Volatility

Volatility – what is that?

Volatility in the energy sector, describes the fluctuation intensity of electricity prices or quantities of electricity over a specific period of time. It plays a central role in the electricity market, as electricity can only be stored to a limited extent and supply and demand must always be in balance. This special market structure means that even minor changes can lead to noticeable price fluctuations.

Why do electricity prices fluctuate so strongly?

Electricity price fluctuations are caused by a combination of different factors: Electricity demand varies depending on the day and season, while the supply of renewable energy sources such as wind power and photovoltaic depends heavily on the weather. In addition, there are unforeseen power plant failures, grid bottlenecks or regulatory interventions. These factors make the electricity market vulnerable to short-term, sometimes significant price movements.

What causes volatility the most?‍

‍The most important driver of volatility on the electricity market is the increasing supply of renewable energy sources. Wind and solar energy depend on the weather and therefore cannot be planned like conventional power plants. According to an NDR article the share of renewable energy in the electricity mix is constantly growing. As a result, the importance of these fluctuating forms of production continues to grow. Strong sunlight or sudden wind lead to oversupply; calm or darkness, on the other hand, to scarcity. These uncertainties are directly reflected in volatile electricity prices on stock exchanges.

Why is volatility a problem – and for whom?‍

‍A common misconception is that volatility only affects energy suppliers. In reality, it affects all market participants: households, industrial companies, grid operators and electricity traders. High volatility makes planning difficult. Companies with high electricity consumption must take into account strong price fluctuations, which increases their production costs. Grid operators, in turn, are under pressure to react quickly to peak loads in order to ensure grid stability.

What role does flexibility play in dealing with volatility?

Flexibility is key to dealing with or even profiting from volatility. Companies who focus on flexibilizing electricity consumption, i.e. adapting to price signals, can not only relieve the grid, but also reduce energy costs. This applies to households as well as to companies. Technical measures such as load management help to control power consumption in a targeted manner and to avoid peak loads. Electricity storage, flexible gas-fired power plants and intelligent grids (smart grids) are also helping to balance supply and demand and cushion the effects of volatile feed-in.

What specific solutions are there to deal with volatility?

A particularly effective measure is intelligent energy management. Digital systems analyze power consumption, generation and electricity prices in real time and automatically optimize energy flows. Household appliances, heat pumps, charging stations or industrial systems are specifically operated when electricity is cheap and sufficiently available – for example when there is a high supply of electricity from wind or solar power.

In addition to relieving the load on the power grid, intelligent energy management also enables cost savings. In buildings or companies, battery storage systems can specifically temporarily store electricity so that it can be used for self-supply in expensive phases. In industry, energy-intensive processes can be flexibly postponed or load peaks can be avoided without disrupting processes. Many systems also incorporate weather and spot market data and make decisions proactively. In this way, the volatility caused by renewable energies can not only be better controlled, but also specifically integrated into optimizing energy consumption.