Upcoming market changes

How small hydro producers need to prepare for upcoming market changes

Due to slim profit margins, proper imbalance management is crucial to the financial success of small hydro power plants.  These plants must increase the accuracy of their generation forecast and reduce the quantity of generated power that is exposed to imbalance settlement prices.

As described in the previous articles, harmonization of intraday markets and increasing interconnection capacity to continental Europe will not only expose Norway to the generation technology mix of external markets but also to the price drivers and price volatility in the connected regions.  An example of this continued harmonization is next year’s implementation of X-Bid, the cross border intraday market which promotes increased liquidity and more efficient utilization of generation resources across Europe.

In this article, we will examine how these changes affect small run-of-river hydro producers, which factors affect imbalance costs and how small hydro producers can reduce imbalance costs going forward.

Settlement Advantage of Small Generators

Due to slim profit margins, proper imbalance management is crucial to the financial success of small hydro power plants.  These plants must increase the accuracy of their generation forecast and reduce the quantity of generated power that is exposed to imbalance settlement prices.

In Norway, it is observed that power plants with less than 3 MW capacity may have their imbalances settled at the regional, hourly Consumption Imbalance price, whereas larger generators are exposed to the market Up and Down Regulating prices (Figure 1).

It should be noted that in other analyzed markets, this advantage of Consumption Imbalance settlement price has been removed or simply does not exist.  In other words, in these markets, the small hydro generator would be exposed to the hourly Up and Down Regulating imbalance prices from the intraday market.

As described in the previous articles, harmonization of intraday markets and increasing interconnection capacity to continental Europe will not only expose Norway to the generation technology mix of external markets but also to the price drivers and price volatility in the connected regions.  An example of this continued harmonization is next year’s implementation of X-Bid, the cross border intraday market which promotes increased liquidity and more efficient utilization of generation resources across Europe.

In this article, we will examine how these changes affect small run-of-river hydro producers, which factors affect imbalance costs and how small hydro producers can reduce imbalance costs going forward.

Simulating the revenue performance of a small hydro power plant

We have used real-life production data from a sample Norwegian run-of-river power plant with a maximal production capacity of 2 MW and annual average generation of 6.500 GWh (see Figure 2) and simulated its revenue performance in the Norwegian regional price zones over a period of one year (from September 2016 to September 2017).

When calculating the power plant revenue performance, we looked at the energy value and ignored any fees, throughput charges and other cost or revenue items.

To analyze the effect of imbalance costs on the revenues of the plant, imbalance costs were then modelled in three ways and the regional price zones output averaged:

What would be the average sales price for power generated if the power plant had been perfectly forecast and there were no imbalance settlement charges?
What would be the average sales price for power generated if the power plant was a small hydro plant with imbalances settled at the hourly Consumption Imbalance price?
What would be the average sales price for power generated if the power plant was a large hydro plant with imbalances settled at the hourly Up and Down regulating price?
For Scenarios 2 & 3, a basic forecasting methodology was used for the sake of this analysis, whereby day ahead generation was forecast as actual, hourly production from the previous day.

There are regional differences in the Day Ahead Prices and Consumption Imbalance prices (EUR/MWh). In each geographical zone, comparing Scenarios 1 and 2 (above), the power plant earned over 98.3% of the achievable revenue (Figure 3).

Using the basic forecasting methodology (Scenario 2), the small generator received 175k EUR/year, earning 0.37 EUR/MWh less than the perfect forecast methodology. In contrast the large hydro, with exposure to the Up and Down Regulating imbalance prices (Scenario 3), earned 1.25 EUR/MWh less than the perfect forecast methodology outturn, leading to a total lost income of almost 8 000 EUR per year due to forecasting errors (based on the described forecasting methodology) (see Figures 4 & 5).

Using the basic forecasting methodology (Scenario 2), the small generator received 175k EUR/year, earning 0.37 EUR/MWh less than the perfect forecast methodology. In contrast the large hydro, with exposure to the Up and Down Regulating imbalance prices (Scenario 3), earned 1.25 EUR/MWh less than the perfect forecast methodology outturn, leading to a total lost income of almost 8 000 EUR per year due to forecasting errors (based on the described forecasting methodology) (see Figures 4 & 5).

Advantage goes to the small hydro produce

Small hydro producers presently benefit greatly from Consumption Imbalance pricing. There is the threat that this benefit could be removed, at some point, with the implementation of continued continental Europe harmonization. There will be more pressure on TSOs to balance, increasing the possibility that the market could move to quarter hour granularity.

How small hydro producers could prepare themselves

For the present analysis, a basic forecast methodology was used for the sake of simplicity. But with already slim profit margins, there is of course pressure on hydro producers to minimize their imbalance costs by improving forecast accuracy beyond such a simple model, and this incentive is likely to rise over the next few years.

There are three basic requirements to accurate generation forecasting and imbalance management for run-off-river power plants:

1. Fundamental models based on meteorological data that allow a high precision in the forecasting of hydrological inflow data.
2. Real time metering telemetry to enable the monitoring of the power plant generation and inflow
3. The ability to trade intraday to reduce any generation imbalances.

Those hydro producers who begin implementing these steps now, can rest assured that they will be well prepared to meet any challenges that the imbalance regime harmonization with Europe, over the next few years, may bring to the Nordic markets.