Wind-driven intraday volatility: patterns, risks and opportunities

This can make it difficult to trade these types of energy compared to more stable sources, such as fossil fuels, which are more reliable in their generation.

This is where intraday volatility becomes more apparent, requiring micro-pricing adjustments throughout the trading day to help mitigate volatility in wind energy as a commodity. This volatility creates spikes and plunges in pricing, as intraday strategies attempt to smooth it or profit from it before the trading day closes.

The types of shifts that cause these rises or falls in production include changing daily patterns, such as decreasing wind levels in the afternoon and increasing levels first thing. These are known as diurnal patterns. Geographic smoothing occurs when wind covers a large area rather than a single, wind-energy-generating area. Large changes or extreme weather followed by calm stretches can also lead to intraday volatility, known as Dunkelflaute. When wind farms suddenly ramp up in generation or ramp down, sometimes intervention is needed to stabilise the grid.

All of these factors can combine to significantly affect intraday markets and how traders must act to profit from volatility.

Why wind dominates intraday volatility in many markets

Renewable energy differs from fossil fuels in its flexibility, as it cannot be switched on; it must be generated. Fossil fuels' ability to fire up quickly and generate energy to fulfil demand quickly is what’s known as dispatchable power. Renewable energy is not dispatchable. This inability to fulfil demand for power as and when it arises is what causes price spikes: the more energy is required, and the less is available due to wind-related issues, the higher prices become due to scarcity. Forecasting errors can compound these wind-related issues by predicting more or less wind than is actually generated, requiring final positions to be rebalanced at the close of the day. This works well in certain types of markets: nimble, flexible markets that can reprice in reaction to make changes, for example, European markets such as EPEX SPOT or Nord Pool. These types of markets heavily utilise tools such as flexible storage systems to make renewable sources more flexible and automated trading to enable shorter-term forecasting.

Common wind-driven intraday patterns

In wind energy, intraday patterns are often influenced by the time of day. In the case of U-Shaped volatility, the start and end of trading days are usually more frantic and unpredictable. In contrast, during forecast convergence, trading volumes tend to increase closer to the point of energy delivery. In some cases of forecast error scaling, day-ahead and actual wind output are compared, with some volatility in the last part of the day. More pronounced seasonal shifts are evident in the wind-heavy Nordic markets, which show higher correlations during the colder months.

Regional differences in wind volatility

 Depending on where an array is located in the world, wind volatility can be more pronounced or less pronounced. Wind-heavy regions, such as parts of Sweden, underpin pricing across the entire market, so they have a more pronounced effect on intraday trading. However, certain parts of the Nordics have large hydro operations that can weather the storm of wind volatility much more easily. Europe has implemented the European Single Intraday Coupling, an International grid connection that allows the transfer of energy across borders, to reduce volatility in wind energy.

Interaction with system tightness

The flexibility of a system can also affect intraday volatility. When there is a lack of wind energy compared to the forecasted amount and supply is higher than expected, prices increase rapidly - this is what’s known as a tight system. A looser system, on the other hand, sees an abundance of wind energy compared to expected forecasts, avoiding these price spikes. However, this can increase volatility by widening the spread between hourly prices.

Trading strategies around wind risk

 One of the key risks in trading wind in the intraday market is the increase in balancing costs at the close of trading. This is when energy producers can face financial issues because the energy they generate either outstrips or underperforms forecasts. They are then forced to pay penalties to balance this error. This can result in future price spikes, making forward budgeting and potential relationships with traders difficult for generators. But it's not just financial impacts that can be felt. Overperformance of wind energy can cause grid congestion, resulting in enforced generator shutdowns, lost revenue, and continued price volatility. Restarting plants also has a cost implication that needs to be clawed back through repricing at a later date. However, there are also opportunities related to wind risk. If traders can utilise machine learning to automate one element of intraday trading, making trades more reactive and nimble, the balancing penalties received at the close of trade can be reduced, stabilising prices further.