HERON Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view

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1 HERON Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view Costas Baslis, Dr. Electrical Engineer, Energy Portfolio Manager Energy Commodities Conference 2018, Athens, May 10 th

2 AGENDA Section 1 Section 2 Section 3 Section 4 Section 5 INTRODUCTION IPPs IN THE GREEK ELECTRICITY MARKET THE SECOND NATURE OF GREEK IPPs: GAS THE MISSING MONEY PROBLEM PROVIDING LIQUIDITY & FLEXIBILITY

3 INTRODUCTION

INTRODUCTION HERON Group at a glance GENERATION: The first independent power producer in Greece HERON I: A 147 MW OCGT power plant, HERON I was the first IPP generating facility in Greece.

HERON II: A 435 MW CCGT power plant, HERON II is among the most efficient power plants in Greece, being also a major player in the ancillary service market.

SALES: A reliable leader of market liberalization A vertically integrated entity, HERON has been actively involved in the supply of electricity to end customers since 2005 as the reliable and leading

4 INTRODUCTION HERON Group at a glance GENERATION: The first independent power producer in Greece HERON I: A 147 MW OCGT power plant, HERON I was the first IPP generating facility in Greece. It has the fastest start-up time among Greece s thermal units, reaching full capacity in 20 minutes. HERON II: A 435 MW CCGT power plant, HERON II is among the most efficient power plants in Greece, being also a major player in the ancillary service market. Thanks to its high efficiency, flexibility and reliability, HERON II is ready to meet the challenges of the future electricity market with high penetration of renewable energy sources. SALES: A reliable leader of market liberalization A vertically integrated entity, HERON has been actively involved in the supply of electricity to end customers since 2005 as the reliable and leading pioneer of market liberalization, offering competitive prices as well as quality energy services. Currently, HERON holds a leading position among independent electricity suppliers and is dynamically expanding its portfolio in the liberalized retail sector in both the electricity and the natural gas markets. Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 4

5 INTRODUCTION Main question at stake How can an independent producer provide liquidity and flexibility in the Hellenic Energy Exchange? the only thing I know is that I know nothing Socrates, 5 th century B.C. Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 5

6 IPPs IN THE GREEK ELECTRICITY MARKET

7 IPPs IN THE GREEK ELECTRICITY MARKET The role of HERON and IPPs in the current market model HERON I Super-peaker. Dual-fuel capability, securing national supply during gas shortage crisis. HERON II 20% of production (IPPs share). Major player in the ancillary services market before they plummeted to almost-zero price status. Fast adaptation to: continuously changing regulatory environment (abolition of capacity payments and cost recovery mechanism) market conditions (fast swing of gas prices, sharp penetration of renewable capacity). Flexible cycling although initially designed as baseload unit. Production (MWh) Operating hours per start/stop cycle PPC (excl. Megalopoli V) IPPs Heron_CC PPC (excl. Megalopoli V) IPPs Heron_CC Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 7

IPPs IN THE GREEK ELECTRICITY MARKET Do independent power producers participate in the design of the new markets? Lack of any kind of regular working groups with IPP participation Tabu topic.

8 IPPs IN THE GREEK ELECTRICITY MARKET Do independent power producers participate in the design of the new markets? Lack of any kind of regular working groups with IPP participation Tabu topic. Yet it would prove a valuable approach even for minor technical issues. Lack of transparency and dialogue before a proposed reform is entered into public consultation Market participants very frequently caught by surprise. Focusing on ex-post damage control instead of ex-ante direct dialogue. Lessons learnt from market-wide sessions with the Regulator Gas crisis of January Numerous emergency management sessions with (almost) all parties from the electricity and gas sectors. Quickly reaching a point of mutual understanding, stronger commitment to commonly set rules. Harvard Kennedy School Professor W. Hogan and S. Pope presenting their proposal for ERCOT market reform in a public hearing in front of the Public Utility Commission of Texas, August Screenshot from live streaming provided for web access to the hearing. Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 8

9 THE SECOND NATURE OF GREEK IPPs: GAS

10 THE SECOND NATURE OF GREEK IPPs: GAS Can an IPP in Greece hedge its production costs? All IPPs are currently gas-fired power producers 3 main sources of natural gas supply for IPPs (apart from occasional spot LNG): SOURCE PRICE FLEXIBILITY TAKE-OR-PAY OIL-INDEXED Annual contract with Public Gas Corporation (DEPA) Participation in DEPA gas release auctions Gazprom-sourced pipeline gas from Bulgaria A major risk: retroactive revision of supply price Long lasting multi-million-euro arbitration cases extending to several years in the past. Is hedging possible? Price-wise it can be done through Brent-based forward positions. Volume-wise, locking the gas price in a spot only energy market is not a wise decision. No forward electricity market: impossible to lock forward clean spark spread. Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 10

