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6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary
Electricity supply: Cost structure and
decision making in plant operation and
investmentPéter Horváth
9th May 2018 – Budapest – ERRA training
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary2
1. Microeconomics
2. Cost structure of different power plant technologies
3. Short run (production) decisions
4. Long term market impacts
5. Long term investment decisions
AGENDA
0. Introduction
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary3
MET Group is a unique international multi-commodity wholesale
and trading company with a significant European presence
MET Group introduction
Countries via subsidiaries13 UNIQUE POSITION
IN CEE19 Internationaltrading hubs 27 National gas
markets
KEY FACTS• Diversified commodity structure - natural gas, power, oil, oil products, LNG, LPG
• Track record in successful expansion to international markets
• Excellent understanding of CEE and CIS political and economic environment
• Stable and significant financing facilities and credit lines
• Ability to capture real option value through physical asset ownership
• Highly motivated and competent management and employees
• Proven track record of high profitability and fast growth
• Headquarters in Zug, Switzerland
500+e
mployees
d3Number of newly opened country
offices in 2016 and 2017
LEADERIN THE CEE
GAS MARKETSubsidiaries of MET Group
Trading regions for MET Group
24+ BCM
Gas turnover volume in 2016
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary4
Oil storage tanks (95% idle)
Feedwater canal for cooling water
Dismantling site – LOT1
G3 unit, AEN94.3 GT based multi-shaft 403 MW CCGT
unit
Dismantling site – LOT2 (former 5 steam cycle)
Demin water plant – LOT2
G2 unit, SIE94.2 GT based multi-shaft 220 MW CCGT unit
G1 unit, SIE94.2 GT based 150 MW OCGT unit
TSO 220 kV and 120 kV substation
Gas receiving station
Helicopter view of Dunamenti PP
Dunamenti is the largest gas fired power plant in Hungary with
794 MW of installed capacity on three combined cycle units
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary5
1960
Oil based BEADC blocks of Dunamenti start their commercial
operation
„Glorious history under plan-economy”
„Golden ages”
„Turbulent times”
1994
1973
2009q1
2014q1
2011
G1 gas turbine unit starts commercial operation1995 Privatization by Tractabel, long term PPA with state
power utility
1998 G2 CCGT unit starts commercial operation, to serve PPA
Repowering program: G3 CCGT unit starts commercial
operation
Due to EU pressure, termination of LTPPAs in Hungary,
including Dunamenti’s
1968
Decision about power plant investment at Százhalombatta
„F” blocks of Dunamenti start commercial operation
1980s Natural gas becomes the main fuel of the PP
• Initial objective was the support of the Danube Refinery
with energy (electricity, heat) and other resources (water)
• Oil tar was the main fuel of the units at the beginning
• Until the late ´80s the units were used for baseload power
production
• The main blocks were the up-to-date natural gas based
CCGT units
• As a result of the long-term PPAs (LTPPA) the G1, G2
and F units operated with high utilization
• Due to the act of the European Commission MVM breaks
up the LTPPAs
Dunamenti loses market share as a result of the termination
of LTPPAs, regional generation capacity oversupply and
collapsing clean-spark spreadHeadcount reduction, cost improvement program, efficiency
capex program, halt of power generation from 2014Q42013
Threatening insolvency, ownership change
2015-16 Full restructuring and corporate turnaround program
(business/revenue model, costs, organization, assets, liabilities)
2017-18 Consolidation, new investments (HGPI, Solar)
„Corporate turnaround”
• Through comprehensive restructuring program creating a‚
lean and compact’ power plant, given legacy constraints
• Elaboration of a new business model that revolves around
the capacity and not the energy generation capability of
the plant
The almost six decades of operation of Dunamenti provides plenty
of illustrative examples for the subject of today’s course
History of Dunamenti in a nutshell
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary6
1. Microeconomics
2. Cost structure of different power plant technologies
3. Short run production decisions
4. Long term market impacts
5. Long term investment decisions
AGENDA
0. Introduction
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary7
Cost curves of a firm
To
tal
co
st
[EU
R]
Output [unit]
Total fixed costs
Un
it c
os
t
[EU
R/u
nit]
Output [unit]
ATC Average total cost
AVC Average Variable Cost
TC Total Costs
FC Fixed Costs
VC Variable Costs
Microeconomics 101: Total Costs, Fixed Cost, Variable Costs,
Marginal Costs… We’ve probably all heard it all…
MC Marginal cost
FR-ATC Full reinvest-ment marginal cost
FC Full investment cost
Cost
structure
of a firm
Unit cost
structure
of a firm
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary8
Competitive industry with price taking firms and industry market dynamics
Un
it c
os
t
[EU
R/u
nit]
Firm’s output [unit]
Microeconomics of a competitive industry, assuming price taking
firms with commoditized provide a good conceptual framework for
power generation
Industry output [unit]
D = Industry demand
S = Industry supply
Pri
ce
[EU
R/u
nit]
P1
D1
P2
P3
P1
P2
P3
ATC Average
total cost
AVC Average
Variable
Cost
MC Marginal
cost
FR-ATC Full reinvest-
ment marginal
cost
P2 (D2; S1) Inefficient or financially weak suppliers have shut down lost making production, thereby supply is industry curtailed
(S2S1). Hype is over, those firms that have survived the storm are back producing operating profits.
