The usage value
25 January 2022
This article is based on a Twitter thread published on 25 January here (in French).
A slightly geeky thread to cover the concept in its broadest sense (and surreptitiously declare my love for the EPEX order book). In economic terms, usage value refers to the value of the future economic benefits expected from the use of an asset. In the electricity sector it is quite intuitive to understand for the management of an asset with a limited stock: high altitude dam hydro. The producer has a stock of water, he has at each moment the choice between using it to produce or not to produce electricity.
Every time he produces, he empties his dam: he cannot produce 24 hours a day, 7 days a week. So how does he make his decision? The first step is to give a value to his water stock, which corresponds to the expected gain in the future. He will try to estimate, in an ideal scenario, the maximum price at which he could sell his production. This is where futures prices come into play. They are a vision of the future price and will thus make it possible to try to estimate the best time to produce. On this graph, for example, it’s easy to understand: it’s January 5, 2022, and prices for February 2022 are over €800/MWh on some days…
Source :
It is not in the producer’s interest to sell now at €200 per MWh, knowing that he will be able to sell at four times that price in a few weeks. Of course, at some point, it will be necessary to produce whatever happens, otherwise the dam will overflow. And then there are the daily constraints: a kayak competition downstream from a dam can impact production. This is the second step: taking into account the constraints to refine the use value.
The usage value of the hydraulic stock is set, in our example, at €700 per MWh. Every day, the producer will post offers at the limit price on the EPEX exchange.
If the price is lower than the usage value, he will not produce. If the price for tomorrow is much higher than expected (surprises can happen), he will produce. The order will look like this ( €- 500 /MWh and € 3.000 /MWh are the technical limits of EPEX):
Aggregated with the orders of other producers, this order will participate in the formation of the cost-volume curves that EPEX publishes every day. For example:
Source :
Stock management is a science. A stock is an option: to produce or not to produce.
Optimising the value of this stock therefore often calls on financial derivatives to secure gains while minimising risks. In France, EDF is very good at this. Precipitation, snowfall, temperatures and market prices are very different from one year to the next, and yet we have never heard of a major alert following a poor optimisation of the hydro stock.
The usage value can also be used for power plants with a limited number of maximum operating hours. This is the case for the famous coal-fired power plants in France that were at the heart of the debate a few weeks ago: Usine Nouvelle article (in French).
While the marginal production cost of a coal plant was around €140/MWh, some plants in France were only offered on the market at €325/MWh in December as shown in the EPEX order book:
As capacity retention was forbidden, the plant was thus available on the market, but at a price that was not its marginal cost, but its usage value, based on expected future prices. In addition to this, one can imagine that there is probably also a desire to keep some stock for the winter.
What about nuclear power in all this? Beyond the modulation that we observe, it is the study of the EPEX cost/volume curves, hourly this time, that allows us to assume that the reactors are optimized using usage value. To do this, we subtract the sell orders from the buy orders and we obtain a good vision of the merit order around the market price (X axis: MW ,Y axis : €/MWh).
If nuclear were managed on a fixed “marginal cost” basis, e.g. €10/MWh, we should see a significant horizontal bar at this level. Let’s zoom in to analyse 1 January 2021 and 1 January 2022 (two fairly similar days, with 2 to 3 GW of nuclear modulation). The case is interesting, the modulation hapened at roughly same market price, slightly under 50 € /MWh. But what we can notice is that with 2 500 MW less production (red arrows) the impact on prices would be much larger in 2022 than in 2021.
The shape of the curves are different, we see a more marked slope towards the marginal costs of gas power stations, and therefore probably also the usage value of a good part of the hydro dams. It is definitely the consideration of certain constraints that explain the management of the use value of nuclear power (campaign extension, fuel savings, management of maintenance schedules).
We often hear the figure of 75% of the fleet being managed under these constraints,anyone in our readers to confirm this?
This aspect deserves transparency. When we talk about the cost of nuclear power, we only hear about a “value” of “55 € /MWh” for example, either an accounting or economic cost, but not a marginal cost or a usage value (dynamic by nature). However, management in terms of usage value implies that, in practice, part of the nuclear production is given a higher value (or a lower value, this also happens).
This is not neutral in terms of market price, nor in terms of CO2 emissions, as it can mean putting a nuclear power plant in competition with a gas power plant.
Do not hesitate to contact us for more information!
Emeric de Vigan
CEO and founder, COR-e
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