Energy providers have traditionally restricted themselves to selling electricity and gas, ...
Energy providers have traditionally restricted themselves to selling electricity and gas, sourcing the required volumes in a structured manner on wholesale markets (and/or generating it themselves), operating the grid business and, less frequently, engaging in proprietary trading. However, as renewable energy forms (such as wind, photovoltaics and biogas) become ever more widespread, power generation becomes more and more decentralised (thanks to small and micro-installations, "prosumers" and cogeneration plants) and specialised newcomers in particular take up their positions on the market, power utilities' distribution business is coming under ever heavier pressure. As a result, the margins on the traditional sale of energy are eroding continually.
Some players on the energy market have understood that widening their trading strategy to include the short-term market can serve as a useful complement to their existing activities. The short-term market (15-minute intraday trading) comprises the opportunities created by the direct marketing of fluctuating renewables, the reoptimisation of controllable facilities (such as feed-in from biogas plants and from flexible industrial plants) and transactions to balance out deviations forecast for key accounts on the basis of real-time data. Typical features of this market are extreme volatility due to a dependency on parameters that are difficult to forecast (solar radiation, wind etc.) and serious complexity due to the sheer diversity of products (auctions, simultaneous constant trading of 60-minute and 15-minute products). This level of volatility creates pronounced risks for companies that can only react, but opens up tremendous opportunities for those that can operate proactively on the market. Against this backdrop, moderately to very flexible generation and consumption systems can be marketed more effectively – i.e. with a greater chance of higher yields – provided the risks can be contained appropriately. The key questions with which the emergence of this new market confronts energy producers are: What quantities should be marketed when and under what conditions on which of the available markets (the futures market, day-ahead market or intraday market)? What risks can a company eliminate by marketing power generation on the futures market? And how does this possibility compare with the opportunities that are thus foregone in short-term trading? The answers depend on the nature of the power plants which are available, how flexible they are and the current market situation, which is constantly changing. A higher margin on forward sales, for example, will prompt the marketing of a larger share on this market, while the expectation of higher volatility in short-term trading would trigger the allocation of volumes on this market.
High volatility and a diverse array of products makes the interplay between different marketing possibilities hugely complex. And this fact takes energy providers into a new dimension of tackling decisions under uncertain circumstances. Risk management must therefore be stepped up, and a clear definition of the adjusted operational framework is needed. Beyond that, the most extensive adjustments can be found in trading. Alongside the introduction of automated and algorithmic trading to facilitate effective action on the short-term market, new valuation and optimisation models are also needed to provide effective support for portfolio management decisions about the allocation of volumes and flexibility. At the same time, these models constantly provide a quantitative decision basis in response to the key questions raised above.
Source: KPMG Corporate Treasury News, Edition 67, May 2017
Author: Malte Neuendorff, Senior Manager, Finance Advisory, firstname.lastname@example.org
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