D2S1 S2
P1 (D1; S1) Market prices are above FR-ATC levels, it makes sense for the firm investing into production capacity (just like for
others with similar cost structures).
P2 (D1; S2) New production capacities increased supply (S1S2), new equilibrium market prices are above ATC levels, but below
FR-ATC. It makes no sense to enter the industry, but industry incumbents are making profit.
P3 (D2; S2) Industry demand decreased (D1D2), new market prices are below ATC levels. Firm (and other similar suppliers with
similar cost structures) are bleeding cash and are considering to exit the industry, shut down production. Survival of the
fittest.
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary9
1. Microeconomics
2. Cost structure of different power plant technologies
3. Short run production decisions
4. Long term market impacts
5. Long term investment decisions
AGENDA
0. Introduction
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary10
Power plants can be depicted with very simple cost curves
Costs curves applied to conventional power generation
Long-run marginal cost
On top of SRMC it includes unit cost of fixed cost items,
typically :
- Fix part of fuel costs (e.g. mine)
- Fix operational costs
- Fix maintenance costs
- Labour costs
- Other (e.g. insurance)
Short run marginal cost is usually a linear rate at
which the plants total cost changes as output changes.
It typically includes:
- Linear unit fuel cost of production and rampup
- Unit cost of auxiliary materials (raw water,
chemicals etc.)
- Unit cost of waste (e.g. ash) disposal/depose
- Variable maintenance costs
Generation
capacity
[MW]
Unit cost
[EUR/MWh]
SRMC = AVC
ATC = LRMC
FR-ATC
Capacity
of the
unit
Full reinvestment average total cost
On top of LRMC includes unit cost of annual capital
charge of investments, such as:
- Initial investment
- Repowering investment
- Regular maintenance works (Major overhaul, HGPI)
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary11
Main peculiarity of renewable power plant is the unusually low
variable cost component
Cost curves applied to renewable power generation
Long-run marginal cost
On top of SRMC it includes unit cost of fixed cost items,
typically :
- Fix operational costs
- Fix maintenance costs
- Labour costs
- Other (e.g. insurance)
Short run marginal cost is the rate at which the plants
total cost changes as output changes. It typically
includes:
- Unit cost of expected imbalance charges
- Unit cost of grid access fees
- Unit cost of variable-type O&M price components
- (Note: no fuel cost)Generation
capacity
[MW]
Unit cost
[EUR/MWh]
SRMC = AVC
ATC = LRMC
FR-ATC
Capacity
of the
unit
Full reinvestment average total cost
On top of LRMC includes unit cost of annual capital
charge of investments, such as:
- Initial investment
- Repowering investment
- Regular maintenance works (Major overhaul)
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary12
Levelized cost overview for different techonologies
LCOE1) for different techonologies [GBP/MWh]
63 7352 4435
52
7219
28
20
240
13
00
0
0
0
0
50
100
150
200
Biomass
86
5 6
0
OCGT 600MW
(500hrs)
168
5
173
CCGT H Class
66
7 2
Onshore Wind
63
4
10 5
Large Scale Solar
67
6
9 0
Offshore Wind
105
5
3
1) LCOE sums up all accumulated costs for building and operating a plant and compares this figure to the sum of the annual power generation.
Source: Department for Business, Energy & Industrial Strategy: Electricity Generation Costs, Nov 2016
Variable O&M
Fuel Costs Construction Costs
Carbon Costs Fixed O&M
Pre Development Costs
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary13
Wind and solar PV LCOE’s have decreased with 67% and 85%
in the last eight years
Unsubsidised Levelised Cost of Energy (Wind & Solar PV)
(1) Represents average percentage decrease of high end and low end of LCOE range.
(2) Low end represents crystalline utility-scale solar with single-axis tracking in high insolation jurisdictions (e.g., Southwest U.S.), while high end represents
crystalline utility-scale solar with fixed-tilt design.
(3) Lazard’s LCOE initiated reporting of rooftop C&I solar in 2010.
Source: Lazard’s Levelized Cost of Energy Analysis – Version 11.0
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary14
The market supply curve is build up of the marginal cost curves of
each individual plant
Short run merit-order curve
Short-run
marginal cost
[EUR/MWh]
Generation capacities
[MW]
Power generation types, with lower
SRMCs (e.g. RES (Hydro), Nuclear)
are at the beginning of the curve,
while OCGTs are ending it
RES & CHP mustrun
Nuke Lignite & Coal
CBC imports
CCGT OCGT
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary15
1. Microeconomics
2. Cost structure of different power plant technologies
3. Short run (production) decisions
4. Long term market impacts
5. Long term investment decisions
AGENDA
0. Introduction
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary16
Typical short run decision of a plant is a simple production
decision, which in competitive markets are set by market prices
Type of business decisions along price curves - SRMC
SRMC time horizon: From hour ahead to within
year
• Shall the plant generate power the next hour,
tomorrow, next week/month?
