Spot Price Volatility Research Articles

Effect of the intermittency of non-conventional renewable energy sources on the volatility of the Colombian spot price

This paper explores one of the side effects and challenges that integrating non-conventional renewable energy sources poses to the Colombian electricity market, the spot price volatility which is directly related to financial risk. We propose a vector error correction model that allows an integrated and dynamic modelling of the offer-side of the spot market by considering bid prices, available energy, renewable energy production and the spot price. To validate the model, we performed statistical tests on the residuals of the model and back-testing. The results show that given a one standard deviation shock in renewable energy production from non-conventional sources, the spot price volatility increases from 12.7 % to 14.5 % in a 365-day horizon, which represents a relative increase of 14.2 %. Also, when evaluating different renewable energy integration scenarios and the official system expansion, we see that assuming 100 % fulfilment of the non-conventional sources integration plan, the volatility goes up to 31.2 % vs. 12.3 %. It is also worth noting that if the plan is fulfilled up to 25 % there is no significant increase in spot price volatility, which can be justified by the simultaneous expansion of conventional sources that compensate for the effects of non-conventional renewable sources.

Grid variability and value assessment of long-duration energy storage under rising photovoltaic penetration: Evidence from Japan

Using high-resolution grid power balance and market data, this work investigates the effects of rising solar photovoltaic generation on the variability of large-scale net grid load and spot prices, and conducts an analysis of the potential balancing profits of various grid-scale energy storage systems. Analysis results show the correlation between PV (photovoltaic) generation and electricity demand has been identified as a significant factor influencing spot price value. As PV penetration increases, the value of spot prices experiences a notable decline, with values declining to nearly zero when the share of hourly PV generation surpasses 70 %. The volatility of electricity spot prices has a substantial impact on utilization rates and economic profits of energy storage systems employed for grid energy balancing. Despite the lower roundtrip efficiency, reversible hydrogen storage system can offer positive benefits. The longer storage duration offers the advantage of capturing greater dispatch profits by exploiting price differences over extended periods. Considering the time-varying nature of spot prices, the rated power capacity of the storage system plays a significant role in determining its utilization rates. The larger rated charging and discharging ability of the storage system allows for more effective utilization of price fluctuations, resulting in greater profitability.

Interval prediction of crude oil spot price volatility: An improved hybrid model integrating decomposition strategy, IESN and ARIMA

Crude oil price volatility prediction are important for energy policymaking and investment risk avoidance, and have attracted a great deal of global attention. In recent years, although some studies have proposed methods for prediction crude oil price volatility, most of them are point prediction, which are difficult to provide richer reference information for managers. Therefore, an improved hybrid interval prediction model is proposed. The hybrid model combines data feature extraction and quantification techniques, fuzzy information granulation(FIG), improved echo state network (IESN), and autoregressive integrated moving average model (ARIMA). The hybrid model is able to accurately portray the different features present in the volatility of crude oil spot price. The features are quantified in order to merge similar feature components and improve the prediction effect. On this basis, IESN, which possesses strong nonlinear learning ability, is used to predict high-frequency sequences, and ARIMA, which has strong linear carving ability, is used to predict low-frequency sequences and residual terms. By “divide and conquer”, excellent prediction intervals are obtained. West Texas intermediate (WTI) crude oil spot and Brent crude oil spot are selected for analysis, and consider the influence of futures on interval construction. The effect of volatility intervals is validated from the pricing benchmark and time scale dimensions, respectively. The experimental results show that the proposed model has optimal performance in all scenarios. Take the performance of WTI on the daily scale as an example, its PICWC value is 0.8205. Compared with other benchmark models, it improves by 137.4504, 3.1118, 1.0506, and 0.4875, respectively. The proposed model provides a reliable new idea for crude oil spot volatility interval prediction.

Supplier encroachment and pricing scheme choice in a supply chain with two-sided uncertainties

ABSTRACT This paper examines supplier encroachment in a scenario where the supplier procures an input in spot and processes it into a final product, while the retailer chooses between contingent and committed pricing schemes for the contract price. We find that when the correlation between the input spot price and final product demand is relatively small, it is optimal for the retailer to adopt the contingent pricing scheme regardless of the supplier's encroachment decision. This is because this scheme enables the supplier to share the input price risk, resulting in a lower contract price. Furthermore, the likelihood of the retailer adopting the contingent pricing scheme increases as demand variability decreases or spot price volatility increases. However, supplier encroachment reduces the retailer's inclination to use the contingent pricing scheme. We further demonstrate that the supplier should encroach when the correlation is sufficiently small, because encroachment alleviates double marginalisation in the retail channel and brings the additional responsiveness in the direct channel. By contrast, a large correlation compels the supplier to encroach even with a sufficiently small market size. In this case, encroachment improves the responsiveness of both retail and direct selling quantities and enables the quantities to match the demand better.

