The spot market in the electricity industry is where electricity is traded in real time, playing a crucial role in balancing supply and demand. With the increasing adoption of renewable energy, electricity prices have become more volatile, elevating the importance of the spot market for operators. However, relying too heavily on the spot market introduces risks, necessitating effective risk management strategies.
Mechanics of the Spot Market
The spot market facilitates real-time electricity trading, reflecting immediate supply-demand conditions. Trades typically occur hours or a day in advance, with suppliers offering electricity and buyers making purchases. Prices rise with increased demand and fall as supply grows. Higher prices are common during peak demand periods, while lower prices are available during off-peak times. The spot market aims to enhance electricity distribution efficiency and cost control, but prices can fluctuate sharply during supply shortages or demand spikes.
Risks of Over-Reliance
In Japan’s Electric Power Exchange (JEPX), the spot market is central, yet its prices are highly sensitive to supply-demand shifts, leading to significant volatility. For instance, in fiscal 2020, the average price in summer was a low 5.9 yen/kWh, but a winter cold wave caused a surge in demand, pushing the 24-hour average price in January to over 100 yen/kWh. Such rapid price fluctuations pose risks for operators dependent on the spot market, increasing the likelihood of power shortages and outages. To mitigate this, power companies must use bilateral and long-term contracts to avoid excessive reliance on the spot market.
Proactive Measures by Major Power Companies
Major power companies are actively working to manage risks in the spot market by maintaining generation capacity, improving demand forecasting, strengthening backup systems, and using long-term contracts and derivatives to reduce exposure to price volatility.
Following the Great East Japan Earthquake, these companies (including former independent power producers) placed maximum bids based on marginal costs, expanding market trading volumes as market makers without disrupting their retail operations. During fuel shortages, price adjustments based on opportunity costs were permitted when market prices surged.
Concerns About Market Manipulation
As the spot market becomes more liberalized, there is an increasing risk of market manipulation by dominant operators. Large power companies or market-dominant players could unfairly inflate prices by manipulating the supply-demand balance. For example, if a producer withholds electricity despite having the capacity to generate it, they could be suspected of price manipulation. Typically, it is economically rational for producers to supply electricity at marginal costs, and failure to do so might indicate an attempt to artificially raise prices.
Conclusion
The spot market is essential for enhancing the efficiency and flexibility of electricity trading, providing a valuable tool for power companies. However, excessive reliance on it carries risks, prompting efforts to hedge against price volatility. Additionally, the potential for market manipulation by dominant operators calls for stronger regulations to ensure fairness. As the role of the spot market expands, designing systems and managing risks will be key to ensuring a sustainable energy supply in the future.
See original article at : https://jareenenergy.com/2024/09/28/%e3%82%b9%e3%83%9d%e3%83%83%e3%83%88%e5%b8%82%e5%a0%b4/
