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EDF Leads Generators in Winter Windfall

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EDF Leads Generators in Winter Windfall

Date
February 10, 2021
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  • EDF was paid more in 3 days than in all of Q3 by National Grid to balance the system

  • National Grid forced to buy power at £4,000/MWh, some 70 times greater than the average price paid over 2020

  • EPH achieved the highest average sales price for any day in the Balancing Mechanism of over £3,600/MWh

 

A Perfect Storm for Generators

A perfect storm of peak winter demand, low wind generation and delays to supplies from the continent saw record prices for UK power last month. Generators were quick to cash in on this tightness with National Grid forced to pay EDF nine times more than the previous year for their flexibility in January, averaging sales1 of £473/MWh compared to £53/MWh. Meanwhile, EPH and Drax settled for £387/MWh and £303/MWh.

Hartree Analysis – sales price1 to National Grid in the BM by operator4. Jan ’20 vs Jan ’21

 

Record Sales Prices

When the margins were especially low on January 8th, generators were able to drive a hard bargain for their much-needed megawatts. EDF was paid more in three days in the balancing market2 than in the three months through September as National Grid was required to procure their power at £4,000/MWh, some 70 times greater than the average price1 paid over 2020.

Hartree Analysis – sales price1 to National Grid in the BM against maximum sales price4.

 

First Mover Advantage

It was EPH on 13th January that achieved the highest average sales price1 for any day in the Balancing Mechanism2 (BM) of over £3,600/MWh during the second week of tightness. However, we can observe that EDF was quickest to react to the supply scarcity, achieving the highest average sales prices1 in the BM for the three initial tight days. On the last of these, the EDF owned West Burton B recorded the highest ever price paid in the BM contributed to an average sales price1 of over £3,200 /MWh that day.

Hartree Analysis – sales price1 to National Grid in the BM by operator4.

The weekend allowed for a brief interlude to high prices as demand edged lower. But just three days later, as demand rose again, both EPH and Uniper responded to the market dynamics adopting a similar strategy in the BM and surpassed EDF’s average sales prices1 for the remainder of the week.

 

Withholding Power

With high prices available in the markets, most generators sold their power in advance, locking in huge profits well before the power itself had to be delivered. As a result, the amount of unscheduled generation available was minimal, leaving National Grid with few options to balance the system.

Hartree Analysis – the volume of balancing actions by National Grid as a percentage of total generation against the EPEX3 baseload day-ahead auction price4.

On 6th January, the first day of tight margins, National Grid’s actions made up just 3.6% of total volumes compared to 19% for January 2020.

Hartree Analysis – the volume of balancing actions by National Grid as a percentage of total generation4.

As power prices hit £1,500 in the day-ahead auction, all generation sources will have been well in the money a day before delivery. Unsold volumes will either have been a prudent decision against plant failure or a commercial decision in the hope of achieving far greater profits. In the case of West Burton B, EDF offered these withheld volumes to balance the system at a huge £4,000/MWh.

 

Stations Profiting from Low Margins

There were just a handful of generating stations that exploited these low margins including the SSE owned Keadby, the EPH owned Langage, the EDF owned West Burton units, the Uniper owned Connahs Quay units, and the Drax owned Rye House and Draxx-5 coal unit.

Hartree Analysis – highest sales price to National Grid in the BM. Showing the top 10 generation units4.

It was the EDF owned West Burton B that achieved the highest daily and monthly revenues from BM sales across January, receiving over £7.5m in a single day.

Hartree Analysis – plant revenue from sales to National Grid in the BM. Showing the top 6 plant revenues for January

Throughout January the cost of these purchases, despite the low volumes, was over £100m with West Burton B making up over £20m or 21% of that total spend. Costs that are ultimately borne by consumers and generators alike.

Hartree Analysis – the sum of costs of National Grid’s buys in the BM against the volumes of these buys5

 

Estimated Generator Revenues

Whilst there is no information available to show how much volume each generator had presold coming into January, those who presold the lowest volumes will have fared much better. Suppose we estimate scheduled generation revenues using the Day-Ahead auction as an income metric. This case shows that operators such as RWE and Uniper could have seen their revenues from gas, coal, and biomass plants triple compared to the same time last year. Similarly, estimated revenues of Drax, SSE and EDF’s units nearly doubled year-on-year.

