2. Energy System Investment and Risk Management Unit 2C: Electricity Trading and Renewables Simon Watson, CREST Loughborough University

3. Electricity Trading and Renewables Simon Watson

4. Overview In this lecture, we will explore: State-owned Electricity Supply Industries The Electricity Pool How to Hedge Your Bets! Market Deregulation Support mechanisms for renewables Feed-in Tariffs NETA/BETTA and renewables

5. Ancient History: The Central Electricity Generating Board CEGB owned wires, generation, meters, etc Central planning of power system Central dispatch of all plant in merit order State monopoly Little opportunity for independent generation or supply Very secure system

6. Privatisation ESI privatised in 1990 Generation and supply split National Grid – transmission and system operator + pump storage National Power, Powergen, Nuclear Electric Regional Electricity Companies Electricity Traded in a Power Pool

7. The Pool 12:00 12:3013:0013:30 System Operator needs to meet demand half-hourly Day ahead forecast Generators offer into a power pool to generate certain volume for certain price

8. Generator Offers into Pool GeneratorOffer Price (£/MWh)Volume (MWh) 1 (CCGT)42.794000 2 (Coal)58.392000 3 (Coal)32.432000 4 (Coal)84.791000 5 (Nuclear)00.002000 6 (OCGT)150.561000 System Operator needs to procure 9000MWh in a half- hour period

9. SMP System Marginal Price (SMP) Generator 5 £00.00/MWh Generator 3 £32.43/MWh Generator 1 £42.79/MWh Generator 2 £58.39/MWh 9000MWh

10. Pool Prices Capacity credit (CC) payments for being available SMP+CC=Pool Purchase Price (PPP) PPP paid to all selected generators CC paid to those available but not selected Amended payments to constrained generators so they did not lose out Balancing costs added to PPP=Pool Selling Price (PSP) paid by suppliers

11. Typical Pool Prices (Nov ’99)

12. Hedging Your Bets PPP, PSP variable Large fluctuations in prices paid in each half-hour – say up to £0.25million for large supplier Risk Cash flow problems! Would be nice to pay a fixed price…

13. Contracts for Differences Pay PPP/PSP as normal Agree a contract with third party Fix a given volume at a given price If PPP/PSP above fixed price third party pays you the difference for the contracted volume If PPP/PSP below fixed price you pay third party the difference for the contracted volume Price effectively fixed

14. Effect of Hedging Trader pays Supplier £(75-30)x20 Supplier pays Trader £(30-13)x13 Agreed Strike Price

15. Deregulation 1992 – 1MW customers can choose supplier 1994 – 100kW customers ditto 1999 – all customers ditto Independent generators Independent suppliers Supply, distribution, metering split Initially fragmentation of large generators More latterly consolidation – The Big Six

16. Non-Fossil Fuel Obligation Nuclear liabilities Chance to stimulate renewables market Levy on all electricity sold Projects bid to generate for given price Projects selected to fill capacity of each technology tranche Successful projects paid bid price for long term (15 year) contract from levy

17. NFFO Prices NFFOPrice (p/kWh) NFFO 1 (1990)7.51 NFFO 2 (1991)8.78 NFFO 3 (1994)4.84 NFFO 4 (1997)3.59 NFFO 5 (1998)2.71

18. Renewables Obligation Obligation on all suppliers to source generation from RE (3% 2002/2003 – 15% 2014/2015) Can ‘buy-out’ £42.02/MWh (2013/2014 price) Buy-out proceeds recycled to compliant suppliers Generator receive renewable obligation certificates (ROCs) which can be sold separately to electricity Number of ROCs/MWh depends on technology Buy-out price and recycled proceeds set ROC value To be fully replaced by a Contracts for Differences mechanism by March 2017

19. Climate Change Levy Levy on all energy sold to all non-domestic consumers £5.24/MWh (2013/14 prices) Renewable electricity exempt Renewable generators receive Levy Exemption Certificates (LECs) which are sold with electricity to supplier

20. Feed-in Tariff For renewable energy generation <5MW Guaranteed price for electricity generated AND extra bonus for that exported (at least 3p/kWh) Banded depending on technology and size TechnologyBandTariff (p/kWh)Duration (years) Wind<=1.5kW21.6520 Wind>1.5-15kW21.6520 Wind>15-100kW21.6520 Wind>100-500kW18.0420 Wind>500-1500kW9.7920 Wind>1.5-5MW4.1520 Will change again on 1 st April 2014

21. The Move to NETA/BETTA Rigging of Pool prices Freedom to contract bilaterally Drive down prices Third party traders Increase competition in wholesale market Introduced on 27 th March 2001 New Electricity Trading Arrangements later extended to GB as British Electricity Transmission and Trading Arrangements

22. Buying and Selling under NETA Generators and suppliers notify future position to National Grid (NG) Allows NG to plan balancing of supply and demand Generator ‘self-dispatch’ Generators and suppliers must notify contracts before gate closure (1h ahead of delivery at present)

23. Physical Contracts Hedging contracts now physical contracts for power Difference between forecast and actual position ‘cashed-out’ at prices set within Balancing Market Generators and suppliers contract on different timescales

24. NETA/BETTA Wholesale Market Bilateral forward contractsPower exchanges t+0t+1h~t+24h>t+month System Operator uses balancing market to match supply & demand Contracted-actual position ‘cashed out’ using imbalance prices Gate closure Generators & suppliers contract to buy/sell power months ahead Closer to gate closure generators & suppliers ‘fine tune’ position Balancing market

25. System Buy and Sell Prices If generator produces more than contracted then is paid for surplus at System Sell Price If generator produces less than contracted then must pay for deficit at System Buy Price If supplier consumes less than contracted then is paid for surplus at System Sell Price If supplier consumes more than contracted then must pay for deficit at System Buy Price

26. Balancing Market Mechanism by which NG balances supply and demand NG instructs generators (and to lesser extent suppliers) to change output/demand to balance system NG selects generators/suppliers through bids/offers into Balancing Market

27. Bids and Offers Generator can bid to reduce output Generator can offer to increase output Supplier can bid to increase demand Supplier can offer to reduce demand Bids/offers ordered and selected as required (bit like Pool) Generators/suppliers pay as bid if selected Generators/suppliers are paid as offered if selected

28. Balancing Market – Imbalance Prices Balancing Market System Operator accepts bids/offers to balance supply/demand Generators make bids/offers to adjust output Suppliers make bids/offers to adjust demand Cost of bids sets System Sell Price Cost of offers sets System Buy Price Energy excesses paid SSP Energy deficits pay SBP System Sell Price < Average forward price System Buy Price > Average forward price

29. Black Law Wind Farm Output 6/3/14 to 12/3/14

30. Scenario: Black Law produces a forecast of power output based on persistence every 6 hours for t+1h to t+6h Generator has a fixed price contract of £45/MWh for output What is the exposure to imbalance prices?

31. Actual vs Forecast

32. System Buy and Sell Prices 6/3/14 to 12/3/14

33. Revenue Earned During the Week Contract worth £45/MWh Exposure to imbalance prices due to error in forecast reduces value to £42.13 (6.4% reduction) Just spilling power and accepting SSP would net £37.21 (17.3% reduction)

34. Reducing Exposure Cost of balancing the system placed on those who cause imbalance rather than averaged over whole market (unlike pool) Better forecasting Aggregation/consolidation Storage, combining with another more controllable renewable energy generation source