The Value of Renewable Energy in a Competitive Wholesale Market Introduction

This section deals with the valuing of renewable energy generation when competing against other forms of generation in an electricity market. The following section deals with the issue of the 'green value' of the electricity. There are two basic differences between renewable energy generation and 'conventional' generation with regard to trading in an electricity market. These are:

• the relatively small size of renewable energy generation units;

• the variability or lack of controllability for most renewable energy generation units.

The first issue indicates that such generators tend to have less teverage in a competitive market. In order to make a reasonable profit, electricity suppliers have relatively large customer bases and may demand thousands of MW. Renewable energy generators may only produce tens of MW (though some of the proposed offshore wind farms may produce significantly more than this). Many of the power exchanges, for example, do not accept bids or offers of less than 1 MW and even if a renewable energy generator is able to trade in 1 MW blocks, this market is likely to be relatively illiquid, that is to say, trading blocks of this size are not easily sold in the market. These drawbacks will tend to restrict the value of the renew-ably generated electricity.

The second issue is particularly important in a market that sets ex ante prices and has a balancing market for top-up and spill. Wind power generation is variable, relying on changes in the wind, which can be forecast to a degree but with diminishing accuracy the further ahead one looks. Hydro generation, without storage, is dependent on river flow rate, which in turn relies on rainfall. Reservoir storage will help to mitigate fluctuations, but a prolonged drought will cause generation output to cease. Biomass generation, though controllable, is dependent on the biomass feedstock, which may be seasonally dependent. Photovoltaic power can be reasonably predictable in a warm climate with little cloud, but the movement of clouds can cause significant fluctuations in output. Wave power generation is reliant on wind to create waves. Changes in the energy in waves tend to be smoother than changes in wind energy as the waves tend to 'integrate' the energy that the wind imparts. Tidal power relies on the relative phases of the moon and sun and as such is very changeable on a daily basis but is reasonably predictable. Changes in wind speed/direction and pressure can modify the expected tidal range.

The topic of variability was discussed at length in Chapters 2 and 3 and the summary above highlights that all renewable energy sources have issues relating to variability to varying degrees and on different timescales. The ability to forecast changes also varies from one renewable energy generation source to another. If an intermittent renewable energy generator contracts bilaterally for a given amount of energy with another party, e.g. a supplier, any difference between what the generator is contracted to supply and what the generator actually supplies will be 'cashed-out' at top-up and spill prices emerging from a balancing market. These prices are generally unfavourable compared with average bilateral prices. In this type of market, renewable generators that cannot accurately predict their output are disadvantaged.

Case Study: The Impact on a Small Hydro Generator of an Electricity Market with Bilateral Trading and a Balancing Market

A small hydro generator wishes to trade its power output into an hourly electricity market where participants are able to trade bilaterally and cash-out imbalances in a balancing market at asymmetric top-up and spill prices, i.e. top-up and spill are charged/paid at different rates reflecting bids and offers from flexible generators/consumers who are able to adjust their output at short notice if called upon by the system operator. The hydro generator has entered into a day-ahead contract with a supplier to provide a fixed output of 1.9 MW every hour over a 24 hour period at a price of €15/MW h. What will be the generator's average revenue in €/MWh over this 24 hour period?

To answer this question, the actual hourly output of the hydro generator and the hourly top- up and spill prices over the 24 hour period need to be known. Table 7.9 illustrates the required calculation. It can be seen that the hydro generator's output varies throughout the day above and below the 1.9MW value for which it was contracted. As far as the supplier is concerned, the 1.9 MW is supplied as contracted and the supplier will pay the generator a total of €684.00 for the energy supplied during the day. This contract is notified in advance to the market operator. However, the hydro generator's output is metered hourly and the market operator can see that output does not match the contract at each hour. The generator is thus obliged to make up shortfalls at the top-up unit price (TUP) and is paid the spill unit price (SUP) for any excess. In this market, as with most markets having asymmetric balancing prices, the SUP is rather less than the prevailing market price and the TUP is rather more than the prevailing market price. The net value of energy deficits and surpluses then has a value of cost to the hydro generator of €53.40. If this is added to the

