Electricity is a commodity some of us take for granted. It is the form of energy that powers our homes, factories, and increasingly, our vehicles. Being able to request supply at a flick of a switch seems so simple. At any time of the day, you can switch on your kettle and have your tea ready in a few minutes, yet the operations for providing such a service are far from simple. Unlike most energy commodities such as oil or gas, electricity cannot be stored on a large scale*, meaning all supply must be consumed in real time. Any shortfall or excess of it can damage electrical equipment, or cause blackouts.
Every transmission grid has a transmission system operator whose job is keeping supply and demand in constant equilibrium, minute by minute, second by second. This is no easy task, and in Great Britain’s transmission network, it is taken on by National Grid Electricity System Operator (NGESO). Through the ‘Balancing Mechanism,’ the National Grid can call on generators to increase or decrease supply at the prompt, based on demand levels to help balance the amount of electricity on the grid in real time.
*Electricity can be converted to other forms of energy that are easier to store in scale, like chemical potential energy in batteries, or gravitational potential energy in pumped storage hydropower plants. However, these assets still need to be dispatched manually. Pictured above is the Cruachan pumped storage plant, located in the Cruachan ‘The Hollow Mountain’. [image credit: Drax Group]
At Cobblestone, our aim is to predict the future imbalance of the grid and make calculated, risk-adjusted trades based on our own in-house analysis.
So, how do we do it actually?
We trade on the GB Intraday market, which is a real time generation platform catering for the small imbalances the grid has at the prompt. This market consists of power producers i.e power plants, large scale consumers such as factories and local power distributors as well as nonphysical traders such as Cobblestone. By nonphysical traders we mean that we neither own a power plant (where we can generate electricity) nor do we have any consumer to supply electricity to. We are just in the middle. Buying it from an anonymous party who could be a generator of electricity, a power plant, or a nonphysical trader like us and then selling that power to an anonymous party who could be a supplier of electricity or again, a nonphysical trader like us.
The power prices on this market are driven by demand and supply fundamentals on any given day i.e if there is more demand than supply, the price goes up, if there is more supply, the price goes down. We conduct our own analysis into diverse types of generation whether it be gas, wind, solar or the many other types that the GB market uses to keep the country’s lights on. We dig deep into demand, trying to predict future demand patterns or fluctuations caused by any change in fundamentals. Our value comes in developing a strong understanding of market fundamentals at any given time to have a view on where we think prices should be. If our view differs from what the price currently is, then we act on it.
The GB intraday market is where we started our core business and have been the experts in. But we didn’t stop there. At Cobblestone, we also do Cross Border Trading. Europe’s electricity network is connected by what is known as interconnectors. These are huge cable structures designed to flow power to and from different countries to help with the supply and demand constraints with direction often dictated by the price differentials between the connected countries. Mainland Europe benefit from the distribution of German power, who generate a lot of their power through solar generation and can flood their neighbors with cheaper energy. GB instead experiences more volatile prices as interconnector constraints are fewer. Currently, GB has connections between Ireland, France, Belgium, Netherlands, and Norway. However, projects are on-going to continue to increase the connectivity of GB with plans to connect both Germany and Denmark.
Now, how does this Cross Border Trading work?
What we do is that we buy power in UK and move it to France or vice versa depending on our view of the fundamentals in these countries. This involves analysts and traders working together to predict price differences between any 2 interconnected countries and thus flow power to, or from different countries across the interconnectors. This enables us to benefit from price spreads often seen across different countries experiencing different fundamentals throughout Europe. For example, on a non-windy day in UK, when gas prices are so high, the power price in UK whose generation consists of 60% gas plants would be higher than France whose power generation is mostly dominated by nuclear. Due to this price differential, we would be willing to buy power in France and flow it across the interconnector to GB.
Did we stop there? Definitely NO.
Furthermore, we also trade on the UK ‘Day-Ahead’ market, with scope to expand further down the GB curve into longer term positions. In the day-ahead market, our team of analysts participate in auctions to buy or sell power for a given time the following day based on both systematic and discretionary strategies.
All this combined gives Cobblestone a diversified portfolio when it comes to the power market. We endeavour to expand our operations, as mentioned earlier, by extending our scope down the GB curve as well as, reaching out to GB’s neighboring countries to fully understand their fundamentals.