Navigating Market Volatility

The latest reporting from the Financial Times highlights a point that energy analysts have been making for years: geopolitical shocks consistently strengthen the case for renewables, electrification and storage. Microsoft’s global vice-president for energy notes that oil and gas price spikes linked to the Middle East conflict reinforce the value of wind, solar and batteries in providing price stability. Once installed, renewables offer predictable cost profiles and reduce exposure to volatile global fuel markets. We saw this dynamic after Russia’s invasion of Ukraine. Europe accelerated solar deployment, heat pump uptake increased in several countries, and governments revisited questions of energy security through the lens of diversification and electrification. The underlying issue remains unchanged. Fossil fuels must continuously flow through complex global supply chains. When those flows are disrupted, prices spike and economies are exposed. Renewables, by contrast, are capital intensive upfront but deliver long term domestic supply and insulation from commodity shocks. There are short term risks. Inflation, higher interest rates and supply chain constraints can slow clean energy investment. Some governments may also respond by doubling down on gas infrastructure. The policy challenge is to avoid locking in further structural vulnerability. Energy security and climate policy are not competing objectives. In a world of recurrent geopolitical instability, they are increasingly aligned.

In the wake of Europe’s worst blackout, Spain has adopted a temporary solution to address the energy security challenges during "hellbrise" at midday. These are periods with the highest solar and wind generation combined. Spain’s grid operator, Red Eléctrica (REE), has transitioned the national grid into a "strengthened mode" of operation. Essentially, this involves partially suspending normal electricity market operations by compensating renewable generators (solar and wind) to curtail output at peak times, making space for more synchronous generation from hydro, nuclear, and gas plants. These conventional plants provide essential stability services. Their large spinning turbines offer critical system inertia, absorbing shocks and smoothing power fluctuations, thus creating a robust buffer against disturbances. Furthermore, synchronous generators significantly enhance frequency regulation and voltage support, while also boosting system strength through short-circuit capacity and power system stabilizers (PSSs). Spain’s post-blackout strategy represents a clear departure from typical operations, emphasizing a conservative, reliability-focused approach. At a Senate hearing on May 6, Spain’s Energy Minister Sara Aagesen Muñoz stated, “The electrical system is now operating under reinforced conditions regarding operational security," explicitly referencing measures introduced after the April 28 incident. She also highlighted REE’s independent technical authority in taking necessary actions to "guarantee security of supply." In practice, wind and solar generation are now being modestly curtailed, depending on daily renewable forecasts, until the grid infrastructure and control systems can reliably accommodate higher instantaneous renewable penetration levels. The current "strengthened mode" is intended as a short-term emergency measure. Government and REE officials have clarified that this strategy will remain only until the precise causes of the blackout are fully understood and appropriate upgrades are implemented. Historically, Spain has been a pioneer in renewable energy integration, regularly setting records in wind and solar production, making this temporary shift especially notable. For now, however, maintaining grid stability and ensuring reliability clearly takes priority: more spinning turbines, less immediate reliance on solar and wind, until operators are confident the grid can handle operating at a smaller stability margin safely.

Tight as a Drum (+76 bps) Investment Grade Corporate Credit Spreads trade at the 0 percentile, a spread of +76 bps vs. UST, the tightest spread since 1997 (see table below). A-rated bonds trade at +62 bps, while BBBs are +96bps. Reasons why spreads are so tight: - Credit risk and balance sheets has improved for IG issuers - Credit conditions in the financial markets are at its easiest level since pre-COVID - The Fed will soon embark upon an easing cycle - Corporate earnings are strengthening - The risk of recession is low - Investor Demand is robust (higher UST yields allows the absolute yield level to remain ~50%, despite tight spreads) These strong fundamentals paint a supportive picture for IG credit; however, historically tight spreads suggest that much of the positive outlook is already reflected in current pricing. Investors should remain disciplined and selective, with no reason to sell IG at the current juncture as our favorable credit conditions should remain intact. Since diversification and intelligent asset allocation decisions remains paramount to long-term wealth creation, capital allocators can identify compelling non-IG and Private Credit that will continue to offer higher IRR/MOIC profiles as yield premiums for higher yielding assets should continue to meaningfully enhance portfolio income, just as it has over the years.

