The problems of expectation

"Oft expectation fails, and most oft there where most it promises."

This is a post about expectations. The quote is from “All’s Well That Ends Well.”

One step at at at a time, variations.

I was reflecting on expectations and learning Chinese while waiting for take-off to Shanghai. There are a lot of nice Chinese expressions about incremental progress. Deng Xiaoping’s “cross the river by feeling for the stones” is probably most famous outside of China, but there are all sorts of very interesting standard phrases.

Stratnergy is all about taking things step by step, making errors along the way. Indeed, errors may be particularly obvious when a stratnergy post looks at data (something I haven’t done in a serious way for a long time, and not to say that I’m doing it seriously here). The plots that I offer here are meant as sketches, ideas, rough drafts. The underlying data may be wrong. The idea may not make sense. The execution may be flawed. It’s best if you follow along with a more reliable dataset.

The aim is to build a spirit of experimentation: to test some ideas, develop conversation. I am grateful for your comments, questions, corrections, criticism, links to material I hadn’t seen: “…and there is no new thing under the sun.”

Now towards our next tiny stepping stone.

In a previous post we reflected on an industry expert’s ideas about “delta tracking” which is all about seeing how expectations evolve in time. This is a very powerful conceptual frame with which to think about the markets.

Arguably, the most visible and important day-to-day delta occurs between the Day-Ahead Auction and the Continuous Intra-Day Market.

One comes out of the day-ahead auction with a sense of the “sensitive periods.” The next important step is the re-balancing that has to happen to move from hourly to 15-min profiles.

This is where we can start seeing “deltas” e.g. on the IDA 1 auction, giving a sense of how the market sees the prices progressing. High deltas give a sense of sensitivity to generation factors, for example ramps in renewables compared to fossil fuel generation.

Volatility in short-term power markets

We’ve looked at this delta previously. Let’s have another go from a different angle, with a nod to the developing series on variability swaps (Part 1, Part 2 - coming soon).