Trading Power

Introduction to the Electricity Market

Iain Robertson, Generation Sales Manager

Agenda

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SmartestEnergy

What is a PPA?

Traded markets

The role of Elexon

SmartestEnergy

The UK’s leading purchaser of power from independent renewable generators and supplier of renewable electricity to large commercial and industrial organisations

Established as generation aggregator since 2001

Diverse portfolio

3GW contracted installed capacity

600 sites (>13% of GB independent embedded renewables)

Includes all commercial-scale renewable technologies

Strong balance sheet, backed by an international corporation

Annual turnover £1.2bn and profit after tax £13m

Wholly-owned subsidiary of Marubeni Corporation

170+ employees across offices in London, Ipswich & Glasgow

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What is a PPA?

4

What is a Power Purchase Agreement?

Route to market contract between: Generator (the seller) and Purchaser of electricity (the buyer)

Defines the commercial terms, including: Pricing structures Key dates and schedule for delivery Obligations and penalties Payment terms Risk and termination provisions

The principal agreement that defines the revenue and credit quality of a generating project and is a key element of project finance

Construction Risk ROC PPAs For Project Finance, up to 15 years

FiT PPA For Feed-in Tariff generators

CfD PPA To dovetail with CfD contract

Short-term PPA Merchant, typically up to 3 years

FlexiPPA Typically for portfolios

Frameworks up to 7 years

“Linked Supply” Direct PPAs with end-users

PPAs for renewable generators

Project revenue made up of 4 components

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Wholesale Power Price

Fixed or flexible market price

Embedded Benefits

Payments for distribution-

connected generators

Renewable Subsidy

e.g. ROC, FiT, CfD top-up

New Benefits

REGO value emerging

Capacity Market

Avoidance Benefit

New Benefits

Subsidy

Embedded Benefits

Power

Fundamentals: short-term Supply & demand

Recession led to 6-8% demand reduction

Outages

Supply of primary energy

Price largely linked to gas price

Coal, oil

System capacity margins

Gas storage

European markets

Weather

UK Electricity Wholesale Market drivers

Sentiment: longer-term view Economic climate

(Geo)political effects

Regulatory changes

Emissions legislation

New technologies, sources and uses

Power Price options

May be fixed for a forward period based on liquid

wholesale market at the time typical forward liquidity 3-4 years

Prices can be fixed beyond the liquid curve if a

suitable hedge can be found in the market

Price may float by linking to a market index or via

agreed price setting mechanism

Floor price may be required for project finance

Forward annual price

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11

N2EX day-ahead price

PPA - Imbalance

Purchaser takes Volume Risk on the forecast versus delivered generation output

An imbalance charge is made, based on:

Nature of the supply

Historic data (if any)

Prevailing level of wholesale prices

Prevailing wholesale price volatility

Time between contract agreement and delivery

Purchaser’s experience of similar generation

Purchaser’s portfolio

Expected nature of prices in the imbalance mechanism

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What are Embedded Benefits?

Costs to end users accrue as

benefits to embedded generation

as it is treated as ‘negative demand’ in settlements

Vary according to location and

connection voltage

Distribution and Transmission losses

Generation Distribution Use of

System (GDUoS)

Balancing Services Use of System

(BSUoS) charges

Residual Cashflow Reallocation

Charge (RCRC)

Capacity Market Avoidance Benefit

Transmission Network Use of System Charges (TNUoS)

Transmission Network Use of System

(TNUoS) – Triad benefit

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2015/16 Final (£/kW)

2016/17 Final (£/kW)

2017/18 Current Forecast (£/kW)

1 Northern Scotland 23.47 40.97 29.73

2 Southern Scotland 26.79 40.24 30.45

3 Northern 32.62 42.93 38.16

4 North West 35.68 42.83 43.59

5 Yorkshire 36.29 42.49 44.13

6 N Wales & Mersey 35.62 42.68 44.50

7 East Midlands 39.07 44.72 47.01

8 Midlands 39.63 45.74 48.26

9 Eastern 41.18 46.54 49.02

10 South Wales 37.61 42.31 45.44

11 South East 43.74 49.20 51.83

12 London 46.24 51.87 54.37

13 Southern 44.79 50.08 52.83

14 South Western 43.98 48.58 51.43

Range 22.77 11.63 24.64

Transmission Network Use of System

Charges (TNUoS)

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Embedded Benefits Review

1. Growing gap between the Use of System charges faced

by transmission connected and embedded generation

2. Regulatory developments:

a) Ofgem reviewing charging arrangements for

distribution-connected generators

b) CMA proposals also effectively remove the transmission

losses embedded benefit

3. NG widening review of “Commercial Charging

Arrangements”