"One of the key ways to make energy systems more reliable is by maximizing flexibility — improving how well the system can adapt in real time to changes in supply and demand. The more flexible the system, the better it can handle sudden demand spikes in the event of extreme weather, such as cold snaps or heat waves, or respond to supply disruptions such as plant outages. Improving flexibility includes upgrading aging infrastructure. Much of the U.S. grid was built decades ago under different demand patterns. Modernizing the grid — by updating substations and transmission equipment, deploying advanced sensors and incorporating advanced transmission technologies (ATTs), for example — can reduce failure rates during extreme heat and cold. These technologies help operators detect problems quicker, reroute power if equipment is damaged and restore service fast. Modernization not only improves reliability but also reduces expensive emergency interventions and lowers long-term maintenance costs. Increasing grid capacity, both through deployment of ATTs and building regional and interregional transmission lines, can reduce the risk of a local weather event turning into a widespread outage. Creating a more interconnected grid allows regions to share power during shortages. Having this greater transmission capacity also help keep prices down by allowing lower-cost electricity to reach areas facing higher demand. Demand-side management options can help ease pressure on the system during extreme weather events. These include encouraging customers and large users to reduce or shift electricity use during peak periods in exchange for lower bills or leveraging distributed energy resources to help prevent shortages. Systems that rely too much on a single fuel are more vulnerable to disruption. Diversification across energy sources and technologies helps reduce the risk of issues related to fuel shortages, infrastructure failures and localized weather impacts. Finally, policy is also critical. It’s vital that incentives are properly aligned with modern needs for flexibility and preparedness. This can help utilities make system investments that really work in extreme weather and minimize costs to consumers in both the short and the long run." Kelly Lefler World Resources Institute https://lnkd.in/e5syqXQp

Spreads at 10-Year Tights: What It Means for Investors Credit spreads have tightened to historic lows. This creates both opportunities and risks for fixed-income investors in 2025. Here’s what the data tells us: Spreads Are Historically Tight: - Emerging Market High Yield (EM USD HY) shows the most variability. - Even investment-grade (IG) spreads are far below their historical averages. Risk vs. Yield Divergence: - Developed Market IG yields remain attractive. - Emerging Market High Yield no longer compensates enough for its risks. What Are the Risks? Tight spreads limit price gains. They also increase vulnerability to market shocks. Key risks include: Geopolitical Tensions: Emerging markets are most at risk of spread widening. Central Bank Surprises: A sudden policy shift could drive spreads higher. What Should Investors Do? Stick to Quality: - Focus on high-rated IG bonds (A or above). - They offer better protection in volatile markets. Be Tactical: - Shorter-dated High Yield bonds in DM markets provide strong returns. - Asia IG bonds stand out with strong credit fundamentals. Use Structured Products: - Credit-Linked Notes (CLNs) offer attractive risk-reward profiles. - They help guard against spread volatility. 2025 Strategy Manage duration carefully. - U.S. rate volatility will remain a challenge. Favor EM IG bonds with robust fundamentals. - Avoid high-risk EM HY names. Pay attention to macro trends. - Policies like Trump’s fiscal changes and Europe’s slowdown will shape credit markets. This is a time for discipline. Focus on quality. Stay diversified. And prepare for volatility. #FixedIncome #CreditMarkets #InvestmentStrategy #EmergingMarkets #PortfolioManagement #Finance

Day 23 of the conflict. Oil prices are up more than 40% since the war began.   At moments like this, it feels like the scale of the problem is bigger than the tools we have. But this is exactly when sustainability thinking matters most; not as an aspiration, but as a practical framework for building resilience.   The pathway forward looks different depending on where you are.   For 𝗱𝗲𝘃𝗲𝗹𝗼𝗽𝗲𝗱 𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗲𝘀, the priority is accelerating what is already in motion: faster permitting for renewables, grid modernisation, energy efficiency at scale, and strategic storage investment. The tools exist. The crisis has made the case for using them clearer than ever.   For 𝗱𝗲𝘃𝗲𝗹𝗼𝗽𝗶𝗻𝗴 𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗲𝘀, the transition requires targeted concessional funding, technology transfer, and South-South cooperation on solar and distributed energy. Getting this right means ensuring the transition is equitable, not just fast.   Across both contexts, a few principles from sustainability thinking apply:   🔹 𝗗𝗶𝘃𝗲𝗿𝘀𝗶𝗳𝗶𝗰𝗮𝘁𝗶𝗼𝗻 reduces fragility. Every economy that has invested in a broader energy mix, whether through renewables, nuclear, efficiency, or storage, is more resilient to what is happening right now. This is not theoretical. It is visible in real time.   🔹 𝗟𝗼𝗻𝗴-𝘁𝗲𝗿𝗺 𝘁𝗵𝗶𝗻𝗸𝗶𝗻𝗴 pays dividends that short-term crisis management cannot. The countries and companies that made transition investments years ago are in a structurally different position today than those that deferred them.   🔹 𝗦𝘆𝘀𝘁𝗲𝗺𝗶𝗰 𝗿𝗶𝘀𝗸 requires systemic responses. The current crisis is a reminder that 𝘦𝘯𝘦𝘳𝘨𝘺 𝘴𝘦𝘤𝘶𝘳𝘪𝘵𝘺, 𝘧𝘰𝘰𝘥 𝘴𝘦𝘤𝘶𝘳𝘪𝘵𝘺, 𝘢𝘯𝘥 𝘦𝘤𝘰𝘯𝘰𝘮𝘪𝘤 𝘴𝘵𝘢𝘣𝘪𝘭𝘪𝘵𝘺 are not separate issues. Sustainability frameworks that integrate these dependencies, rather than treating them in silos, are better equipped to identify vulnerabilities before they become crises.   The disruption we are living through is painful and the immediate human cost is real. But it also demonstrates why the transition matters and why the time to invest in it is not after the crisis, but right now. #sustainability #climateresilience #energytransition

