Tyndall Briefing Note No.

2 3 April 2001

The value of Intermittent Renewable Sources in the first week of NETA
(graeme.bathurst@umist.ac.uk) Goran Strbac
(goran.strbac@umist.ac.uk)

day was also formed from this schedule, and this was the price that the electricity suppliers had to pay for the electricity that they used in that period. It was also the price that was paid to all generators for the electricity that they generated, regardless of the price that they submitted. While all large generators had to submit prices for generation into the Pool, there was no obligation to deliver as the bidding was not firm. There were no penalty costs associated with non-delivery to the Pool, except for those in external contracts. While the Pool was not designed with Intermittent Renewable Sources in mind, it did work for them as they received the common electricity price for all their generation when trading through the Pool. “The role of the NETA Programme is not to dictate how energy will be bought and sold on these exchanges or in bilateral contracts. Instead it is to provide mechanisms for near real-time clearing and settlement of the imbalances between contractual and physical positions of those buying, selling, producing and consuming electrical energy.” [1] All contracts must be submitted 3.5 hours ahead of the particular half-hour dispatch period. Flexible generators can then submit prices into the Balancing Mechanism, which allows the system operator to take action to ensure balanced and secure operation of the electrical system. These prices form the imbalance prices that must be paid by generators or suppliers for any differences between their actual position, and what they had contracted to do. The purpose of the imbalance prices is to provide a commercial incentive to all participants to honour their contracted positions. If a generator has a shortfall in contracted generation, then it must pay for that shortfall at the System Buy Price. If a generator produces more energy than it has contracted, then it is paid for this excess at the System Sell Price. These are referred to as the NETA imbalance prices and there is no constraint on their magnitude or sign. These costs are a considerable problem for Intermittent Renewable Sources as even with state of the art forecasting techniques, they are still in imbalance by 30-40% [2]. A one week sample of the output of a 10MW wind farm in the UK is shown in Figure 1. By comparison forecasting electrical consumption is very advanced with typical errors in the range of only 2-5%.

Graeme Bathurst

Synopsis The New Electricity Trading Arrangements came into effect on the 27th of March 2001. This new system referred to as NETA replaces the existing England and Wales Pool as the commercial mechanism by which wholesale electricity is bought and sold. While there was some concern prior to the “Go-Live” date about the adverse impact of NETA on the value of Intermittent Renewable Sources, the harsh reality of the first week of operation has taken all by surprise. One of the design characteristics of NETA is to punish generators that do not honour their advance contract commitments. If a generator has a shortfall in contracted generation, then it must pay for that shortfall at the System Buy Price. Over the last seven days, these prices have been very volatile and considerably higher than expected. If the generator produces more energy than it has contracted, then it is paid for this excess at the System Sell Price. These prices have been very low and often negative. As Intermittent Renewable Sources are intrinsically difficult to forecast, the effect of these penalty costs in the first week of NETA has made renewable energy worthless. This paper shows that over the last seven days the most profitable way of operating wind farms was to switch them off. Background to the Pool simplified description and NETA – a

There are some fundamental differences between the previous Pool based trading arrangements and NETA. Under the Pool, participating generators submitted prices for their energy to the system operator. Based upon these and the forecast of expected electricity use, the system operator then formed a daily schedule of the generators that were required, and when they needed to operate. A common electricity price for each half-hour of the
Tyndall Briefing Note No. 2

3 April 2001

Half-hourly energy output from a 10MW wind farm for one week
5000 4500 4000 3500 kWh/half-hour period 3000 2500 2000 1500 1000 500 0 0 48 96 144 Half-hour periods 192 240 288

Figure 1 The variation in output from a 10MW UK wind farm during a week in March Unfortunately for Intermittent Renewable Sources such as wind generators who cannot accurately predict their generation, the costs incurred by these imbalance prices reduce the overall value of their generation. Initial predictions put these costs for wind generation at between 0.1-0.3 p/kWh on an optimistic contract price of approximately 2.0 p/kWh. The potential impacts of these imbalance costs, and also the additional cost of trading, was recognised at an early stage and so provision was made for small generators in the form of consolidation options. Consolidation is basically a form of sharing the risk of imbalance between all members of the group. It relies on one member’s negative error being partially compensated by a positive error of another’s. In practice this could lead to a small benefit, however this is dependent upon the mix within the group. Analysis of the first week of Intermittent Renewable Sources NETA for

The first week of live NETA has shown extreme volatility in both the System Sell Price and the System Buy Price (Figure 2). An important observation to note is that the System Sell Price has gone negative many times within the first week. A negative price means that a generator spilling onto the system must pay the system for that un-contracted energy instead of being paid. The second point to note is that the System Buy Price has had a large number of extremely high price occurrences.

NETA Imbalance Prices
System Sell Price System Buy Price Go Live

180.00 160.00 140.00 120.00 100.00 p/kWh 80.00 60.00 40.00 20.00 0.00 0 -20.00 Half-hour periods 48 96 144 192 240 288 336 384 432 480

Figure 2 Imbalance prices for the first week of NETA (and three days pre-GoLive)

Tyndall Briefing Note No. 2

3 April 2001

Minimum System Sell Price System Buy Price -14.64 p/kWh 0.83 p/kWh

Average 0.07 p/kWh 20.04 p/kWh

Maximum 3.80 p/kWh 3414.76 p/kWh

Table 1 Summary of imbalance prices from the first week of NETA Table 1 gives a summary of the actual imbalance prices that occurred during the first week of NETA [3]. To assess the value of an Intermittent Renewable Source under these market conditions, the energy data from a 10MW wind farm in the UK from the same time of year is used. The energy is forecast using a standard forecasting method, assuming that the energy can actually be traded during each day. It is also assumed that an optimistic contract price of 2.0 p/kWh can be obtained for all of the forecast energy. A wind farm with the output shown in Figure 1 over the first week of NETA produced 378MWh of energy and by doing so made a loss of -£1,532 (Income through short/long term energy contract at 2p/kWh would amount at £7,560 while the total NETA imbalance penalties in the same period were £9,092). That gives this wind farm a net negative unit value of –0.41 p/kWh. Hence, the most profitable way of operating this wind farm over the last week would have been to switch it off. Summary The first week of operation of the New Electricity Trading Arrangements has delivered a nasty shock to owners of Intermittent Renewable Sources in the form of severely punitive imbalance prices. Due to the stochastic nature of their primary energy sources, the energy output of these generators is difficult to forecast and hence they are continually exposed to the imbalance prices of NETA. The magnitude and volatility of these imbalance prices has exceeded the initial expectation by more than tenfold with a devastating effect on the value of Intermittent Renewable Sources. Given the prices observed in the first week of NETA, it will be interesting to see how this develops in the future, and what the long term impact on Renewables will be. References [1] “An Overview of the New Electrical Trading Arrangements”, May 2000, Ofgem, www.ofgem.gov.uk [2] “Maximising the Commercial Value of Wind Energy Through Forecasting” ETSU W/11/00555/REP, 2000. [3] www.bmreports.com

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Tyndall Briefing Note No. 2

3 April 2001