A GARCH Model to Understand the Volatility of the Electricity Spot Price in Brazil

Electricity is sensitive to extreme price events and spot price volatility is an inherent characteristic of competitive electricity markets. The purpose of this article it to model the realized volatility of electricity spot price in Brazil. The Brazilian electricity industry presents unique characteristics and because of this price varies a lot in a short period. So, we developed a GARCH model using 862 weekly observations to understand the realized volatility in the four different market. We conclude that the spot price in Brazil presents high volatility that presents risk to agents. This high volatility is associated with institutional factors and the increase in the share of renewable energy in the electricity mix.

Joint forward contract negotiation: The role of B2B procurement platforms

B2B procurement platforms operate by aggregating the orders of small and medium downstream buyers to acquire forward contracts with selected upstream suppliers through negotiation. This paper studies the value of and the suitable market environment for this type of start-ups. We find that a unique equilibrium forward contract can be obtained if spot price volatility is sufficiently large, an increase in buyer participation cannot always lead to a favorable contract price for participating buyers. Furthermore, when buyer-side bargaining power cannot be improved, the utility gain of an individual buyer from a forward contract declines as buyer participation increases, while that of the supplier initially increases and then decreases. By contrast, when bargaining power is moderately improved, an increase in buyer participation may benefit the supplier and participating buyers. We further show that the equilibrium participation increases in spot price volatility and supplier’s capacity but decreases in downstream demand uncertainty.

System value and utilization performance analysis of grid-integrated energy storage technologies in Japan

Deploying utility-scale storage systems is expected to play a critical role in improving energy flexibility and economic performance considering rising variable renewable energy penetration. However, existing studies take the impacts of storage duration times and changes in the real-world electricity market into account less. This study develops a framework to evaluate and compare the opportunity value of different storage technologies as a price taker aiming at maximizing the arbitrage profit. Firstly, long-term operational data of real-world grids were collected, and results indicate that rising penetration of renewable energy generation increases the inter-annual volatility and decreases the average value of spot prices. Comparative results verified that the storage roundtrip efficiency, duration time and variation of spot prices impacted the storage arbitrage profits and utilization rates significantly. The rising volatility of spot prices is largely driven by the rapid expansion of renewable energy generation, adds more opportunity value to the storage system dispatch process, and amplifies the influence of storage duration. The results present the potentiality of deploying power to hydrogen as long-duration storage to deliver economic benefits by exploring the variations of the spot prices. Overall, a full understanding of how the role of storage systems changes provides insight into options for storage planning of renewable-dominated electricity systems.

The Economic Sustainability of Variable Renewable Energy Considering the Negotiation of Different Support Schemes

The increase in the prices of fossil fuels and environmental issues are leading to a high investment in wind power and solar photovoltaic all over Europe, reducing its dependence on imported fossil fuels. The European countries started incentive programs for investment in these renewable technologies, which consisted of fixed and market premium feed-in tariffs. These feed-in schemes involve long-term contracts with updated prices over inflation. These incentives highly increase the investment and installation of new renewable capacity in Europe. They lead to high renewable penetrations in power systems but originate a tariff deficit due to the difference between market prices and the tariffs paid to these technologies. End-use consumers pay the tariff deficit on retail tariffs. This work analyzes the market-based remuneration of variable renewable energy considering different support schemes and the role of risk-sharing contracts in mitigating the spot price volatility. It presents models able to negotiate bilateral contracts considering risk management, notably risk attitude and risk sharing, bid establishment, and clause (by-laws) negotiation. Furthermore, to evaluate the economic sustainability of renewable generation in Spain, it presents a study for different 12-year support schemes starting in 2010. The results confirmed that, in the case of using risk-sharing contracts during crisis periods, the incidence of low energy prices (price “cannibalization”) decreases, such as the tariff deficit. Furthermore, in the case of high-inflation periods, these contracts hedge against the increase in retail prices, resulting in an economic surplus for consumers.