You’re unlikely to get away with no cost increases But there are loads of levers to reduce the hit Here are 9 classics… 1/ Should Cost Modelling → Build costs from bottom-up: raws, packs, conversion… → Identify what’s real cost inflation vs profiteering 💡Fact-based negotiations reduce emotional hype 2/ Index Price Challenge → Ask supplier to share their cover position (% fixed by month) → Align timing of increases to actual exposure, not headlines 💡Index ≠ Price (your supplier is probably buying below index) 3/ Specification Challenge → List out all spec attributes: variety, size, granularity, colour… → Set attributes to cheapest. Then dial up just to where needed 💡When prices surge, it’s amazing how specs can be relaxed! 4/ Network Optimisation → Review footprint of manufacturing, distribution, customers → Shift quantities to lower cost plants and lanes 💡These flex options should have been tested in quieter markets 5/ Phased Price Increases → Requested staged increases vs one big hit → Tie increases to triggers: month, volume, further market shifts 💡Likely supplier has stock in system made with lower costs 6/ Give and Get Trades → Ask suppliers what matters to them: cash, longer contract… → Then trade. Eg you need lower price now; they need cash 💡Value comes in many forms – never assume anything 7/ Spot vs Contract → Assess whether buying spot is cheaper → There can be good opportunities such as ‘day-ahead’ energy 💡Requires robust governance and clear guidelines NB – probably best to do no more than 20% spot to cap upside risk 8/ Packaging & Orders → Recheck pack formats, pack specs, MOQs, order frequency → The price difference of 3X6T monthly vs 18T/3months is significant 💡If you’ve got cash & storage, larger batches drive supplier efficiency 9/ Demand Challenge → Check inventory levels and challenge forecasts → Eliminate waste, slow movers and over-ordering 💡We often carry more stock than we realise – check your larder! What’s your favourite lever to minimise inflation hits? 👇 Frost Procurement Adventurer 🔔 Follow Simon Frost for more on cost inflation ♻️ Repost to help others faced with cost pressure As a footnote to the above – we should cast our minds back to 2020-2023 during Covid and the geopolitical tension. Remember how creative we became?! There were no sacred cows to secure supply and minimise cost – reignite this mindset again

The escalation of conflict in the Middle East is a reminder of how tightly interconnected energy markets, fertilizer supply chains, and agrifood systems have become. The closure of the Strait of Hormuz -- a critical chokepoint linking Gulf producers to global markets -- has disrupted flows that normally carry about 20 million barrels per day of oil (around one quarter of global seaborne oil trade), along with one-fifth of global LNG exports and 30% of internationally traded fertilizers. Within days, tanker traffic fell by more than 90%, leaving 8-10 million barrels per day of oil production shut in. Markets reacted immediately. Brent crude prices jumped 20-35%, briefly reaching $115-120 per barrel. European natural gas prices surged 50-75%. Fertilizer markets tightened, with urea prices rising nearly 20% in early March. These shocks quickly transmit through agrifood systems. Higher energy and fertilizer prices raise farming costs and may reduce fertilizer use, lowering crop yields later in the year and potentially pushing food prices higher. Import-dependent countries are particularly exposed. Many economies in Africa, Asia, and Latin America rely on fertilizers from Gulf producers, so disruptions are raising prices and shortages. Even modest price increases can push smallholders to cut fertilizer use, reducing yields and increasing food security risks. Energy shocks can reinforce the relationship between fuel and food markets. Higher oil prices often boost biofuel demand, increasing use of crops like maize, soybean oil, and palm oil used for ethanol and biodiesel. Over time, this can shift acreage toward energy crops and increase volatility in global food markets. The conflict also carries broader economic risks. Gulf economies host millions of migrant workers who send billions home in remittances. A prolonged disruption could reduce these flows, weakening household purchasing power as food and energy prices rise. Reopening the Strait of Hormuz through diplomacy remains the most effective way to stabilize global markets. Meanwhile, coordinated action is needed to: - develop alternative trade routes and contingency logistics - enhance market monitoring and preparedness - support vulnerable import-dependent countries - finance farmers and sustain agricultural production - avoid short-term biofuel demand surges Over the longer term, countries need to diversify supply sources, invest in sustainable fertilizer production, strengthen domestic agricultural productivity, and expand renewable energy.

