Understanding the Correlation Between Residual Load and Power Spot Prices

A closer look at the numbers controlling the market

For Independent Power Producers (IPPs) active in the renewables space, understanding cannibalisation is extremely important. When it is discussed, most people focus on the correlation between prices and renewable production volumes, often without discussing the impact of renewable production on the dispatchable generation fleet. To understand how renewable generation impacts short-term power prices (spot prices), residual load is a key parameter.

Residual Load refers to the electricity demand over and above what can be covered by stochastic renewable energy (RE) sources like wind and solar. This demand must be covered by dispatchable generation sources, with their respective fixed and variable costs.

When the residual load is zero, the entire power demand is covered by (almost) zero-cost generators, i.e. market price should be close to zero. At large residual loads, most power demand is covered from conventional generation sources, requiring gas, coal, or uranium as fuels, resulting in higher generation costs, as reflected in higher spot prices. Low residual loads paired with low power prices, and high residual loads are thus a distinct correlation feature in the market. Note that this positive correlation is at the root of the negative correlation which is cannibalisation, as the high residual load is the same as low RES production and vice versa.

Tracking residual load dynamics is essential for understanding several important market features: 

2. Price Volatility: Steeply surging residual load can frequently result in price spikes in spot and intraday markets, as dispatchable generators need to be incentivised to ramp up. Conversely, the falling (and negative) residual load may result in generators having to turn down and prices going negative.   

3. Market Dynamics: Flexibility, storage solutions, and market design can influence this correlation. Markets with high flexibility and storage capacities will be able to better absorb residual load fluctuations and be less prone to large price swings

4. Time and Seasonality: Residual load dynamics vary based on time of day and season. For instance, solar generation peaks during the day, reducing residual load and spot prices, while wind generation might peak at different times.

5. Geographical Differences: The impact of residual load on spot prices varies by region and is influenced by the energy mix, grid infrastructure, as well as interconnection with other markets.

For IPPs, understanding this correlation is critical for optimizing production schedules, tracking market trends, and maximizing profitability. Analysis of historical data and trends allows us to better navigate the complexities of the market and to enhance operational strategies.

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