Hartree Analysis – scheduled generation revenues use the EPEX Day-Ahead auction3 as their assumed income plus the operators realised income from the BM4. No generation or fuel costs accounted for. Jan ’20 vs Jan ’21

 

Scarcity Pricing

Ofgem has already announced6 they will examine these high prices to fully understand the scarcity behind them, adding “Given our findings and penalties in the past year regarding manipulation in the balancing mechanism, the market knows that Ofgem takes any manipulation very seriously and that we monitor the market closely.”

However, it’s worth noting that scarcity pricing is a part of the market design. In periods of low margin, scarcity pricing acts to ensure that the cost to the country of a blackout is correctly priced into imbalance prices. For example, on 13th January the National Grid calculated de-rated margin7 was just 836MW representing the unused margin on the system8 available before a power outage. This value is then fed into a probability calculation representing the likelihood of a blackout. In this case, it generated a 14% probability. Finally, the cost of a blackout is estimated at an equivalent of £6,000/MWh, so bringing generation on at prices lower than this to avoid a blackout is the better financial option for the country. Applying the probability against the £6,000 cost generated an £835/MWh reserve scarcity price that forms a component of the imbalance price calculation for such hours.

Further consideration should also be given to thermal generators reduced run hours due to the renewable build-out. Generator’s fixed costs make up a large portion of their total annual costs alongside their variable marginal cost of generation. They are increasingly required to be recovered over fewer hours, requiring higher prices to do so or risk closure as per the recent Severn Power that in August 2020 went into administration9.

Network Constraints

Gas generators provided the bulk of this flexibility to National Grid to ensure supply met demand. However, notably in second place was wind, but for very different reasons. These volumes represent the UK’s inability to handle periods of high winds with National Grid forced to constrain the generation. Consequently, these volumes are replaced with higher carbon sources of power, typically gas that add to the UK’s emissions resulting from the network constraints.

Hartree Analysis – balancing volumes by National Grid in the BM by generation fuel type5.

 

What is the Balancing Mechanism?

Whilst generators sell much of their power in advance, they can also offer any unscheduled generation via the Balancing Mechanism (BM). This is National Grid’s tool to ensure supply meets demand in real-time because unlike gas, power has almost no flexibility innately in the transportation and distribution network.

By restraining from selling their power into the market ahead of delivery, operators can instead sell that power to National Grid in the BM. If the system is short of power, this strategy typically achieves a much higher price for that power. But it is a calculated gamble because if the system has excess power or there are lower-priced supply options, the operators miss out on any revenue.

 

The Fundamental Conditions

Temperatures 4°C below normal coupled with metered wind generation averaging just 3.5GW contributed to this power price surge. Demand surpassed last winter’s high by nearly 1GW peaking on 7th January at 46.3GW and with wind averaging just 3.5GW, left limited unscheduled generation to meet the peak evening demand.

See our latest Market Insight, where we discuss the new records in more detail.

High demand and low winds, together with delays to the start-up of the IFA2 interconnector, an undersea electricity connection between England and France, and an outage of the BritNed Interconnector between England and the Netherlands presented a unique opportunity for power plants to exploit.

 

More Challenges Ahead?

As the buildout of renewable generation continues, the UK power market is increasingly exposed to extreme pricing with no low-carbon alternative to coal and gas units’ flexibility to turn to at times of low wind and solar generation. January painted a stark picture of the UK’s challenges as it seeks to decarbonise its electricity. With weather forecasts pointing to further cold weather across Europe for February, the potential for extreme pricing is not yet over this winter.

These events highlight the rewards of having fully optimised assets to capitalise on these conditions. By partnering with Hartree Solutions, businesses can benefit from the team’s wealth of real-time trading and analytical experience and enjoy on-site, low-carbon generation that turns the potential liability into a performing asset.

 

Footnotes
1 Volume Weighted Average
2 National Grid Balancing Mechanism
3 EPEX Day Ahead Auction
4 Data filtered to gas, coal and biomass (flexible thermal) plants and operators with generation volumes greater than 10 million MWh’s in 2020
5 Data filtered to gas, coal, biomass, wind and hydro
6 As reported by Bloomberg on 15th January
7 De-rated margin and LoLP calculation
8 Reserve Scarcity Pricing
9 Severn Power Administration
Cover image – Drax Power Station

 

 

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written by
Adam Lewis

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  • New business founded to drive positive impact as $30bn Voluntary Carbon Market matures

  • Joint venture combines world-leading sustainability expertise of SYSTEMIQ with trading and risk management experience of Hartree Partners

  • Vertree will focus on high-integrity nature-based solutions; investing in its own projects; and market-leading insights and due diligence

 

Wednesday 26 May 2021, London.