As the energy sector transitions away from fossil fuels, renewable sources like wind and solar are becoming more dominant in electricity generation. While this shift is vital for sustainability, it also introduces challenges due to the intermittent nature of variable renewable energy (VRE). These fluctuations can lead to significant energy price volatility throughout the day, requiring innovative strategies to ensure grid stability and reliable energy supply. Hydropower and pumped storage projects can play a crucial role in addressing these challenges. Here’s a breakdown of key considerations: Increasing Role of VREs and Price Volatility - Wind and solar energy are expected to occupy a growing share of electricity generation as fossil fuel power plants retire. - The intermittent nature of VREs contributes to energy price fluctuations, making grid stability a pressing concern. Revenue Diversification for Hydropower and Pumped Storage - Hydropower and pumped storage can participate in diverse electricity markets, including capacity, energy, and ancillary services. - Despite this diversification, revenues may not always cover project costs, such as the levelized cost of energy (LCOE). Opportunities in Ancillary Services -Expanded services like inertial frequency response can stabilize the grid during disturbances, ensuring operational continuity. -Regulators need to ensure fair compensation for these services to make them economically attractive. Need for Ramping and Flexibility - The demand for quick power output adjustments (ramping) and flexibility commitments is recognized and compensated. - Enhanced compensation mechanisms could further incentivize investment in hydropower and pumped storage projects. Call for Further Research - Investigating the viability of expanded ancillary services can provide insights into making hydropower and pumped storage more feasible and appealing for investors. By addressing these challenges and opportunities, hydropower and pumped storage projects can strengthen their role in stabilizing the grid and complementing renewable energy sources.

Back to the grid…. Most people who use electricity don’t fully appreciate where it comes from or how the cost is calculated for them as a consumer. Energy spot price auctions are a mechanism used in electricity markets to price electricity according to real-time, market based supply and demand conditions at a particular moment. The goal of spot price auctions is to create a competitive market for electricity and facilitate efficient allocation of resources. However, the volatility in spot prices has created significant challenges for all stakeholders. The symptoms include price volatility and instability in electricity markets. To enhance grid reliability and stability, alternative approaches must be considered. While spot pricing may seem like a straightforward way to determine prices, it fails to account for the unique dynamics of the power grid and the long-term investments required to maintain a reliable and resilient energy ecosystem. The primary issue with spot price auctions is that they treat electricity as a commodity, subject to the whims of the market. Dramatic price fluctuations have severe consequences for both consumers and energy providers. When prices spike during periods of high demand or supply disruptions, it imposes enormous financial burdens on households and businesses, threatening economic stability. From the perspective of energy suppliers, the unpredictability of spot prices makes it challenging to plan for long-term capital investments in new generation capacity, transmission infrastructure, and grid modernization. These investments are crucial for ensuring the continued reliability and sustainability of the power grid, but they require a level of price certainty that spot markets simply cannot provide. It is time for policymakers and industry leaders to explore alternative pricing mechanisms that prioritize stability and long-term planning. One alternative is the use of capacity markets, where energy providers are compensated not only for the #electricity they generate but also for the availability of their generation assets. This model would provide a more reliable revenue stream for suppliers, enabling them to make the necessary investments in the grid's future. Another alternative is the implementation of forward contracts and hedging strategies. By locking in prices for electricity over longer time horizons, these mechanisms can help smooth out price volatility and provide the predictability that energy providers and consumers require. Transitioning to a more resilient energy system will not be easy, but it is a necessary step to ensure the long-term prosperity and security of our communities. By moving beyond the limitations of #energy spot price auctions, we can build a power grid that is truly fit for the future. The #grid of the future should reward a diverse portfolio of generation sources. It is time to move past demonizing reasonable energy sources even if they don’t fit certain ideologies.