I-SEM DAY 4 – THE COST OF SPILLING WIND

  Since the first pricing emerged from the I-SEM on 30th September, market participants, particularly wind generators, have been considering what these prices mean for them. In this post, we explore the implications of these prices for REFIT wind generators. Over the first two days of generation, prices have been highly volatile with half hourly imbalance prices ranging from a negative €260.17/MWh to a positive €684.05/MWh. In order to calculate the REFIT subsidy, REFIT wind generators will have been assumed to earn the “REFIT Reference Price” which is calculated as the minimum of (i) the Day Ahead Price and (ii) a blend of 80% of the Day Ahead Price and 20% of the Imbalance Price. The subsidy will top up generators from this point therefore it is imperative for a REFIT windfarm to earn as close as possible to the REFIT Reference Price. The graph below displays the Day Ahead Price, the Imbalance Price and also the REFIT Reference Price for each half hour period over the first two days of the market.   The average time-weighted, and more relevant, the wind-weighted prices for these periods were: We have analysed the impact of these volatile prices on a selection of windfarms assuming three different trading strategies:

1. Spill only
2. Trade 80% of Forecast in Day Ahead Market
3. Fixed Balancing Product Please note this analysis excludes any fees or costs associated with the various trading strategies.

1. Spill Only Strategy

A spilling strategy has been adopted by some windfarms who have offtake arrangements with incumbents who have not agreed to provide ex-ante market access. If a windfarm “spilled” all of its output into the Balancing Market, it would only earn the Imbalance Price. As noted, average baseload (i.e. for all hours in a trading day) Imbalance Prices for day one were €47.18/MWh and for day two were €8.42/MWh. However, given the effect that wind production has on power prices, (high prices tend to occur when wind is short, and conversely, when wind is high, prices tend to be lower) the wind weighted imbalance price for day one and day two was €19.19/MWh and a negative -€0.29/MWh respectively. This means that, on average, windfarms that spilled on day two had to pay the market €0.29 for every MWh of production. For these periods, the REFIT Reference Price calculation would assume the windfarm earned €68.62/MWh and €54.18/MWh respectively for the two days – resulting in balancing costs of between €50-€55/MWh.    

2.Trade 80% of Forecast in DA Market

Anecdotally we understand that a relatively passive strategy of trading 80% of forecast in the Day Ahead Market and letting any forecast error spill to the Balancing Market is being adopted by some offtakers on behalf of their contracted generators in the market. If a windfarm traded 80% of its Eirgrid site specific wind forecast in the ex-ante Day Ahead Market on day one, it would have earned an average of €41.82/MWh. The equivalent data for day two was €42.11/MWh. These prices are significantly lower than the Day Ahead Prices due to volatile Imbalance Prices and the fact that wind was under-forecast by Eirgrid on those days. While undoubtedly this strategy had a better result than the Spill only strategy, the windfarm is still short €26/MWh from the REFIT Reference Price on day one, €11/MWh on day two.    

3.Fixed Balancing Strategy

Under this structure, ElectroRoute “guarantees” a fixed balancing discount across all time periods for wind. In these situations, ElectroRoute takes exposure to Imbalance Prices and forecast errors and uses its expert 24/7 trading and forecasting skills to manage its risk. Our counterparties are therefore insulated from the impact of volatile Day Ahead and Imbalance Prices.  

As noted above, this example does not include the fees charged to take on this risk.

Summary

In summary, the average prices achieved under the various strategies and resulting balancing costs for the first two days of the market are shown below. While this is a limited data set, these results are remarkable and we expect that the pricing algorithms and market rules will continue to cause high levels of volatility in Imbalance Prices for the foreseeable future.       Please contact our Client Services team if you would like to explore the trading, forecasting and balancing services that ElectroRoute can offer to help you minimise the impacts of this volatility on your assets.