The document provides an overview of the power, gas, and emissions certificate trading industry in Europe. It discusses how these different commodities are linked and traded together. Power is generated through various sources like fossil fuels, nuclear, and renewables. It is transmitted through a grid and distributed to end users. Trading involves buying and selling power and related commodities like gas to balance supply and demand in real time given fluctuating needs. Risk management tools like VaR and PaR are used to price assets based on volatility. Comparative generation and cost data is also presented for technologies and countries like Lebanon.
3. Why are the Power, Gas and Emissions
always mentioned together?
• ETRM (Energy Trading and Risk Management) often refers to the
power, gas and emissions trading.
• Why Gas traded as energy? Simply because its unit is the Watt.
• An energy producer, to be able to generate and trade power, needs to
trade Gas and Emissions, Coal, Fuel Oil, etc. Plus some basic FX and
MM trades.
• Nuclear combustibles like enriched uranium are not traded in open
markets, but are part of more complex deals and agreements.
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10. Transmission
• European Network of Transmission
System Operators for Electricity
(ENTSO-E) is an association of Europe's
Transmission System Operators (TSOs)
• It uses a super grid across all Europe
• At any point in time, the grid needs to
be balanced
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12. Distribution
• Local power resellers distribute the power to
homes, schools, businesses, industry, etc.
• Distribution is two-ways since private power
producers are entitled to sell to the grid the
energy they have generated
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13. ETRM Projects
Basically, what is required is to set up a platform to:
- Calculate the Risk
- Price the power
- Trade it
- Trade the other needed assets to produce the power
Except that we are dealing with the most complex machines ever built
and exploited by man : Nuclear Reactors
And put under huge constraints in terms of availability and precision
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14. What is the asset being traded?
• By nature, electricity cannot be “kept for later”
• This is what distinguishes it from other financial or physical assets:
Electric power must be consumed at the very moment and place it is produced
• Demand fluctuates, but supply is inflexible
• As a consequence, the total electricity grid must at any time and place be “in
balance”
In order to guarantee the overall balance, a framework is imposed on every
participant
• Up-front: rules
• Real-time: adjustments
• After-event: penalties
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18. Power Need Fluctuation
Special events can affect the power profile.
One famous example of a wrongly predicted profile is the royal wedding of Charles and
Diana in 1981, where the largest surge in power demand was a huge 1800 Megawatts
(MW), the equivalent to 720,000 kettles being boiled at the same time.
In 2011, the latest royal wedding generated a
different profile, for different reasons.
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19. Power Need Fluctuations
TV shows can also affect the need profile.
For example, the top 3 fluctuations in
the UK are:
• A 2,800 MW surge, set at the end of
the penalty shoot-out after
England’s World Cup semi-final
against West Germany in 1990
• A 2,600-MW surge after a 1984
episode of “The Thorn birds”
• A 2,570-MW surge at half-time
during England’s semi-final match
against Brazil in the 2002 World Cup 20
20. What happens when power need
fluctuates?
When demand raises, power suppliers must provide power on the spot
to their clients:
They use the ETRM to buy and sell power
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21. What about power availability?
Example from Germany Nuclear reactors provide a constant power
Wind power is not reliable
Solar power is only available during
daytime
Coal plants allow very little production
fluctuation
The only source that can easily be
controlled is gas turbine. Simple equation:
more gas on the input, more power on
the output
Therefore, in order to compensate for
sudden changes in profile, the gas
turbines are put in production.
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23. Intermittent Source Production
Photovoltaic energy
The energy of sunlight is about 1 kW per square meter. So the sunlight
hitting the roof of a normal car is about 1 kW.
If PV crystal efficiency is 100%, 1 m2 will produce 1kW.
But a first price photovoltaic cell has 15% efficiency => 150W/m2.
Space-age cells are 40% efficient, generating about 400W/m2.
Practically, it means that to provide 2500MW, we would need to cover
10,000,000m2 with photovoltaic cells (25% efficient)
USD/W
Austr
alia
China
Franc
e
Germ
any
Italy Japan UK US
Residential 1.8 1.5 4.1 2.4 2.8 4.2 2.8 4.9
Commercial 1.7 1.4 2.7 1.8 1.9 3.6 2.4 4.5
Utility-scale 2.0 1.4 2.2 1.4 1.5 2.9 1.9 3.3
PV energy is expensive. A 2,500MW production farm
would cost 5 billion USD to implement. Furthermore, the
lifespan for a PV cell is 20 years (1% efficiency decrease per
year).
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And another major issue: PV power is available
only during the day…
24. How to price the power?
At mid-day, consumers use much more power than at 4am and are ready to pay
more for it.
A company in shortage is ready to pay very high amounts to compensate for its
production (and weak prediction)
0 MW 1000 MW
0 EUR/MWH
100 EUR/MWH
12pm
4am
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25. How to price the power?
The base cost is:
The cost of site preparation, construction,
manufacturing, commissioning, financing and
dismantlement of a power plant
The operating cost of the plant, including fuel cost
External costs
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26. How to price the power?
However, many power plants produce much less power than their rated capacity
Some power plants produce much less power than their rated capacity because they use intermittent energy
sources
Operators try to pull maximum available power from such power plants, because their marginal cost is
practically zero, but their available power varies widely, e.g. it can be zero during heavy storms at night
In other cases operators deliberately produce less power for economical reasons
The cost of fuel to run a load following power plant may be relatively high, and the cost of fuel to run a
peaking power plant is even higher.
