WITH ERIS (ENWEX RENEWABLES INDEX SETTLEMENT) FLEXPOWER TRIES TO REVOLUTIONIZE THE ENERGY TRANSITION. ERIS STANDARDIZES RENEWABLE ENERGY STRUCTURES, ENABLING DIRECT AND TRANSPARENT PRICE DISCOVERY, LEADING TO A VIRTUOUS CYCLE OF LIQUIDITY AND FAIRER PRICING. BY CALCULATING AND PUBLISHING HOURLY UTILIZATIONS FOR PV AND WIND, THE INDICES FUNCTION AS A PROXY FOR HOURLY VOLUME PER TECHNOLOGY AND MARKET. THIS PAVES THE WAY FOR NEW MARKETS FOR STANDARDIZED RENEWABLE SHAPES, SIMILAR TO EXISTING BASELOAD PRODUCTS. THE PLATFORM'S GROUNDBREAKING APPROACH PROVIDES A TRANSPARENT, SIMPLE, AND STRAIGHTFORWARD WAY TO PRICE RENEWABLE SHAPES, BENEFITTING GREEN ASSET DEVELOPERS AND OWNERS WHILE ADVANCING THE ENERGY TRANSITION. THE VISION IS TO EMPOWER INVESTORS WITH THE TOOLS FOR TRANSPARENT PRICING, ACCURATE HEDGING, AND COMPETITIVE ADVANTAGE, BRINGING THE ENERGY TRANSITION ONE STEP CLOSER TO COMPLETION.
Let's commoditize
At FLEXPOWER like every prudent investor we try to think about risk and reward relative to our edge, i.e. comparative advantage, in everything we do. As power traders, we have to rely on market prices. Market price levels and respective buying and selling interest at those levels, in other words: liquidity allows traders to voice their opinion through prices. If I think the best buyer is bidding too high, I will sell to her and vice versa.
The presence of market prices require the existence of a („fair“) market. The fairest and best functioning markets are commoditized, meaning that products have become standardized and many actors have access to them. The primary goal of futures markets is always the shifting of certain risks. There are many such commoditized markets globally ranging from stock markets to commodity markets in general.
All markets start with a clearly defined product. After all, if I don’t know exactly what I will get, I will have issues naming a price for an underlying.
Commodity markets start with a clearly defined product. This is necessary so everyone bidding, offering, buying and selling, know exactly what they are dealing with. After all, if I don’t know exactly what I will get, I will have issues naming a price for said underlying product.
Power Markets and Baseload prices
Now, let’s jump to power markets and think about how they currently function around trading and settlement. This provides the best baseline to explain how price discovery for renewables can work. A standard power product — in our exemplary case it is settled physically — is one hour of 1 MW of power delivery for tomorrow. Bidding for this product is done in spot. Price discovery in spot happens on the margin, i.e. everybody partaking are biding close to their marginal cost, for every hour of the next day (day-ahead auction). Granted, a few must-run assets will bid using so called blocks, but we will ignore that fact for now, as it is not relevant here. Those bids are being aggregated by the exchanges, sorted by marginal price (highest to lowest selling and buying interest) and cleared at the maximum volume (the very price where the maximum numbers of sellers’ volume meets the maximum number of buyers’ volume).
We call this methodology pay-as-cleared. The clearing price is one single price per hour for every day. Standard practice has it to calculate the average (mean) of those realized 24 hourly prices to get the baselod price. What does this baselod price tell us? Well, as explained before it is merely the mean of all hourly prices. In practice, well fundamentally, this price is the price for production or consumption of 1 MW per hour (in €/MWh). Another way to get to the baseload price is calculating the volume (1 MW per hour)-weighted average price of a delivery period, e.g. 1 day. Historically, this structure, an equal volume of 1 MW per every hour for the respective delivery period, allowed both producers and consumers to put on adequate proxy hedges (proxy: well, hedges are per definition never perfect). (Fossil) Producers were able to produce a structure that closely corresponded to baseload, such as a nuclear plant producing at a stable straight-line level and off-takers got used to buying that very structure. Now, times are a-changing: Green power production is not only a given societally, but also from an economic standpoint; fluctuating renewable energies are the pace winners. As fundamentals have changed, we are moving to push the market towards a timely financial integration of these new phenomena.
ERIS builds on the enwex Index
The crafty reader might already figure where I am going next. Our team at FLEXPOWER have helped with the development of the novel Renewables Indices that are now being published daily and free of charge at enwex.com.
enwex standardizes renewable energy structures to enable trading such that direct and transparent price discovery will result in a virtuous cycle of liquidity and fairer pricing.
enwex transparently calculates and publishes hourly utilizations for PV and Wind based on same day’s ECMWF 00 run. At FLEXPOWER, we think about those hourly values as a proxy for this day’s production volume for the respective technology. Depending on scale, you could consider this structure a chunk of a market’s day-ahead forecast. In essence the indices function as a proxy for an hourly volume per technology and market. Using the same logic from above — when talking about how baseload is calculated — we can now derive daily values for Wind and PV. You already know how to do it! Just take the volume-weighted price per technology.