Theory of storage implications in the European natural gas market

The theory of storage stands that futures prices should be equal to the spot price plus the interest forgone in storing the commodity and the warehousing costs minus the convenience yield on the inventory. In this paper, we test several implications of the theory of storage on the pricing of United Kingdom natural gas futures. We obtain partial evidence for the theory of storage as a complete explanation of the pricing of this futures contract. Explicitly, (i) we obtain evidence to explain convenience yield seasonality with spot price volatility, unexpected demand shocks when supply is tight, inventory variations, and trading activity in the futures markets; (ii) we obtain indirect evidence for the theory of storage in accepting the Samuelson hypothesis; (iii) weak although significant influence of storage levels in determining the basis is obtained; (iv) we find weak evidence for the inventory influence of futures volatility; and (v) finally, the slope of the convenience yield structure is found to respond to inventory changes and trading activity in the futures markets that anticipates inventory scarcity. All in all, we can conclude that our evidence for the theory of storage in this market is strong but cannot completely explain futures pricing for natural gas.

Futures markets and price stabilisation: An analysis of soybeans markets in North America

AbstractThe objective of this paper was to determine whether the futures markets have a stabilising or destabilising impact on soybean's spot prices in North America. Directed acyclic graphs (DAGs) are used to test for causality between futures prices, spot prices and ending stocks, followed by time series econometric analysis. The DAGs point to the two‐way causal link between futures and spot prices and a lack of a causal link between inventory/stocks and spot price volatility. Time series results, including cointegration, vector error correction, impulse response and variance decomposition analysis, indicate a large impact from futures markets on the level and volatility of soybean spot prices in both the short and long run. These results have potentially important implications, as the impact of commodity price volatility is typically asymmetric across different actors. Farmers, for example, unlike speculators, utilise price risk management (PRM) instruments such as futures markets to mitigate price risks and appear to suffer from intensified volatility precisely because of their use of these instruments. Therefore, additional policies to cope with commodity price volatility, such as direct price controls or mitigation of consequences, can have critical stabilising functions supporting farmers' welfare and regional (rural) development.

Single Stock Futures Trading and Stock Price Volatility: Empirical Analysis

This study examines impact of the introduction of single stock futures contracts on the return volatility of the SSFs-listed underlying stocks. The study documents a significant decrease in return volatility for the SSFs-underlying stocks following the introduction of single stock futures contracts on the Karachi Stock Exchange. The multivariate analysis in which the spot trading volume, the futures trading volume and open interest were partitioned into news and informationless components, the estimated coefficient of expected futures volume component is statistically significant and negatively related to volatility, suggesting that equity volatility is mitigated when the expected level of futures activity is high. The findings of the decreased spot price volatility of the SSFs-underlying stocks associated with large expected futures activity is important to the debate of regarding the role of equity derivatives trading in stock market volatility. These empirical results for the Pakistan’s equity market support theories implying that equity derivates trading improves liquidity provision and depth in the equity markets, and appear to be in contrast to the theories implying that equity derivates markets provide a medium for destabilising speculation. Finally, the SSFs-listed stocks were grouped with a sample of non-SSFs stocks to examine cross-sectional data for comparing changes in return volatility. After controlling for the effects of a number of determinants of volatility, sufficient evidence is found to support that, this multivariate test, like the previous analysis, provides no evidence that the volatility of the SSFsunderlying stocks is positively related to the introduction of the single stock futures trading in the Pakistan’s stock market.

Strategic Participation of Active Citizen Energy Communities in Spot Electricity Markets Using Hybrid Forecast Methodologies

The increasing penetrations of distributed renewable generation lead to the need for Citizen Energy Communities. Citizen Energy Communities may be able to be active market players and solve local imbalances. The liberalization of the electricity sector brought wholesale and retail competition as a natural evolution of electricity markets. In retail competition, retailers and communities compete to sign bilateral contracts with consumers. In wholesale competition, producers, retailers and communities can submit bids to spot markets, where the prices are volatile or sign bilateral contracts, to hedge against spot price volatility. To participate in those markets, communities have to rely on risky consumption forecasts, hours ahead of real-time operation. So, as Balance Responsible Parties they may pay penalties for their real-time imbalances. This paper proposes and tests a new strategic bidding process in spot markets for communities of consumers. The strategic bidding process is composed of a forced forecast methodology for day-ahead and short-run trends for intraday forecasts of consumption. This paper also presents a case study where energy communities submit bids to spot markets to satisfy their members using the strategic bidding process. The results show that bidding at short-term markets leads to lower forecast errors than to long and medium-term markets. Better forecast accuracy leads to higher fulfillment of the community programmed dispatch, resulting in lower imbalances and control reserve needs for the power system balance. Furthermore, by being active market players, energy communities may save around 35% in their electrical energy costs when comparing with retail tariffs.