Operators keep power plants turned off ("operational reserve") or running at minimum fuel consumption
("spinning reserve") most of the time
Operators feed more fuel into load following power plants only when the demand rises above what lower-
cost plants (i.e., intermittent and base load plants) can produce, and then feed more fuel into peaking power
plants only when the demand rises faster than the load following power plants can follow.
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27. Trading pattern
During the day, power producers
Analyze the market, the risks, the weather conditions, fuel price changes,
political situations, etc.
Assess the sales, the production versus the day profile based on historical
data
Buy power or sell exceeding production
On scheduling cut off, they need to send a schedule of power production
and injection into the grid with a granularity of up to 1 minute for the
next day
They need to book capacity on the grid, via transport deals, to be able to
deliver the power
The last 10 minutes before cut off witnesses a high trading with the highest
price, in order for each producer to balance his schedule.
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28. What if the scheduling failed?
If one operator’s scheduling fails, all the grid will be impacted, and thus
all European clients.
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A wrong prediction results in financial penalty for the first two
times, and a ban from using the TSO grid after the third error
29. Recycling Nuclear energy
What if the demand drops below the nuclear base production?
The exceeding energy is used to pump water for the hydroelectric plants, allowing the
production of green energy
Each power producer is obliged to produce a certain percentage of green energy
Demand
The missing
part is
purchased
from the
market
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30. Gas Trading
Whenever a fluctuation requires instant power, gas turbine are put into contribution.
Therefore gas trading is essential for power producers.
• Gas state
• Compressible (this gives advantages and disadvantages)
• Dissipating: losses must be taken into account
• Storability
• Natural gas can be stored (at cost)
• Pricing of gas contracts
• Historically (long term contracts) are derived from an “alternative fuel” perspective, and therefore are oil
linked
• For short term deals, demand is mostly driven by weather conditions and power generation needs, and
therefore the pricing is more power linked
• Furthermore, political and social situations impact the gas price.
• Physical routes with underlying “capacity” trades, freight, interconnections between power grids and gas transport
through pipes need to be taken into consideration.
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31. Emissions Trading
Certificates were created to highlight “environment quality” in industrial production, and the desire
to reduce emissions in an economically optimal way
Governments require that the production is the least harmful for the environment, which is
translated in a requirement to be “long” in “environmental goodness”. A certificate (for CO2, NOx or
the type of origin of electricity) is a proof of “goodness”
Economic actors consume “goodness” by polluting, and
create it by an environmental friendly activity
The validity of certificates is limited
In case of shortage, actors have to buy back “goodness” in
an open market. This mechanism is intended to be price
driving
The intention is that over time, the number of available
certificates is reduced, thereby making it more difficult to
be “good” and hence more expensive to be polluting
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32. Risk Management
Pricing is closely linked to Risk Management. Higher risk, means higher
margin and higher price.
In addition to the classic volatility and simulations, two reports are very
important for the power pricing:
• VaR
• PaR
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33. VaR and PaR
The Value at Risk – VaR: It is used to inject a set of
random data (deterministic, historical or Monte-
Carlo) into a simulation engine to assess the value
when this risk occurs.
In other words, the VaR allows the producer to calculate the probability and amount
of loss if a certain risk occurs within a determined timeframe. It allows the operator
to set the right price to sell/buy power, gas and emissions.
The Profit at Risk – PaR: It is used to calculate the impact of certain set
of input data over a long period of time
It allows the calculation of profit if the risk or issue persists for long
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34. VaR and PaR
Value at Risk is measured in three
variables:
• the amount of potential loss
• the probability of that amount of loss
• the time frame
For example, a power operator may
determine that it has a 5% one day
value at risk of $100 million.
This means that there is a 5% chance
that the operator could lose more than
$100 million in any given day.
Therefore, a $100 million loss should be
expected to occur once every 20 day.
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35. Comparative Numbers / Lebanon
Technology
Region or
Country
At 10% discount
rate
At 5% discount rate
Nuclear Europe 8.3-13.7 5.0-8.2
China 4.4-5.5 3.0-3.6
Black coal with CCS Europe 11.0 8.5
Brown coal with CCS Europe 9.5-14.3 6.8-9.3
CCGT with CCS Europe 11.8 9.8
Large hydro-electric Europe 14.0-45.9 7.4-23.1
China: 3 Gorges 5.2 2.9
China: other 2.3-3.3 1.2-1.7
Onshore wind Europe 12.2-23.0 9.0-14.6
China 7.2-12.6 5.1-8.9
Offshore wind Europe 18.7-26.1 13.8-18.8
Solar photovoltaic Europe 38.8-61.6 28.7-41.0
China 18.7-28.3 12.3-18.6
Cost of KWh in Lebanon:
Lowest : 0.02US Cent/kWh
Highest: 0.13 US Cent/kWh
Actual Costs of Electricity
(US cents/kWh)
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43. • IEA
• EDL
• EDF
• Carboun
• Alpiq
• Statkraft
• Bloomberg
• PWC
• Cap Gemini
• World Nuclear Association
• US Energy Information Administration
• Murex
Credits – data source and pictures
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