfolio management, leaving behind more traditional, static end-of-day approaches and moving towards a more fluid, real-time outlook. Data will underpin his attitude, with a focus on tracking forecast deltas rather than just prices. Delta forecasting involves examining trends, pressure, and which market players most often affect the market. Traders might want to utilise a tool that tracks price-volume volatility, or create volume profiles that identify thicker, supportive areas during high volatility. Adjusting execution is key: dynamic risk management using intraday positioning, adjusting factors such as position size and the scale of expected gain, and calculating entry and exit during high-volatility windows. Traders can also use limit orders to try to prevent slippage: a high percentage loss can be avoided if traders place mental stops that are system-based and rigid.  It’s important to remember that intraday volatility is no longer noise; it is a structural feature of renewable-led power systems.