I-SEM Part 2 – Market Volatility – The Terrible Twos

We saw in yesterday’s article that Wholesale Power Prices are currently stable and are out-turning consistently low when compared to their historical values. However, like most two-year olds, I-SEM is not always well-behaved as we will see in the following charts.

Figure 1 plots the 30-day Coefficient of Variation over the last 4 years. The coefficient of variation is a measure of the magnitude of the standard deviation relative to the mean. In simple terms, the higher the coefficient of variation, the higher the level of volatility in the day-to-day Wholesale Power Price.

The standard deviation of the Wholesale Power Price has increased as the average has decreased, leading to a rise in the coefficient of variation. The day-to-day variability of the Wholesale Power Price has risen as I-SEM has matured. This is due to the influence of wind on the price and the large price spikes we see at peak demand hours.

Figure 1 shows that while the average or mean Wholesale Power Price might be low, the volatility in price movement, up or down, from one day to the next has increased significantly since October 2018.

This does not represent a problem for electricity consumers who track energy costs on a month by month basis and are not concerned with day-to-day price fluctuations.

However, for a lot of customers this volatility presents cost uncertainty and a risk exposure that they need to manage.   

Peak Prices

Figure 2 looks at what are known as peak prices and compares them to their daily average. The hours 17:00, 18:00 and 19:00 bring a rise in demand for power which often results in a spike in the Wholesale Power Price. This is known as “peak demand” and the hours in which it occurs can vary slightly as seasons change.

Figure 2 shows the monthly average % increase in the wholesale power price for these peak demand hours when compared to the daily average price.

In the first two years of I-SEM the Wholesale Power Price for the peak demand hours of the day are on average 46% higher than the daily average. For year one of I-SEM the peak demand hours were 39% higher than the average Wholesale Power Price, the second year of I-SEM has seen this figure increase to 53%.                                                               

Winter Peak vs Summer Peak

Peak demand is most extreme in the Winter months, and the large % increases we see in Figure 2 for these months are a result of low average Wholesale Power Prices combined with high prices in the evening hours as demand increases.

The Summer price profile has two peak periods but the price increases during the high demand evening hours are less dramatic than in Winter. 

Figure 3 compares daily price profiles for Winter and Summer for the last 12 months of I-SEM to illustrate that the price spikes at peak demand hours are a significant factor in the increased volatility we are seeing in the Wholesale Power Price. In Winter, the peak demand hours (17;00, 18:00, 19:00) were on average 59% higher than the daily average, with the Winter DA price averaging at €41.37/MWh.

The Summer price profile differs to the Winter price profile such that there is a peak in demand in the morning (08:00, 09:00, 10:00) as well as in the evening (17:00, 18:00, 19:00).

The morning peak is 14% higher than the average day-ahead price for Summer, this increases to 35% for the evening peak. The average DA price in Summer (€31.45/MWh) is 24% lower than in Winter.

In the next and final entry of this blog series, looking back at the impact the introduction of I-SEM has had on the Wholesale Power Price, we discuss flexible procurement and what that means for Irish consumers.

Tomorrow’s Blog
ISEM – “The Toddler Years”.
Article 3: – A Flexible Procurement Strategy