tew (08.10.18) - Transparency and use of published data, price formation and fundamental analysis
- 1. Presentation for Kyiv Energy Transparency Week Day 1: Transparency in Wholesale Energy Markets Transparency and Use of Published Data Price Formation and Fundamental Analysis Kiev, 08.10.2018
- 2. Outline • Introduction • The GEN-I Group – Geographical Presence and Key Indicators • Presence in Ukraine – GEN-I Kiev • Fundamental Analysis and Price Formation • Consumption as Demand • Production as Supply • Net Positions, NTCs, and Cross-Border Flows • The Fundamental Model • Use of Data and Importance of Transparency • Market Participant Analytics • Efficient Price Formation – Theoretical Examples • Practical Importance and Implications • Conclusions and Key Messages 2
- 3. The GEN-I Group – Geographical Presence • 3
- 4. The GEN-I Group Key Indicators 4
- 5. The GEN-I Group – Key Indicators 5
- 6. Presence in Ukraine: GEN-I Kiev • GEN-I Kiev (ТОВ «ДЖЕН-АЙ КИЇВ») established on 30.04.2015 • Wholesale Electricity Market (WEM) Member since 27.10.2015 • Having cross-border trading (export) infrastructure since 2016 • Holding License for Electricity Supply since 31.08.2017 • Carrying out continuous electricity export activity from Ukraine to Hungary since January 2018 • Total quantities exported so far app. 63 GWh (Jan-Sep 2018) 6
- 7. Fundamental Analysis and Price Formation 7 CONSUMPTION PRODUCTION NET POSITIONS ECONOMIC ACTIVITY, SOCIAL BEHAVIOUR WEATHER, ... UNIT AVAILABILITY AND FLEXIBILITY, FUEL PRICES, WEATHER, REGULATORY FRAMEWORK, ... PRICES POWER EXCHANGES (HUPX, BSP, OPCOM, ...) Flow limits (NTC)
- 8. Fundamental Analysis and Price Formation Consumption as Demand • Consumption within a country repesents demand, and is influenced by a variety of factors • In the short term, especially on day-ahead, the demand (consumption) is mostly inelastic (non-responsive) to price and depends significantly on fundamental factors such as: • Behavioural patters (work/leisure, ...) • Weather (winter/summer, ...) • The combination thereof means that demand differs from hour to hour in a given day, i.e. each hour has a specific demand curve which can and does vary significantly between peak and off-peak 8
- 9. Fundamental Analysis and Price Formation Production as Supply 9 • Production within a country represents supply, and is formed through the merit- order curve, which ranks production technologies by their marginal cost • In the short term, especially on day-ahead levels, the supply (production) is more elastic (responsive) to price than demand is, but this depends on flexibility of production technology (e.g. nuclear very inflexible compared to pumped hydro storage) • Production therefore also depends significantly on fundamental factors such as: • Availability and flexibility of production units • Fuel prices • Weather • The combination thereof means that each day has a different supply curve, but from hour-to-hour the variations depend on the country's production structure and the flexibility thereof
- 10. Fundamental Analysis and Price Formation Net Position 10 • The intersection of demand (consumption) and supply (production) determines price levels within a system (in this case within a country) • Electrical systems must always (in the absence of sufficient storage) balance consumption and production instantaneously to keep system operation secure, but because of interconnections across borders, individual countries are not closed systems → production does not have to strictly follow consumption within a single country • Therefore, for each hour, a country can have a net position which is either long (P>C) or short (C>P) and which results in flows across neighbouring countries • The maximum of cross-border flows is limited by the availability of cross- border transmission capacity, i.e. NTCs are the optimization constraint Country A above has for hour H a domestic equilibrium of demand and supply at PA and QA however, production for hour H could be QA‘ if the price were higher → the net position of country A is LONG and the excess quantities could be exported, if sufficient NTCs available and the price in the neighbouring country is high enough
- 11. Fundamental Analysis and Price Formation Net Positions, NTCs, and Cross-Border Flows 11 • If NTCs are available between Country A (LONG) and Country B (SHORT), then flows from Country A to Country B will occur as long as there is available transfer capacity and as long as the price of this transfer capacity is equal to or below the price difference between Country A and Country B: • In a theoretical example with infinite NTCs (alternatively the absence of any congestion), power will flow from Country A to Country B until the price in both countries will be equal: • In Country A, demand increases due to the demand for export and in Country B, the supply increases due to supply of import; in Country A, producer surplus increases whereas in Country B, consumer surplus increases → in both Country A and Country B, overall social welfare increases! PA < PB NTC = ∞ PA‘ = PB‘ NTC = ∞
- 12. Fundamental Analysis and Price Formation The Fundamental Model 12 The fundamental model analyses interdependency between fundamental data in order to evaluate countries‘ net positions and optimise cross-border flows given NTC constraints, i.e. covering a system‘s load at the lowest cost to maximise social welfare and economic surplus of market participants → the basis for price formation
- 13. Use of Data and Importance of Transparency Market Participant Analytics • Market participants use fundamental data as key inputs for: • Model development and calibration (ex-post based on historical data) • Price forecasting and scenario simulations (ex-ante data on production/consumption unit and NTC availability → fundamental model price forecasting and flow optimization across markets) • Transparency in data is key, since availability of accurate data enables a level-playing field among market participants, resulting in improved optimisation of flows and consequently improved social welfare: • Data regarding weather, economic activity, etc. is obtained from a number of sources and proprietary analyses, including for example meteorological services as well as other data/forecast providers • Data regarding availability of production units as well as for significant consumption units is obtained from Transparency Platforms and provided by respective TSOs, Production Units, as well as dedicated REMIT websites • Of critical importance are not just transparency and publication of essential data but also the quality of data and ease of access (usability)! 13
- 14. Use of Data and Importance of Transparency Efficient Price Formation – Theoretical Examples 14 The interplay of multiple simultaneous changes in multiple factors has a vast spectrum of results → accuracy and flexibility of individual market participant modelling comes into play! A change in net transfer capacity changes flows from low price to high price regions, with impact on price (ceteris paribus): A change in the availability of production units suggests decreased supply, with impact on prices (ceters paribus):
- 15. Use of Data and Importance of Transparency Practical Importance and Implications • Efficient price formation means that market participants formulate strategies based on all available information • If information is not available to all market participants in a transparent and non-discriminatory way, or if the information is provided to market participants transparently but the information itself is not accurate, there is significant potential for abuse and consequently loss of social welfare through value destruction • Examples: • announcement of a power plant outage when in fact the power plant is functioning means market participants will expect a higher price and therefore adapting their bidding strategies accordingly (while the plant will be able to sell all of its output at the higher price) • announcement of a power plant outage to selected participants in advance means those participants will be able to benefit by anticipating the resulting price spike (e.g. by buying at lower prices before the announcement, and selling after at higher prices) • Prevention and sanctioning of such market manipulations and abuses as the key consequences of lack of transparency is the goal of Regulation (EU) No. 1227/2011 on wholesale market integrity and transparency – REMIT: • Prohibition of insider trading and obligation to publish inside information • Prohibition of market manipulation (false and misleading signals; securing prices at artificial levels) 15
- 16. Conclusions and Key Messages • Price formation depends on accurate and transparent fundamental data... • ...transparency of quality data which is easy to access provides a level-playing field for market participants... • ...better data means improved optimisation, which leads to increased social welfare! 16
- 17. Thank you for your attention! 17