Peak vs baseload forward curves: understanding spreads and risk

What peak and baseload products represent

While both are related to how we use the forward curve in trading, peak and baseload products differ in what insights we use them for and when.

Baseload: continuous delivery

Baseload products represent continuous, uninterrupted energy, 24 hours a day, seven days a week. We use them to measure the bare minimum requirements of the grid. (1)

Peak: high-demand hours

Peak products refer to energy delivered during peak periods**. These tend to cover** industrial daytime demand on weekdays, along with mornings and evenings for the residential market. (2)

Contract definitions on exchanges

Exchanges offer power products as contracts segmented into months, quarters, or seasons. Exchanges traders may come across include EPEX SPOT and the European Energy Exchange (EEX). (3) The calculation is based on how much power is delivered within a certain timeframe**. For** example**,** a 1 MW baseload contract delivers 1 MW in every hour of the contract’s delivery period. (4)

Why peak carries a risk premium

Higher costs and risk are usually associated with peak power curves**, which** also tend to have a tighter supply-demand balance.

Demand uncertainty

Energy demand rises and falls with the weather, which makes forecasting difficult. This can leave gaps between the amount of energy produced and the amount required.

Scarcity risk during peak hours

Scarcity risk premiums may be built into forward prices to cover the risk of unexpected price spikes caused by supply failures. This is particularly relevant for a power purchase agreement (PPA), where supply commitments cannot always be met, as a risk premium can help offset the penalties. (5)

Limited flexible supply

Baseload plants run continuously but cannot change output quickly. Peaking plants can fire up quickly, but they are expensive to run and limited in number. This restricts the flexible supply available at peak times, just as more variable renewable generation enters the grid. (6)

Renewables and peak price behaviour

Energy traders use baseload and peak curves to build a picture of the power market across periods of high and low generation and consumption.

Solar flattening midday peaks

As solar takes a bigger share of the market, its main impact on the forward curve is to flatten midday peaks. On sunny days, particularly in the summer months, solar can produce more energy than is needed at midday, causing midday prices to collapse. Evening prices then rise, as this is exactly when solar production drops. (7)

Evening ramp increasing volatility

This increase in demand on other generators during the evening is known as the evening ramp. In regions with high solar penetration, such as California, flexible generators are needed to keep the lights on during the evening ramp. (8)

Wind variability impacts

Wind is one of the less predictable sources in the renewable portfolio, which makes it more difficult for peak generation to be profitable. When wind output increases, prices can crash during peak hours because wind has very low marginal costs.

Peak-base spread dynamics

The price difference between peak and baseload energy is known as the peak-base spread. It can be used to assess the state of the market at a given time, such as how tight or volatile the system is.

Spread widening during stress

The spread between peak and baseload widens when the market is more volatile**. As** risk increases, traders tend to exit the market, putting further stress on it. (9)

Impact of system tightness

The grid tightens when there is a shortfall in resource adequacy. This can be influenced by the increase of renewable energy in the grid, which requires peaking capacity to balance the grid when renewable output drops. The peak-base spread can then widen or narrow without warning. (10)

Regional differences

In the US, peak-base spreads often widen during the summer**,** when air conditioning demand increases due to the heat. In Europe, spreads vary more with the seasons throughout the year. (11)

Trading and hedging implications

For traders to maximise revenue and manage risk effectively, it’s key that they understand and use data from baseload and peak power curves. It’s important to keep in mind that baseload curves tend to be less volatile than peak curves.

Spread trading strategies include exploiting the difference between peak and baseload pricing, potentially using the day-ahead market to compare expected prices with actual prices. Traders might also look for opportunities to take advantage of regional price differences and trade across these areas.

Hedging peak exposure is another useful strategy, though hedging peak load is much more complex than hedging baseload. Finally, traders may use portfolio balancing strategies**: a** mix of off-peak and peak contracts alongside baseload contracts could offer a more cost-effective way to match load curves. While trading in renewables can be profitable, the volatility requires sophisticated strategies, including integrating PPAs, battery storage or taking spot market positions.