Is there a "fair value" for power and what is it used for?

13 April 2021

Since the early 2000s, day-ahead auctions have been one of the pillars of the short-term power markets. They give generators visibility on their operating schedules, suppliers access to hourly hedging of their load curve, and consumers a reference for optimising their portfolio.

As a true Snasphot of the supply/demand balance at a given time, they were for a long time considered as the “fair value” of power, with many regulatory mechanisms encouraging players to buy/sell their best forecasts at that stage to balance their perimeter.
The other market segments, Intraday and balancing, were traditionally reserved for adjustments in the face of production or consumption contingencies.

The explosion of renewable capacity has changed the situation, and risk management by generators/generation aggregators is encouraging them to use a global optimisation strategy between the different market segments.

At the same time, Europe is in the process of harmonising the mechanisms for sourcing system services via the PICASSO, MARI and TERRE projects, with an almost systematic switch to daily auctions, at an increasingly fine granularity. This evolution allows producers to have more choice in the valuation of their assets, between wholesale and reserve markets.

The gradual developments of the last few years strongly strengthen the links between the different market segments, and the day-ahead auction price is often impacted by the optimisation and risk management strategies of renewable generators and system service providers.

Photo by Karsten Würth

Let’s take a very simple example: Let’s imagine ourselves in winter, in a situation of strong tension on the supply-demand balance, with a forecast of renewable production not at  zero, but low. In this situation a wind producer will definitely  anticipate the asymmetry of risks on the balancing market. The risk of very high imbalance settlement prices is important, and it seems reasonable to avoid being short on its balancing perimeter.

In this context, the risk of lower than expected generation is much higher than the risk of higher generation. Risk management will therefore probably encourage him to limit the volumes sold at the day-ahead stage (up to 36 hours in advance, let’s not forget that) and only sell them as close to real time as possible, when the reliability of the forecast is very high.

The optimisation problem of course becomes extremely complex if all the players apply the same strategy. In this example, if the producers have voluntarily sold less than their forecast, but the forecast turns out to be correct, the prices on the intraday and balancing markets will be significantly lower. The producer will then lose out on the value of the production that he could have obtained on the EPEX auction.

This phenomenon also exists in case of low consumption and excess wind generation, which seems to have become an habit during the Easter weekend! In these situations, the risk is clearly to the downside, with a high probability of strongly negative prices, and therefore encourages players to limit the risk of being long on their perimeters.

Modelling these strategies is of course not easy, as they vary from one player to another and are dynamic according to market conditions. In any case, the analysis and forecasting of market prices can no longer stop at the day-ahead auction. It is essential to have a global vision in order to avoid unexpected price movements in one market segment.
The link between the different market segments and the strategy of the different players requires state-of-the-art tools to forecast the “fair value” of power and thus choose the best outlet for its production.

Photo of Emeric, founding president of COR-e

Emeric de Vigan
CEO and founder, COR-e

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83000 Toulon, France

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