The Electricity Wholesale Market and its Fundamentals

1
The Electricity Wholesale Marketand its
Fundamentals

• November 2008
• Kris Voorspools
• Head of Energy Market Analysis Trading
  Portfolio Management

2
Agenda
1
Market Price Logic
2
FAQs misconceptions
3
Price forecast, an attempt to consistently look
forward
3
Market Price Logic

• Supply stack of power plants ranked according
  to marginal costsMarket price Marginal cost of
  last unit activated

4
FAQs and misconceptions

• The CO2 price component should not be in the
  electricity price if allowances are
  grandfathered
• Why are investment costs not in the power price?
  Isnt that a problem for newcomers?
• Questions from the floor?

5
FAQs and misconceptions

• The CO2 price component should not be in the
  electricity price if allowances are grandfathered

Gas fired power plant, 50 efficiency, emissions
0.4tCO2/MWhe Generator bought gas on market for
30/MWhgas current spot is 40/MWhgas Generator
received free allowances current market price is
20/tCO2
OPTION 2 Not generate power COST gas 30/50
60/MWhe REVENU gas 40/50 80/MWhe CO2 200.4
8/MWhe
OPTION 1 Generate power COST gas 30/50
60/MWhe REVENU Power Price, ASK in market
GENERATION CONDITION Power Price - 60/MWh gt
28/MWh ASK 6028 88/MWh 80 market price
gas 8 market price CO2
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FAQs and misconceptions

• Why are investment costs not in the power
  price? Isnt that a problem for newcomers?

Wind turbine - investment cost 50/MWh - no
additional marginal cost - wind conditions are
good and turbine is at Pmax
OPTION 2 Not generate power COST 50/MWh REVENU 0
OPTION 1 Generate power COST 50/MWh
REVENU Power Price, ASK in market
GENERATION CONDITION Power Price - 50/MWh gt
50/MWh ASK 50-50 0/MWh, hope to get more
than 50/MWh
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FAQs and misconceptions

• Why are investment costs not in the power
  price? Isnt that a problem for newcomers?

8
An attempt to consistently look forward

• Supply stack of power plants ranked according
  to marginal costsMarket price Marginal cost of
  last unit activated

? What is wrong with this picture ?
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An attempt to consistently look forward

• Forward markets needed to facilitate hedging
  forward transactions
• Forward markets are not necessarily good price
  predictors

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An attempt to consistently look forward

• Crude oil price forecast Below 60/bbl not
  sustainable Realistiic longer term level
  100/bblHuge price swings from lt60 to gt150/bbl

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An attempt to consistently look forward

• Crude oil exponential price trend channel
• Current range from 55/bbl to 170/bbl

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An attempt to consistently look forward

• Supply stack of power plants ranked according
  to marginal costsMarket price Marginal cost of
  last unit activated

? What else is wrong ?
?
?
?
13
An attempt to consistently look forward

• Consistent price scenario low

Consistent price scenario high
14
Agenda
1
Market Price Logic
2
FAQs misconceptions
3
Price forecast, an attempt to consistently look
forward