11 THE SECOND NATURE OF GREEK IPPs: GAS Which developments in the gas market are essential? A rapidly changing gas transportation regulation No harmonization with electricity market structure. Numerous intra-day balancing nomination sessions, low tolerance limits (3%) and high imbalance penalties while no intra-day electricity market exists for imbalance cost management. Yet transition to a stricter imbalance framework is due MWh-th Natural Gas Consumption The fundamental share of power production in the gas consumption mix (60%) and the central dispatch principle of power system operation are neglected Essential gas market developments Harmonization with current electricity market model and the transition roadmap towards the new market design. Development of a day-ahead gas market (the role of HELEX?) Development of a voluntary imbalance market that will clear prior to the already designed regulated imbalance gas auctions Development of long-term storage and/or reliable and liquid cross-border flows (Bulgaria and Turkey). /MWh 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 Total PPC IPPs Indicative Supply Price Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 11

12 THE MISSING MONEY PROBLEM

13 THE MISSING MONEY PROBLEM Is there a missing money problem for IPPs? 20,00 10,00 0,00 13,94 4,66 Cumulative CCGT Clean Spark Spread in 2017 For baseload operation at 52% efficiency -2,81-4,15-3,73-2,94-2,46-2,09-1,95-1,55-0,09-0,08-10,00 Ιαν-17 Φεβ-17 Μαρ-17 Απρ-17 Μαϊ-17 Ιουν-17 Ιουλ-17 Αυγ-17 Σεπ-17 Οκτ-17 Νοε-17 Δεκ-17 No capacity revenues a temporary flexibility capacity market is still pending EC s approval Benchmark: negative baseload CSS in 2017, i.e a year when: There were exceptional periods (January, February, November) with high price spikes. Due to low gas prices CCGTs were displacing several lignite units in the merit order. Practically an energy-only market with: Low price cap of 300 /MWh (e.g. the energy-only market of ERCOT has a $9,000/MWh cap) Even lower implied price cap set by the maximum hydro plant bid floor, 150 /MWh. Even lower actual price cap as all hydro capacity (as if fully available) is offered slightly higher than the higher thermal unit offer, 60 /MWh. Persistent missing money problem: negative IPP Net Results for many consecutive years. Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 13

14 PROVIDING LIQUIDITY AND FLEXIBILITY

15 PROVIDING LIQUIDITY AND FLEXIBILITY Does the currently proposed design of the new markets enhance competition? The elephant has always been in the room: A dominant firm with sole access to low-cost production assets (lignite, hydro) strategically acting as a net energy buyer and thus interested in as low as possible spot prices. Which is the currently proposed market design? Fundamental key market rules and settings are still undefined or being revisited. How can we avoid hampering competition and worsening the missing money problem for IPPs? PPC maximum allowed forward percentage: Increasing with a decreasing PPC market share. Unit-based day-ahead market: Essential for level playing field due to asymmetric asset ownership. Minimum Average Variable Cost in energy offers: Otherwise prone to PPC market power (able to internalize all different technology costs), similar effect to portfolio bidding. Pricing of ancillary services: Which will be the price cap? Flexible generators should be able to receive substantial revenues from the procurement of ancillary services. Permanent capacity market: Rewarding flexible capacity in a robust and transparent way, offering the appropriate economic signals for optimal entry/exit decisions. Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 15

16 PROVIDING LIQUIDITY AND FLEXIBILITY Main question at stake How can an independent producer provide liquidity and flexibility in the Hellenic Energy Exchange? Fundamental market design prerequisites that will allow fair competition and flexible capacity remuneration. IPPs will be active in every market segment. Proven track in providing increasing flexibility to meet the challenges of the tight and shallow Greek market; adequate day-ahead and intra-day gas market developments will enhance this legacy. Forward market will it be a liquid marketplace? It takes two to tango. Will suppliers have an incentive for forward positions with IPPs? Will a successor to NOME forward mechanism acting as a catalyst towards liquidity? Further steps for higher IPP contribution to a liquid forward market Options (+ CSS, heat rates). Forward gas market. RES profile products, motivation for higher RES aggregator engagement. Energy Commodities Conference 2018, May 10 th Providing liquidity and flexibility in the New Hellenic Energy Exchange - An independent power producer's view 16

17 THANK YOU!!!

Electricity market design with thoughts for New Zealand. Peter Cramton University of Cologne and University of Maryland 12 February 2018

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