Sustainability experts SYSTEMIQ and global energy and commodities firm Hartree Partners today announce the launch of Vertree Partners Limited, trading as Vertree, a joint venture that enables organisations to accelerate and deliver ambitious climate commitments through nature-based solutions.

The launch follows news that corporate carbon-neutral pledges led to a record Voluntary Carbon Market (VCM) transaction volume in 2020, growing 6% year-on-year. According to the Taskforce for Scaling Voluntary Carbon Markets, the global VCM could reach between US $30bn and US $50bn in size by 20301.

Nature-based solutions are a crucial part of Voluntary Carbon Markets, harnessing the power of the planet’s natural resources to address the dual climate and biodiversity crises. Done well, nature-based solutions protect and restore vital habitats to increase biodiversity at the same time as reducing atmospheric greenhouse gas emissions by avoiding or removing them.

Land-use change ranks second only to the burning of fossil fuels as the biggest source of emissions that contribute to climate change. But investing in tropical rainforests to sequester and store carbon can have a significant beneficial climate impact; according to the Intergovernmental Panel on Climate Change, ‘‘reducing deforestation and forest degradation rates represents one of the most effective and robust options for climate change mitigation”2.

 

Ariel Perez, Vertree’s Managing Director, said: “It is no longer sufficient to slow the rate of emissions the world produces; we also need to begin removing CO2 that already exists. Although the priority should be to abate emissions wherever possible, the range of technological solutions available today varies greatly, and achieving net zero will require some degree of carbon reductions and removals. Nature-based solutions are among the most scalable and effective ways to reduce emissions, protect and restore biodiversity, and to support the United Nations’ Sustainable Development Goals”.

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“We are committed to catalysing significantly more long-term investment in nature-based solutions”, Perez continues, “but this must be done in a way that genuinely addresses global emissions while improving the livelihoods of local communities. Vertree’s expertise in carbon markets, along with over a decade of on-the-ground forest and landscape project experience that is embedded in the joint venture, enables us to adopt this long-term perspective.”

Vertree will further address concerns around the integrity of carbon offsets with market-leading insights and due diligence of both the projects it supports and the organisations it works with. All Vertree projects are verified and audited by third parties, including the Verified Carbon Standard; Architecture for REDD+ Transactions; Gold Standard; and Climate, Community, and Biodiversity Standard. Vertree will also use the Core Carbon Principles set out by the Taskforce on Scaling Voluntary Carbon Markets, which assess impacts on the climate, biodiversity, and local communities.

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Notes to Editors:

About Vertree

  • Vertree Partners Limited, trading as Vertree, is a joint venture that combines the world-leading sustainability expertise of SYSTEMIQ and the carbon markets and environmental products experience of Hartree Partners.
  • Vertree will drive positive impact in the maturing voluntary carbon market by focusing on high integrity nature-based solutions.
  • By investing in its own projects and using market-leading insights and due diligence, Vertree will enable organisations to accelerate and deliver ambitious and credible climate commitments through nature-based solutions that also have positive impacts on communities and biodiversity.

Website: https://vertree.earth/
Twitter: @VertreeP
LinkedIn: https://www.linkedin.com/company/69693048
Instagram: VertreePartners

About Hartree Partners LP

  • Hartree Partners is a global merchant commodities firm specialising in energy and its associated industries. It focuses on identifying value in the production, refinement, transportation and consumption of tradable commodities and anticipating opportunities in the supply chain where they may be under or over-valued.
  • Founded originally in 1997, Hartree has a global reach spanning 12 offices and over 100 traders. The company’s rigorous research, analytical approach, and entrepreneurial culture have contributed to its strong track record and growth over that time.
  • Hartree Partners is owned by the company’s managing partners, senior staff, and Oaktree Capital, an alternative investment company with over $113bln of assets under management and a major investor in low carbon and renewable technologies.

https://www.hartreepartners.com/

About SYSTEMIQ

SYSTEMIQ is a B Corp created in 2016 to drive achievement of the UN Sustainable Development Goals and the Paris Agreement by transforming markets and business models across three areas: land use, materials and energy. Working with partners across sectors, SYSTEMIQ aims to unlock economic opportunities that benefit business, society and the environment. To learn more, visit www.systemiq.earth

Twitter: @SYSTEMIQ_Ltd

 

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