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The Anatomy of Price Volatility

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One of the top questions I get from my customers who routinely watch the Ontario electricity market (besides asking me for my crystal ball prediction for 2017 price performance!) is “What causes price volatility in Ontario”?

This has been especially true over the last months.  Ontario has been hit with more frequent, more severe incidences of volatility through 2017 year to date.

So why, and how, does HOEP change so dramatically from hour to hour?

Let’s take a look at the anatomy of price volatility.

The Background

To understand price volatility, let’s first take a second look at how price is set in Ontario.

Electricity price, like any commodity, comes at the intersection of supply and demand.  Demand is driven by changes in weather, time of day, industrial operations and exports.

On the supply side, electricity is produced by generators, each of which will set the price for their product.  In Ontario, a price ceiling prohibits prices greater than $2000/MWh, or 200cents/kWh.

As each generator sets its price for production, the price of the hour will be set by the lowest priced generator needed to meet the demand.

When there are sudden changes to supply or demand, the action needed to balance the two can result in high prices, and volatility.

Let’s look at a couple of recent case studies.

January 1st, 2017

Supply and demand patterns followed a typical pattern on January 1st.  Baseload nuclear power was stable and steady throughout the day.  There was some wind generation, which started the day strong and tapered off throughout the afternoon just as demand picked up steam.  Natural gas and hydro ran throughout the day to make up the difference.

The HOEP did fluctuate and spike as demand grew around 5pm; just as wind generation continued to decline.  HOEP topped out at 4cents/kWh towards the end of the day, as we needed additional natural gas to pick up the balance of the generation needs.

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A Volatile Day – March 12th, 2017

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Here, we see the impacts that supply and demand can have on price in a major way.  March 12th was not a particularly cold day, however Ontario pricing was extremely volatile.

Baseload generation provided by nuclear was stable throughout the day, with hydro providing a good deal of additional baseload power.

Wind generation dropped off in the morning, just as demand for the day was picking up – resulting in our first spike of the day. Prices hit ~8.5cents/kWh as the wind dropped off and more expensive gas generation kicked in to fill the void. Towards 5pm, a similar pattern emerged with HOEP spiking with increasing demand and lower wind generation – a large amount of natural gas generation was needed to meet demand.  Prices continued to rise for the rest of the day even through the decreasing demand, when we would typically expect prices to fall.  This is a classic example of tight supply to demand, and the high prices that result from this scenario.

Price volatility can be the result of increased demand or decreased supply – either scenario can result in peaking HOEP.  With a greater dependence on wind generation – an intermittent generator which is difficult to predict –  price spikes are inevitable.

To learn more about how to protect your company from price uncertainty, contact our team today.