What's the risk of buying energy Day Ahead?
We were asked recently on what the risk/impact of buying energy Day Ahead, my initial view was 'more expensive in a risking market, cheaper in a falling market'.
Note: I'll continue to build on this blog post as we get time.
In the chart below, we can see that Day Ahead is typically more expensive in a slow rising market, with the one month delay on the Month Ahead product creating a buffer in any upwards volatility, but also lagging any downward corrections.
(The data has been aligned by Delivery Date, so 1 March was purchased on 1 February on a Month Ahead product, or the previous day - 28 February - on the Day Ahead product)
The chart shows how a month ahead strategy would have provided some protection from the volatility in September and October, but then as prices corrected in November we see Day Ahead being lower in that period.
Chart 1: Daily time series showing Day Ahead vs Month Ahead pricing in 2021
In the second chart we can see what's happening a bit more clearly as we aggregate the time series into monthly averages.
Chart 2: Average of Day Ahead and Month Ahead Prices by Month