Example: How does enwex work?
Let us do a quick example and look at the day tomorrow to make this a bit more intuitive using actual Day-Ahead prices, enwex hourly values for Wind and Solar and a flat shape profile that we assume is a Nuke. Note how Solar (grey columns) produces mostly when the Day Ahead prices (black line) are lower. This is no coincidence but rather driven by the fact that an increase in supply pushes down prices.
Now in the next step we simply multiply this production with the hourly prices to arrive at hourly revenues for each technology.
You can see that the Nuke revenues are perfectly correlated with the DA prices, which should be intuitive by now. You can also see that Wind revenues are higher in hour 20 than in hour 3, even though production is lower, because in the evening they can sell their power at higher prices. To arrive at the daily index price you now simply sum up revenues over this day for each technology and divide over the total volume produced:
Using this methodology, nuke has a daily shape value of 95.24 EUR/MWh which is just the average of all hourly prices. It's simply a baseload shape. Wind is next, which has a daily shape value of 91.82 EUR/MWh. This is usual as wind tends to also push down prices. Solar has the lowest value (or capture rate) at 88.60 EUR/MWh as it tends to all produce simultaneously and therefore pushes down prices the most.
For a detailed explanation how the enwex shapes are calculated see: https://enwex.com/about/.
We just calculated a standardized index for a certain technology and price-weighted it. Voila! You get a technology price for a reference asset for a certain market and delivery period.
Why enwex matters
Why did we do this? Have we created a monster? Well, we created a transparent, simple and straightforward way for people to price renewable shapes. This new index standard allows for the development of new markets catered to renewables analogous to existing markets, like the one for baseload products — described above. This in turn will allow for more people to come in and price those structures. Off-takers can join the party directly and procure standardized renewable shapes rather than originating cumbersome corporate PPAs, liquidity will grow and centralize (explicitly or implicitly through arbitrage). In short, the price one will get for their production will be better when the other side is able to bid competitively on a pre-agreed shape.
The image below shows you the enwex solar production index and the respective daily market values for the last 30 days. Note how solar production tends to already be worthless on Sundays.
Graph 4: 30 history of daily enwex production and daily market values for solar
At FLEXPOWER we have already created a market for tenors of up to three years based on the standardized indices. Our PowerMatch platform shows live future prices for PV and Wind. Powered by enwex settlement, we have standardized and immensely improved the corporate PPA origination workflow. We are calling it ERIS (enwex renewables index settlement). Green asset developers and owners can now use our platform to sell enwex shapes against their production. Similar to operators of fossil assets who in the past turned to baseload hedges — a recipe for disaster for renewable asset owners due to the resulting risk of shortfall, ERIS creates a commoditized market for renewable shapes. In essence, green assets can now sell forward something that is very similar to their actual (future) production in both shape and volume.
Dealing with residual shape risk
The avid analyst will point to and warn about the emerging index risk under this structure (compared to Pay-as-Produced [PaP]) as hedgers are selling something that is very similar to their expected production but not exactly the same. The image below exemplifies the residual spot risk between an as-prodced shape and an enwex-shape. As the two will never be exactly the same, the producers trading company will need to manage the over-/ and under production at spot prices.
Graph 5: Residual Risk for PaP vs enew shape on an exemplary day
This residual risk is a trade-off when compared to PaP structures, but we believe it is easily worth the cost: We would argue that price improvement on the standard shape (compared to PaP) will far exceed and outweigh the assumption of this risk in expectation. After-all any merchant would fully price in their PaP risk (compared to pricing the standardized index) and surely add a risk premium. Furthermore PaP structures are all idiosyncratic by nature and pricing them takes immense time and effort meaning that liquidity for these shapes will never emerge.
Here is why we believe our approach is superior to PaP PPAs:
We believe that investors and owners of renewable assets have been kept in the dark about price discovery of their future production by being offered intransparent PPA products for too long. Too many "pricing experts" are taking part of the margins that belong to producers and conumers.
We believe in market access for everyone. A phenomenon we can already witness in other markets, like the stock market, where commoditization has been achieved. Our standardized PowerMatch platform offers access to all and can be traded at very small volumes.
We believe that green investors are smart and sophisticated. They have shown to be able to erect multi-MW assets in a decentralized manner with or oftentimes even without governmental backing. They have acquired impressive skills to conquer even the densest bureaucratic forests to achieve this.
We want to offer our clients the tools to think about risk/reward and edges and to get a transparent price for their future project cash flows in order to accurately asses their respective competitive advantage. We want to help establish transparent hedging products and let our clients focus on what they know best — building renewable assets to get the energy transition finalized.
When creating a new product, we always start with our vision to fully align all interests with our customers.
We see ourselves as an outsourced trading desk always looking out for our clients best interest rather than a mere service provider.
By creating a truly liquid, transparent and straight-forward PPA product, we aim to take our clients another step closer to creating their own value on the market.
We are here to help. Happy to educate. Born to be challenged. Always!
Prosit (It will be useful)!
