Guest essay by Eric Worrall
Bloomberg reports that energy traders are increasingly using computers, to try to keep up with wild price changes in the volatile German energy market.
Looking for Volatility? Try Germany’s Shift to Renewable Energy
Germany’s shift to renewable energy has created a power market so volatile that humans are having trouble keeping up with it.
Four-year-old Grundgruen Energie GmbH, whose glass-walled office is just off Berlin’s most fashionable shopping street, uses a coping technique more likely found in markets for stocks, bonds and currencies: It lets a computer program do the hard stuff. About nine other trading firms are doing the same in the German market, most starting just last year, according to an estimate by the
The price movements in the nine-year-old intraday German power market are “about 200 times that of financial markets,” said Karl Frauendorfer, a professor of operations research at University of St. Gallen in Switzerland who has worked with electricity traders for almost 20 years. “The volatility makes it impossible for humans to efficiently comply with risk limits.”
German Chancellor Angela Merkel’s commitment to green energy has led to a threefold increase in solar and wind power in the past decade as well as an exit from more predictable nuclear. The intermittent renewable output has made traders increasingly focus on hourly or 15-minute electricity contracts to quickly react to changes in weather that alter the power supply. That’s increased the need for algorithmic computer programs that can do the buying and selling on their own.
“Trading is requiring ever more rapid decision-making,” Eberhard Holstein, the founder and chief executive officer of Grundgruen, said. “Automated trading is without question a competitive advantage, we can see that in our books.”
Traders provide a service. I know it is fashionable to think all bankers are crooks, but there are plenty of real world examples of how traders help businesses control risk and lock in profits.
The classic example of this beneficial role, is the trader as a matchmaker.
If a German business wants to export to America, and repatriate their USD profits as Euros, and a US exporter wants to export to Germany, and repatriate their Euro profits as USD, a trader can arrange a match between the two export businesses. By agreeing to exchange future profits at a fixed exchange rate, both parties are guaranteed a predictable profit, rather than facing the risk that an adverse shift in currency exchange rates could wipe out their margin.
In practice of course there are economies of scale – rather than matching up individual businesses, traders manage massive portfolios of businesses, and monitor when they need to top up their exposure to a particular activity; for example, if a trader is carrying too much exposure to Euros being exported to America, they might try to find more deals going the other way, people who want to export dollars to Europe, to balance their books.
The German energy traders are doing something similar. Every time they shave a slice off a swing in the spot price of power, they absorb some of the risk which end users of power would otherwise face on their own.
But there is a cost – the trader’s profits come straight from the bottom line of productive businesses which use electricity. Fine if there was a point to all this activity – but all this increased volatility, risk, and cost is completely artificial. It is purely a product of insane German energy policies. In the real world, the profits the energy traders make from damping down this politically inflicted price uncertainty, from selling a sliver of safety to end users who are at the mercy of the green madness, is yet another component of the hideous macroeconomic cost of renewable energy.