Gent Summer School Electricity Markets Trading Gregory Michiels

Gent Summer School: Electricity Markets & Trading Gregory Michiels 27 August 2013

EDF LUMINUS: 1 st CHALLENGER IN ELECTRICITY PRODUCTION IN BELGIUM 1, 950 MW installed capacity (beginning 2013) 10 % of the Belgian electricity production capacity 73 MW hydro-electric energy 3. 8 % of our energy mix 117 MW wind energy 6 % of our energy mix 418 MW nuclear participations 21. 4 % of our energy mix 1, 342 MW gas power plants 68. 8 % of our energy mix 2

1 st CHALLENGER IN GAS AND ELECTRICITY SUPPLY 1, 700, 000 access points 30, 000 MWh sold Market share of 20% 3

SHAREHOLDERS June 2009 EDF announces its intent to buy Centrica’s 51% November 2009 Approval by the European Commission 12/11 Closing 51% shares 26/11 Minority shareholders sale option 8 June 2010 Publilum and VEH sell half of their shares, Dexia sells all participation EDF in SPE: 63. 5% 22 November 2011 The company name is EDF Luminus 4

Optimisation versus Trading Asset Optimiser Trader • Manages a portfolio of assets (power plants, contracts, retail portfolio, …) • Objective is to control physical and financial risks and maximising margins = speculation • Creates a position • Objective is to make money from this position when market conditions change = hedging Both actors sell and buy in the wholesale markets to achieve their objectives, thus creating a liquid market 5

Timeline of activities of an asset optimiser From 3 years to 1 month ahead of implementation date [D] • Forecast of the medium-term supply/demand balance • Scheduling of power plant maintenance • Sale/purchase operations on the forward markets 1 Month ahead of implemenation date [D] • Refine the supply/demand balance to more accurate weather forecasts and availability of power plants • Sale/purchase operations on the forward markets Day Ahead [D-1] • Create operating schedule for the power plants • Balancing supply and demand on the Day-Ahead market (DAM) • Send nominations to TSO 6 Intraday [D] • Respond to latest unanticipated changes in the portfolio • Send renominations to TSO • Sale/purchase operations on the intraday market

OTC markets and power exchanges 7

Forward and spot prices 8

Price Drivers 9

DAH price formation: supply/demand balance Commercial demand Industrial demand CCGT Exports Nuclear Imports Peak units Residential demand Hydro reservoir Price Coal Renewables Power 10

The make or buy decision Heat Power Fuel Power Plant CO 2 11

Interaction hedging - dispatching Situation A Forward Market Day-Ahead Benefit • CSS = 5€/MWh • Hedged • CSS = 10€/MWh • PP dispatched • 5€/MWh Situation B Forward Market Day-Ahead Benefit • CSS = 5€/MWh • Hedged • CSS = 2€/MWh • PP dispatched • 5€/MWh Situation C Forward Market Day-Ahead Benefit • CSS = 5€/MWh • Hedged • CSS = -3€/MWh • PP not dispatched • 8€/MWh Situation D Forward Market Day-Ahead Benefit • -3€/MWh • Hedged • CSS = 3€/MWh • PP dispatched • 3€/MWh DAH dispatch decision is independent from hedging decision in 12 the forward markets

Capacity mix Europe 13

CWE Market Coupling • Launched on 9 November 2010 • Cooperation of Transmission System Operators (TSOs) and power exchanges (PXs) coupling the Belgian, Dutch, French and German electricity markets • Provides for the implicit cross-border capacity allocation and matching of orders of the involved PXs, resulting in the optimal allocation of available day ahead cross-border capacity and price convergence between day ahead wholesale electricity markets across this region 14

CWE market results 3 Aug 2013 15

CWE market result 23 August 2014 16

Convergence of CWE prices: are we on a copper plate? 17

Forward markets: OTC 18

Imbalance markets 19

30 sec <15 min AUTOMATIC Levers for the TSO to manage the country balance primary reserve secondary reserve tertiary reserve via generation units MANUAL 15 min tertiary reserve via sheddable customers uncontracted reserve ('free bids') reserve contracts with neighbouring system operators 20

Balancing: how does it work? 1/4 h Balancing obligation for each BRP • Balancing = difference between production and consumption of the whole portfolio (metering) TSO takes care of the position of the country • Short position of BRP purchased at imbalance price • Long position of BRP sold at imbalance price + Imbalance price is equal to marginal price activated by TSO • High incentive for BRP to be balanced • Many opportunities for BRP Imbalance price + and – are equal most of the time • Differences (extra incentive) only if big imbalances 21

Imbalance prices sunny day Cold evening peak NRV = Net Regulation Volume (=volume activated by Elia to restore the balance) POS = Positive Imbalance price (what you get paid if you inject more than you consume) NEG = Negative Imbalance price (what you pay if you consume more than what you inject) 22

Delta between DAH prices and imbalance prices D D-1

Demand side management 24

Market Regulation § § Prohibition of market manipulation and trading on the basis of ‘insider information’ Market monitoring by ACER Transparency Market Integrity Market manipulation prohibitions Insider dealing prohibitions Applies to underlying physical power, gas and transport contracts and markets Post trade transparency for energy markets through ACER Trade data reporting to ACER Public transparency of fundamental data / inside information and their reporting to ACER Applies to all gas, power and transportation contracts and markets 25

THANK YOU ! QUESTIONS & ANSWERS