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=C2=AB Don=E2=80=99t=20 believe those who say carbon diet will cost nothing

Make ACER=20 more acerate =C2=BB

VPPs: = Are buyers=20 making a profit?

November 22nd, 2007 by Margaret = Armstrong, Mines=20 Paris/ParisTech

Virtual power plants are one of the measures implemented by the EU to = encourage competition in the energy sector. They were first implemented = in=20 France to allow outsiders access to the national market while still = allowing the=20 EDF to operate nuclear power stations. What has happened to those who = purchased=20 power through the French VPPs? Are they making a profit too or has = winner=E2=80=99s=20 curse struck again?

To remedy the risk of anticompetitive effects owing to its = acquisition of=20 EnBW, EDF proposed in 2001 to provide access to a part of its generation = capacity located in France to competitors. It mainly took the form of = drawing=20 rights on virtual power plants (VPP, hereafter) while retaining the = operational=20 control of the plants. Those rights are auctioned under European = Commission=20 supervision. The initial agreement with the Commission which ran for 5 = years was=20 extended, with minor amendments, for a further 4 years. Up to now, more = than 25=20 auctions have been held to sell the VPP. Two types of virtual power = plants=20 exist: baseload and peakload. The price for energy from baseload VPP is = set to=20 reflect the marginal cost of running a nuclear plant (initially it was 8 = euros=20 per MWh, and now it is 9 euros); similarly the price per MWh for = peakload VPP=20 reflects the marginal cost of peakload plants in France. Initially, it = was set=20 to 26 euros but has risen in line with fuel price to more than = 50=E2=82=AC.

In the auctions which are held every 3 months, interested parties can = bid for=20 VPP for periods of 3, 6, 12, 24 or 36 months. The VPP contracts are = options;=20 that is, the owner has the right to purchase electricity at the strike = price=20 (e.g. 8 or 9 euros for baseload) up to the capacity that they have paid = for, but=20 they are not obliged to do so. If they wish to exercise the contract = they must=20 notify the EDF of the required load curve by 12 noon on the previous = day. On its=20 website, EDF provides information on the bidding in the different = rounds as=20 well as the results of the auction, namely, the premium in thousands of = euros=20 per MW per month, and the capacity for the different contract lengths = for both=20 baseload and peakload. For instance, 5 MW were sold at baseload auction = N=C2=B022=20 held on November 2006 for a 3 month period for delivery starting on 1 = January=20 2007 with a premium of 39,400 =E2=82=AC/MW.

The question that interests us is whether buyers of the VPP actually = make a=20 profit after having paid such significant premiums. Owners will exercise = their=20 right to draw power whenever the Powernext price exceeds the strike = price (e.g.=20 8 or 9 euros for baseload VPP); otherwise they could simply buy at a = lower price=20 on Powernext. The figure below shows the revenue received at each 3 = month=20 auction in blue and the corresponding profit (or loss) in red, for = baseload and=20 peakload respectively. It clearly demonstrates that after paying the = premium,=20 owners sometimes lost money for the 3 month VPP. So why do bidders push = the=20 premium so high?

3D84_Result_01=20

3D84_Result_02=20

Is this just a case of winner=E2=80=99s curse? One knows that in = auctions for oil=20 leases, the classical case of winner=E2=80=99s curse, the = =E2=80=9Clucky=E2=80=9D bidder is the most=20 optimistic about the future reserves. But she does not discover the true = reserves until years later when the oil field is put into production. = The=20 situation is quite different here as bidders in VPP auctions find out = the true=20 position relatively quickly, especially for auctions with 3 month = delivery=20 periods. Under those circumstances it seems strange for them to = repeatedly bid=20 up to (and past) the breakeven point. One reason is that the quantities = made=20 available via the VPP are large compared to those exchanged on = Powernext. For=20 example, in December 2002, the VPP capacity was about 5 times the total = volume=20 transacted on Powernext whereas in December 2006 (despite the tenfold = increase=20 in Powernext volumes), the VPP capacity would still have had a marked = effect on=20 the market clearing price. One advantage of VPP is that they are the = only=20 optional product that provides some security of supply by allowing them = to=20 diversity their sources of supply.

(If you want to know more about our VPP=E2=80=99s analysis donwload=20 our recent working paper)

Margaret Armstrong, Alain Galli (Mines Paris-ParisTech) and Arun = Kapoor=20 (Indian Institute of Technology)

This entry was posted on Thursday, = November=20 22nd, 2007 at 9:29 am and is filed under Electricity, English. You can follow any responses to this entry = through the=20 RSS = 2.0 feed.=20 You can leave a=20 response, or trackback from your own site. =

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One Response to =E2=80=9CVPPs: Are buyers making a = profit?=E2=80=9D

Juan Temboury Says: =
November = 23rd, 2007=20 at 4:59 pm
I would like to ask a question to the authors and make a general = comment on=20 current VPP processes.

While comparing VPP and Powernext, did the authors take into = account the=20 G-factor of grid tariffs? and the financial effect of paying in = advance the=20 monthly option? Both issues represent an extra cost for VPP = buyers.

VPP experience so far has been a flawed experiment because of its = implicit=20 design. VPP was simply planned to introduce liquidity to the market = and=20 disregarded incumbents=E2=80=99 availability to set the price in the = power market.=20 Actually, with VPP, incumbents have been provided with a practical = tool to=20 consolidate their price setting mechanisms. To reduce = incumbents=E2=80=99 capability=20 to set prices over the competitive reference, VPP should: 1) auction=20 cost-based products with adequate indexation 2) extend delivery = periods to=20 longer terms (5 to 10y) in order to create an alternative sourcing to = end=20 users and limit the interest of simple arbitrage 3) accommodate demand = and=20 releasable offer before auctioning and 4) not use only-ascending = auction=20 rules.

Sessa

Cessa