As we enter I-SEM's third week, it's an opportune moment to step back and review what we’ve seen so far. In our article last week we described what we had seen in the various markets from Day Ahead auctions through to the Balancing Market across the opening days of trading. By and large, the different mechanisms have continued on in similar vein; Day Ahead prices reflecting fundamentals in the market, intraday markets seeing limited to no liquidity, and the Balancing Market proving hugely volatile.
This volatility in the BM has definitely been the topic of most discussion in I-SEM, with market participants raising concerns over their exposure to very high and low prices – particularly given the illiquid intraday markets are not enabling the management of positions post Day Ahead auction. Volatility in markets is often talked about as good thing by trading companies, as it provides price signals reflecting tightness of supply and demand. So are the BM prices reflecting the underlying fundamentals of the Irish Power system?
The below graph shows the 5 minute BM price plotted against the Net Imbalance Volume - the amount of power the system is “long” or “short”. While there are a lot of data points already, it is clear there are a number of outliers.
In the top right hand quadrant, we can see that prices have risen as high as €1800 MWh in 5 minute periods, with a system imbalance of less than 40MWh. In the bottom left quadrant, there have regularly been prices below -€300 MWh; some occurences when the system is quite long (over 100 MWhs), others when the system is near enough to balanced. The range of prices for such a small scale of system imbalance is unusual, to say the least.
The BM prices are a function of the all the actions the TSO has to take to manage frequency and supply on the system. Based on the above, it seems in I-SEM that understanding the short term supply/demand fundamentals (or imbalance) is not enough to predict where the price will outturn in any period - and participants being able to manage their exposure to this volatility is another question all together.
Participants with unpredictable output (e.g. windfarms) will typically be on the wrong side of this volatility, as it is often their over/under production that drive the imbalance. And generators with Reliability Option contracts are exposed to prices above the €500 MWh if they are not running – regardless of availability. Barely a fortnight in, ISEM – and particularly the Balancing Market – is giving everyone plenty to think about!