Option products should be a natural answer to the increasing need for flexibility in the German power market. But while utilities which offer options do report rising demand for their product, market reform is likely to be needed for option products to fulfil their potential as balancing tool for volatile wind and solar power generation, market participants have told ICIS.
“Options could become an interesting new asset class with regard to the market integration of renewables,” Vattenfall head of portfolio management Alfred Hoffmann told ICIS in an interview this month.
Short-term options usage
In particular, the need for short-term adjustment in power generation could be served by options which offer the right, but not the obligation, to buy or sell power at a given point in time ( see EDEM 9 May 2014 ).
Short-term power options are traded on the over-the-counter (OTC) market, while standardised option products are also on offer as monthly, quarterly and yearly products on the European Energy Exchange for the German/Austrian market area.
German utility EnBW’s head of trading Martin Schelker told ICIS at the end of June: “Generally, one can say that options with shorter maturities would become more important in the wake of the Energiewende [Germany’s shift to a renewable-based energy system].”
EnBW has seen an increase in demand for an option product which it offers in the market. The Karlsruhe-headquartered utility offers optionality through its flexible hydro plants to capture the increased demand for flexibility in the market.
Every market participant in the Day-ahead market is required to have a balanced production schedule for the next day. EnBW’s product is aimed at market participants and plant operators which lack the flexibility to adjust their generation in a 15-minute interval and want to avoid high balancing charges.
This flexibility is particularly in demand during hours like 08:00 to 09:00 when power consumption normally surges, Schelker said. “It is more like a ramping-hour option,” he added.
For example, EnBW might supply 15MW from 08:00 to 08:15, and another 30MW in the following 15-minute period. Then the customers’ power plant starts generating, so they supply 15MW from 08:30 to 08:45 and 30MW from 08:45 to 09:00 to EnBW, Schelker explained. “We offer the service with the proposition that the hourly value of supplied and consumed electricity is zero,” he said.
Wind power on the forward curve
Plant operators for volatile wind and solar power generation could achieve a more predictable portfolio with the help of options. As a result, wind power producers could even sell their output on the forward market, Vattenfall’s Hoffmann said. However, they are likely to be more active on the short end of the curve, such as intraday to Week-ahead.
Vattenfall offers options to wind power producers as insurance in times of low wind power generation. “Therefore, the usage of options could increase the willingness of wind power generation to sell on the forward market to insure against price peaks where they might be short,” Hoffmann said.
However, the current market design would not incentivise wind power producers to search for alternative financing, such as selling on the forward market, because they have secured revenues, Hoffmann acknowledged. Selling wind power on the forward market “depends essentially on the risk aversion of the producers and how much they want to secure revenues for the coming year,” he said.
In contrast with the Dutch, UK and Scandinavian markets, selling wind power on the forward curve was not really practiced in Germany, Hoffmann said. “A monthly option with daily right to exercise for the following day could be attractive,” he said.
Vattenfall offers this kind of option on the OTC market for which there is good demand. In total, the market traded 600MW of this type of month-ahead options, according to Vattenfall. “This shows that there is interest in the new products,” Hoffmann said.
Lack of incentives
The obstacles of selling wind power generation on the forward market in Germany are highlighted by Danske Commodities, the Danish commodity trading house which operates a 3.6GW renewable power portfolio under its German direct marketing business. In direct marketing, traders sell the output of subsidised renewable power directly on the European spot power exchange EPEX SPOT instead of selling it to the transmission or distribution system operators.
For Danske Commodities direct marketing business it would not make sense to sell wind power generation on the forward market, Danske’s renewables division country manager for Germany Eddie Weissenborn told ICIS in an interview this month.
“It’s fluctuating production, you can trade it on the forward market but it’s not where Danske Commodities has its focus. Wind and solar production can’t be forecast precisely enough over longer periods to trade the curve. Our strong focus is to get the value out of the short-term markets,” he said.
However, Weissenborn added that if there was demand for power to be sold on the forward market then Danske Commodities would consider it. “Our strength is in short-term trading, but if German regulations change and a fixed future price is no longer guaranteed by the EEG [renewable energy law], then we will have to provide fixed future prices on wind profiles. This is a model we know from other markets across Europe.” Berlin is planning to switch from a feed-in tariff for renewable power such as wind and solar to an auction-based remuneration model in 2017 for new installations. The current feed-in tariff guarantees a certain remuneration for 20 years.
Options as trading products was not a big issue for Danske Commodities. “Only a few clients are asking for it,” Weissenborn said, although if there was demand for this product, Danske Commodities would be able to create options through their options department in Denmark. He compared this to 2012, when the trading house set up its direct marketing business within two months because there was demand in the market to pass on balancing risk.
However, Weissenborn was sceptical that options would become more popular in Germany in the short term because of the current market model. Martin Degen