Southern oscillation: Great value of its trends for forecasting crude oil spot price volatility

An increasing number of studies have verified the impact of climate change on commodity spot markets. Based on the forecasting framework, we revisit this work by focusing on the crude oil spot markets. We employ the Southern Oscillation Index (SOI) to capture the climate changes as it determines the weather and climate of numerous living areas. To obtain a more accurate result, we apply the STL decomposition to construct a series of the GARCH-MIDAS models combining the trend, seasonal, and remainder components of SOI. The empirical results reveal that the SOI trend show significance in the in-sample estimation and the model involving it outperforms others in the out-of-sample prediction. Hence, the trend of weather and climate changes may provide greater economic value for market participants investing crude oil spot markets.

Risk-Sharing Contracts and risk management of bilateral contracting in electricity markets

The liberalization of the electricity sector has conducted to the establishment of spot markets, derivative markets and private bilateral contracts to trade electricity, increasing the competition in the sector. Spot markets are composed of day-ahead, intraday and real-time markets, and their prices are highly volatile. Derivative markets are composed of physical and financial products to hedge against spot price volatility. Players can set the terms and conditions of private bilateral contracts but these have several risks that can be mitigated using a risk management process composed of three phases: risk assessment, characterization and hedging. This paper focuses on both risk attitude and risk-sharing, and how they can influence the negotiation of the price. It presents the standard and non-standard designs of a new type of contract, the Risk-Sharing Contract (RSC). Furthermore, it describes the trading process of these contracts and introduces a negotiation strategy for dealing with risk. It also presents case studies on bilateral contracting involving the negotiation of RSCs, where different demand and supply agents interact and trade according to the rules of an alternating offers protocol. Results from the case studies prove the benefit of RSCs to hedging against spot price volatility, benefiting risk-averse players by reducing the price risk and conducting mutually beneficial agreements. While the use of derivatives products can conduct losses/revenues between −15% and 3% concerning the spot market, by using non-standard RSCs those outputs vary between −1% and 3% with substantially less risk.

Competitive trading in forward and spot markets under yield uncertainty

Many agricultural commodities are traded in both forward and spot markets. This paper studies the interplay of random yield and forward market in a hybrid market with spot and forward transactions. We examine two main questions: (a) How does yield uncertainty (yield risk and yield correlation) affect the equilibrium outcome in this hybrid market? (b) How does the existence of a forward market influence the firms' strategic behaviors and spot price volatility, and how does yield uncertainty mediate the role of the forward market? In our baseline model that considers two firms and no withholding behavior by the firms, it is found that as yield risk increases, firms may sell less in the forward market, and counterintuitively, higher yield risk may benefit firms and make the spot price less volatile. The existence of a forward market leads to greater spot price volatility; that is, a forward market destabilizes spot prices. We identify a mitigating effect of yield variability, but an enhancing effect of yield correlation, on the role of the forward market. Finally, we extend our baseline model to the case with more than two firms and the setting where the firms may withhold some products and demonstrate that some of the key results in the baseline model carry over to these extensions. Nevertheless, the firms' withholding behavior represents a new driving force that changes some results. For example, the decreasing trend of spot price volatility in yield risk disappears in the withholding model.

Cross-regional effects of renewable power generation on the electricity market: an empirical study on Japan's electricity spot market

ABSTRACT We examined the indirect effects of renewable power generated in Tohoku on the electricity spot market in Tokyo, through the channel of cross-regional interconnection. By adopting a two-step regression analysis framework, we investigated how the renewable power generated in Tohoku affects Tokyo’s spot price and market volatility. Our results indicate that the electricity spot market is affected not only by within-regional renewable power generation but also by cross-regional transmitted renewable power generation through interconnection. The relatively higher price reduction effect of transmitted power can be attributed to higher price elasticity under a tight supply-demand balance. Our results confirm the cross-regional price stabilization effect of renewable power generation in Tohoku. We attribute the negative effect on realized volatility of Tokyo to the relatively stabler renewable electricity supply from Tohoku. Furthermore, we find that renewable power producers – especially solar power producers – are not incentivized by the fixed-price feed-in tariff to meet electricity demand during peak hours.

