Environmental Engineering Reference
In-Depth Information
need to be chosen by the NGC to meet the peaks in demand. The PPP was then 'uplifted'
slightly to cover the difference in the total cost incurred by the NGC in balancing generation
and demand and what was paid out to generators through the PPP. This uplifted price was
known as the pool selling price (PSP). The PSP is then charged through to suppliers for the
amount of electricity supplied to their customers.
All generation and demand is metered. Large generators and consumers are metered every
half-hour. Small consumers are metered monthly, quarterly or six-monthly. All meter readings
are processed and made available to the system operator (SO), who works out who should
be paid, what amount and who owes what amount. Additionally, charges are made for the
use of the transmission and distribution networks. The process of allocating the costs and
payments is known as
settlement
.
Hedging
It can be seen from Figure 7.13 that there is a wide variation in prices during the day. The
prices shown are monthly averages. It was quite possible to get price fl uctuations at times of
peak demand (around 5:30 pm), well over £100/MW h (
150/MW h). In certain severe
€
weather conditions this could go over £250/MW h (
375/MW h). For a supplier with a peak
' tea - time ' demand of 2 GW (2000 MW) this could mean half - hourly cost fl uctuations approach-
ing £0.25 million (
€
0.38 million)! Most suppliers operate to quite tight margins and charge
a fi xed price to their customers, so a sudden increase in pool prices over a cold period could
potentially bankrupt a supplier. On the other hand, generators are paying a fi xed price for
their fuel and similarly a dip in prices during a prolonged warm period could also spell disaster
for their cash fl ow. Soon after the introduction of the PSA, so-called 'Contracts for Differ-
ences' came into existence. These 'fi nancial instruments' gave generators and suppliers the
ability to fi x the price of their generation or demand for a given period of time, typically a
month or more, but also up to several years ahead. The contracts did this by
hedging
against
changes in the pool prices.
Typically a supplier would forecast its demand profi le by the half-hour throughout a month,
taking into account changes due the seasons, changes due to expected customer losses/gains,
etc. This would be the
hedged volume
. The supplier would present this profi le to a third party
broker, which could be a fi nancial institution. This broker would then offer a fi xed price for
the contract, refl ecting how volatile the broker expected the prices to be in the next month.
The supplier would still have to pay the half-hourly PSP for demand but at the same time if
the PSP went above the fi xed price, the broker would pay the supplier for the difference
between the PSP and fi xed price multiplied by the hedged volume. On the other hand, if the
PSP went below the fi xed price for any half-hour, the supplier would pay the broker for the
difference between the fi xed price and the PSP multiplied by the hedged volume. In this way
the supplier was effectively paying a fi xed price for its hedged volume. Obviously, if the
hedged volume were an underforecast, the supplier would be
exposed
for the difference
between the forecast and actual demand. If the forecast were too high, then the supplier might
be paying over the odds for the contract, though it could be possible to make a profi t with
some speculation. Generators could fi x the price they were paid for a hedged volume of
generation in exactly the same way.
Eventually, bespoke contracts became ' off - the - shelf ' contracts with standard terms and
conditions and standard contract types, for example for base load or peaking. These were
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