Table 7.9 Illustration of the value of a hydro generation contract at €15/MWh with imbalance cashed-out at spill unit prices (SUPs) and top-up unit prices (TUPs)

Hour

Actual

Contracted

Contract

SUP

TUP

Imbalance

(MWh)

(MW h)

value (€ )

(€/MWh)

(€ /MW h)

cost (€ )

1

1.0

1.9

28.50

11.00

23.00

-20.70

2

1.3

1.9

28.50

11.00

21.00

-12.60

3

1.5

1.9

28.50

9.00

20.00

-8.00

4

2.0

1.9

28.50

8.00

23.00

0.80

5

2.0

1.9

28.50

10.00

28.00

1.00

6

2.0

1.9

28.50

12.00

30.00

1.20

7

2.5

1.9

28.50

12.00

35.00

7.20

8

2.5

1.9

28.50

13.00

33.00

7.80

9

2.5

1.9

28.50

13.00

35.00

7.80

10

2.6

1.9

28.50

13.00

37.00

9.10

11

2.8

1.9

28.50

12.00

33.00

10.80

12

2.7

1.9

28.50

11.00

30.00

8.80

13

2.6

1.9

28.50

10.00

28.00

7.00

14

2.5

1.9

28.50

9.00

27.00

5.40

15

2.3

1.9

28.50

9.00

25.00

3.60

16

2.0

1.9

28.50

8.00

24.00

0.80

17

1.5

1.9

28.50

8.00

23.00

- 9.20

18

1.4

1.9

28.50

7.00

24.00

- 12.00

19

1.5

1.9

28.50

7.00

23.00

- 9.20

20

1.6

1.9

28.50

8.00

24.00

- 7.20

21

1.5

1.9

28.50

9.00

23.00

- 9.20

22

1.3

1.9

28.50

9.00

21.00

- 12.60

23

1.2

1.9

28.50

8.00

20.00

- 14.00

24

1.4

1.9

28.50

9.00

20.00

- 10.00

46.2

45.6

684.00

-53.40

revenue from the generator's contract, the generator makes a total of €630.60 for the day. The total amount of energy for which the generator was contracted was 46.2 MW h. Thus the net value of the generator's energy works out to be €13.65. Therefore, the penalty for the generator's imprecise forecast of power output a day ahead is around 9% of the bilateral contract price.

Trading Renewable Energy in an Electricity Market with Ex Post Pricing

If the same hydro generator were trading in a market with ex post pricing, for example a pool system like the former England and Wales pool, it would not be exposed to unfavourable imbalance prices. The major difference between such a mandatory pool system and a system with bilateral trading and a balancing market is that the former spreads the cost of balancing the entire system on all participants, whereas the latter targets the cost of balancing on those participants who are out of balance compared with their contracted position. In general, mandatory pool prices are less volatile than balancing market prices, as all power must be traded through it, so the price penalty to intermittent renewable generators is less. However, if a renewable generator wished to hedge its position in order to receive a fixed price for output, it would still be exposed to pool prices for any generation not covered by the hedging contract. If pool prices suddenly decreased during a period due to a surplus of generating capacity, the renewable generator would then lose out in this case, particularly if it had underforecast significantly and thus underhedged.

Marketing Green Electricity

Though government legislation is one way to encourage renewable energy generation, it is not the only way. The opening up of electricity markets has given the opportunity for new and existing suppliers to offer green tariffs to consumers. Green electricity is marketed as a 'premium product' for consumers with an environmental conscience. Generally, a premium is charged for the green tariff. This premium is either paid directly to the renewable energy generator or used to support new renewable energy generation. The take-up of these tariffs has varied from country to country. In the UK, for instance, market research suggested 25% of domestic electricity customers, representing 5.7 million households, would be interested in a green electricity tariff, even if this means paying a little more than the lowest prices to ensure their electricity comes from renewable sources. In reality, however, less than 1% of households in the UK has switched to a green tariff, while the Dutch and American markets have achieved a figure of 2%. It seems that the premium that consumers are willing to pay may be quite small. In addition, the freedom to change electricity suppliers is a relatively new concept, as is the idea of buying green electricity, so it may be too early to draw firm conclusions about the success or otherwise of marketing green electricity.

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