ROC PPA

Power + ROCs + REGOs + Embedded Benefits

Monthly cashflow

Short-term market remains competitive

Long-term market typically 10-15 year deals Fewer PPA providers

Power and ROC price volatility

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ROC Values

ROC history Buy-Out Recycle

Nominal

Value

CP1 2002-03 £30.00 £16.52 £46.52

CP2 2003-04 £30.51 £22.99 £53.50

CP3 2004-05 £31.39 £14.17 £45.56

CP4 2005-06 £32.33 £10.19 £42.52

CP5 2006-07 £33.24 £16.04 £49.28

CP6 2007-08 £34.30 £18.65 £52.95

CP7 2008-09 £35.76 £18.61 £54.37

CP8 2009-10 £37.19 £15.15 £52.34

CP9 2010-11 £36.99 £14.35 £51.34

CP10 2011-12 £38.69 £3.58 £42.27

CP11 2012-13 £40.71 £3.59 £44.30

CP12 2013-14 £42.02 £0.70 £42.72

CP13 2014-15 £43.30 £0.35 £43.65

CP14 2015-16 £44.33 ? ?

CP15 2016-17 £44.77 ? ?

Targets

Values

ROC to become fixed price in 2027

Nominal ROC value forecast

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FiT PPA

FiT includes published Generation Tariff plus Export Tariff

Paid quarterly in arrears

Indexed annually

PPA is a market alternative to Export Tariff Generators can opt-out

Export Tariff provides effective floor price

PPA includes Power + REGOs + Embedded Benefits

Monthly cashflow

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Small Scale FiT

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How CfDs work

Low Carbon Contracts Company (LCCC) operate scheme

Difference payments from and to LCCC

Generators also need a PPA provider to sell their power (at

the Market Reference with discount)

Strike Price = Market Reference Price + Difference Payment

Key aspects of CfD P

ric

e

Generator pays back

Strike price

Generator receives Difference Payment

Market reference price

- day-ahead for intermittent

- season ahead for baseload

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PPA standard model is a discount to MRP

CfD v RO

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ROC CfD

Support financing low-carbon generation

Drive down costs

Long-term price certainty

PPAs in a post-subsidy world

Market stabilisation CfD

Direct end-user PPAs

Generator agrees (long-term) price with Consumer Consumer must also be creditworthy

Supplier provides PPA to Generator Including Embedded Benefits

Power is sleeved through to Consumer’s supply

contract at agreed price PPA provider may or may not also be Consumer’s Supplier

Certainty for both parties

Great opportunity to bring together willing parties

CSR and PR opportunities

Trading Power

Wholesale electricity is traded mostly OTC via

brokers Voice and screen

Traders prefer interface

More flexible

Provides market intelligence

Encourages tighter prices

Highlights opportunities

Trades are anonymous, until after the trade

Other trading done via exchanges, on indices

UK trades up to 6 times consumption

Some other European markets more liquid

Wholesale market

Trading Parties

Generators

Suppliers

Banks/ hedge funds

Commodity traders/

speculators

Consumers

European utilities

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Approximately 60 companies

trading UK power

c.100 trading gas

Traded Periods

Forward Market Months, Quarters, Seasons, Annuals

Prompt Market Day-ahead, week-ahead

Spot Market Within-day

Up to gate closure

Can trade baseload or “shape” e.g. peak/ off-peak

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Forward annual price

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Forward winter price

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Forward summer price

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Impact of Solar PV generation on intraday

wholesale price

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The Role of Elexon

What does Elexon do?

Elexon monitor and validate payments made

between generators and suppliers (BSC Parties)

Compare how much electricity generators and

suppliers were contracted to produce or consume

with actual volumes

Calculate a price for the difference and transfer

funds accordingly

Elexon deliver the Balancing and Settlement Code

National Grid

Balance physical

generation and

demand

Elexon Settlement imbalance

for generators and suppliers

BSC Parties

Produce or use

energy

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System Sell Price - Single Cash Out

Trading arrangements

Transmission Network

(Operated by National Grid) Generation

Large

Consumption

Central volume allocation

Supplier volume allocation Grid Supply Point

Distribution Network

GSP Group Supply Embedded

Generation

How does Imbalance occur

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Generators Suppliers Non-physical traders

May produce

more or less energy

than they have

sold contractually

May consume

(through customer

demand) more or

less energy than

they have

purchased

contractually

No generation to

sell, or demand to

satisfy – buys from

generators and

trades to suppliers

for profit

Elexon Settle Imbalance

ELEXON’s systems capture the contracted volumes from generators/

suppliers to record what they said they would produce/consume

ELEXON’s systems and processes analyse the actual data to see who

generated/consumed what

National Grid (Transmission operator) provides pricing data on actions

taken to balance the system

Prices are calculated by Elexon as per National Grid data and applied

to difference between contracted volumes & actual data =

Imbalance.

Payment is made to and from their customers – the BSC parties

Thank you for watching….

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