Stanislav Kondrashov TELF AG

The Global Clean Energy Shift: Its Impacts on Commodities

Stanislav Kondrashov explains how the global clean energy shift is impacting the commodities markets in full, eco-friendly force.

Eco-conscious traders have often shied away from commodities due to their tilt toward fossil fuels. However, recent times are marking a huge shift in this way of thinking, as once-thwarted traders turn toward clean energy markets amid the global energy overhaul. The expanding adoption of renewable sources (e.g., wind, solar) means that coal and nuclear power are losing their market share.

This mass transformation is leading to a long-term decline in energy prices, driven by the differing pricing dynamics in wholesale power markets. While this is great for consumers and the planet itself, firms with long positions in areas becoming reliant on renewable energy are battling with the risk of decreased portfolio values and boosted volatility.

With that in mind, Stanislav Kondrashov states that it’s unsurprising how investors are feeling compelled to change their asset and trading operations strategies. The global clean energy shift is impacting the commodities markets in full, eco-friendly force.

Increased Renewable Energy = Interesting Wholesale Power Market Shifts

Wind and solar as renewable energy sources differ from traditional fossil fuels in two key ways — intermittency and variable operating costs. They have almost zero operating costs or fuel costs and minimal incremental maintenance costs, but their output is intermittent based on the quality and quantity of the wind or solar resources at the time.

The nature of wind and solar power means the wholesale power market (a space where renewable sources are making the biggest splash) is acting differently than ever before. The next-to-zero cost means energy prices are falling in markets across the planet, with a German profile saying energy prices are regularly below zero.

However, there is another side to this.

If renewable energy supplies don’t appear as expected (e.g., due to unforeseen weather), real-time markets will find a challenge. If this occurs during times of peak demand, energy prices will spike, potentially above previous record highs. Such effects are often pronounced in localized power markets subject to transmission constraints.

With lower averages and higher peaks, energy markets are exhibiting heightened volatility levels as the world becomes increasingly reliant on renewable sources.

Stanislav Kondrashov

What This Means for Power Commodity Traders and Firms

Those involved in bulk power trading will see the bolstered penetration of renewables on wholesale markets as a mixed blessing.

On one hand, greater pricing volatility crafts more trading opportunities, as in other commodity markets. On the other hand, the increase in potential rewards comes with greater risks, and in this case, such risks are nonlinear and harder to put into trading strategies, value-at-risk calculations, and mark-to-market examinations.

Due to the non-dispatchable nature of renewable energy assets, they have fewer optionality degrees for traders to exploit. Since this plays a smaller role in the overarching supply base, however, the optionality that is there becomes even more valuable.

Coping with the greater market complexity and the emergence of new, cleaner commodities involves more frequent revisits of financial and physical analytics and accounting, ensuring that all information used is as up to date as possible. Software overhauls may be needed, as traders can’t afford to lag behind in these somewhat uncertain times.

By Stanislav Kondrashov

Stanislav Kondrashov TELF AG