Operational hedging or financial hedging? Strategic risk management in commodity procurement

We study the risk management strategies of two manufacturers that procure a commodity from a supplier to produce a final product and compete in a downstream market. The manufacturers can adopt financial hedging to reduce profit variability or spot trading to mitigate the demand–supply mismatch risk, and they can also combine these two strategies or adopt neither of them. We characterize the equilibria of several representative games where two different risk management strategies are available, and find that financial hedging complements spot trading by protecting both contract procurement and spot trading from the demand uncertainty and spot price volatility. Hence, the combined strategy brings a synergy benefit and dominates spot trading; however, it cannot always outperform financial hedging because the price risk introduced by spot trading overwhelms its benefits. Interestingly, asymmetric risk management equilibria may arise between symmetric manufacturers because the sequential production competition under strategy differentiation allows them to better utilize their respective strategies. We further find that when all four strategies are simultaneously available, financial hedging should normally be adopted, whereas spot trading should not be used alone. Finally, we complement our theoretical analysis with a real‐data–calibrated numerical study to show which risk management strategy performs better in the soybean processing industry.

Integration of long‐ and short‐term contracts in a market for capacity

Motivated by the potential growth of capacity markets due to 3‐D manufacturing, we examine the integration of long‐ and short‐term contracts for a capacity marketplace. In the marketplace, manufacturers and suppliers first participate in long‐term contracts in which manufacturers reserve capacity at one or more suppliers. Subsequently, manufacturers and suppliers trade in a spot market to fulfill residual demand and sell residual capacity, respectively; in the spot market, the equilibrium price is determined dynamically and endogenously by the balance of supply and demand for capacity. We build a model to derive insights on the decisions taken by the manufacturers and suppliers and on the equilibrium characteristics of the market. We show existence of equilibria in both long‐ and short‐term contract markets and establish a relationship between the equilibrium prices for the two types of contracts. We also find that when short‐term–only contracts are available, the expected backlog is lower compared to when integrated contracts are used for much of the planning horizon. Further, we find that the presence of long‐term contracts increases the volatility of spot prices. Our results will make practicing managers aware that contractual arrangement can influence spot price volatility.

Implied volatility surface construction for commodity futures options traded in China

European futures options are not traded on the Chinese exchanges and that generates difficulties to calibrate fundamental market parameters, such as the implied volatilities. We propose an efficient willow tree method to resolve the problem of calibrating the implied volatility from American-style options. The proposed willow tree construction is independent of the volatility itself so as to minimize the cost of the calibration. We also apply the proposed method to calibrate the implied volatilities of most frequently traded options in the Chinese market, sugar and soybean meal, based on the daily closing prices, and construct the corresponding implied volatility surfaces. The results indicate the seasonality in the volatility of commodity spot prices and futures prices in China. Moreover, based on the implied volatility distortion close to the option maturity observed in our empirical results, we suggest a minimum tick price scheme to avoid the distortion and decrease of hedging costs.

Multi-step optimization of the purchasing options of power retailers to feed their portfolios of consumers

The liberalization of the retail market of electricity increased the tariff choice of end-use consumers. Retailers compete in the retail market for customers, obtaining private portfolios of end-use consumers to manage. Retailers buy electricity at wholesale markets to feed their customers’ demands. They can use spot, derivatives, and bilateral markets to acquire the energy they need. The increasing levels of variable renewable energy sources trading at spot markets, increase the price volatility of these markets. To hedge against the volatility of spot prices, retailers may negotiate standard physical or financial bilateral contracts at derivatives markets. Alternatively, they can also negotiate private bilateral contracts. This article addresses the optimization of the retailers purchasing options, to increase their risk-return ratio from electricity markets, and offer more competitive tariffs to consumers. Considering the risk attitude of retailers, they use a multi-step purchasing model composed of a multi-level risk-return optimization and a decision support system. The article presents an agent-based study considering a retailer with a portfolio of 312 real-world consumers. Risk-seeking and risk-neutral retailers obtained a return up to 38%, less than 7% of the optimal return. However, risk-neutral retailers are subject to four times higher risk in their returns than risk-seeking retailers. The results support the conclusion that wholesale markets of electricity are more favourable to risk-seeking retailers, considering their real returns.