• If yes at what capacity?
Generation
capacity
[MW]
Unit cost
[EUR/MWh]
SRMC
LRMC
FR-ATC
Capacity
of the
unit
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary17
Example: What is the day-ahead supply decision of an
individual price-taking CCGT?
Price taker power plant (1/3)
Generation
capacity
Unit cost
[EUR/MWh]
SRMC = AVC
ATC = LRMC
FR-ATC
Capacity
of the
unit
RES &
CHP
Nuke Lignite CBC
imports
CCGT OCGT Market
generation
capacity
Unit price
[EUR/MWh]
Typical CCGT Supply curve / Merit order
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary18
Example: What is the day-ahead supply decision of an individual
price-taking CCGT?
Price taker power plant (2/3)
Generation
capacity
Unit cost
[EUR/MWh]
SRMC
Capacity
of the
unit
RES CBC
imports
CCGT OCGT Market
generation
capacity
Unit price
[EUR/MWh]
Short-run
DA BL
demand
curve
Typical CCGT Day-ahead power market landscape
Market price
Minload of
the unit
Remarks
• Baseloader nuke and coal plants
are usually contracted on a year or
quarter ahead basis, therefore not
present in a short term supply
• Even some of the CCGTs
capacities have already been
contracted, therefore missing
• Weather dependent renewables
are present, as their loads can be
best forecasted on a day-ahead
and intra-day basis
• Only DA CBC capacity is available,
not the full amount
• Both the short term demand and
supply curves is very steep
(inelasticity)
Remarks
• FR-ATC and LRMC are irrelevant
decision points
• Plant is „out of the money”, will
not be dispatched
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary19
Example cont’d: What happens in case demand suddenly shifts
the next day because of an unplanned plant outage elsewhere?
Price taker power plant (3/3)
Generation
capacity
Unit cost
[EUR/MWh]
SRMC
Capacity
of the
unit
RES CBC
imports
CCGT OCGT Market
generation
capacity
Unit price
[EUR/MWh]
DA demand
increases
Typical CCGT Day-ahead power market landscape
Market price
Minload of
the unit
Remarks
• Plant is „in the money”, will be
dispatched
Remarks
• The plant effected with the outage
have already sold its production,
and therefore now is short in
power. This creates short term
demand for replacement power
until the unit is back in production
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary20
Breakeven calculation for baseload product [EUR/MWh] (1/2)
SRMC example of a CCGT: beyond gas and carbon credit there
are plenty of other relevant marginal cost drivers
2,8
2,6
1,0
1,0 1,00,7
Gas
logistics
costs
43,5
Gas cost
(incl. entry)
EUA Cost Water
costs
Revenue
tax
0,3
Rampup
/ down
revenue
Maintenance
0,5
Outage
provision
TSO
balancing
revenue
SRMC
49,9
48,3
Market
price
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary21
R1
Stop the frequency drop
Activation time up to 30 sec
Automatic operation
Continental cooperation
Operating reserves
R2
Restore frequency
Activation time from 0,5 to 5 minutes
Automatic / manual op.
County-wide cooperation
Operating reserves
Usually from flexible units
R3
Restore the required level of R2 to be prepared for a further
system imbalance
Activation time up to 15 minutes
Manual operation
County-wide cooperation
Usually from OCGTs or R2 providers
Overview of balancing markets
Spinning reserves for balancing are required by TSOs from a 5 sec
to a max 1 hr horizon
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary22
Breakeven calculation for baseload product [EUR/MWh] (2/2)
SRMC example of a CCGT: a change in a single component can
change the economics
2,8
2,6
1,0
1,0
6,0
0,7
SRMC
44,9
TSO
balancing
revenue
Outage
provision
Maintenance
0,5
Rampup
/ down
revenue
Revenue
tax
0,3
Water
costs
costs
EUA CostGas
logistics
costs
Gas cost
(incl. entry)
43,5
Market
price
48,3
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary23
1. Microeconomics
2. Cost structure of different power plant technologies
3. Short run production decisions
4. Long term market impacts
5. Long term investment decisions
AGENDA
0. Introduction
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary24
Example: What is the year-ahead supply decision of an individual
price-taking coal plant?
Price taker coal plant year ahead decision
Generation
capacity
Unit cost
[EUR/MWh]
SRMC
Capacity
of the
unit
RES &
CHP
Nuke Lignite CBC
imports
CCGT OCGT Market
generation
capacity
Unit price
[EUR/MWh]
Typical CCGT Supply curve / Merit order
Implied
YAQ3 BL
demand
curve
Market price
LRMC
FR-ATC
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary25
Example: What is the year-ahead supply decision of an individual
price-taking CCGT?
Price taker CCGT year ahead decision (1/2)
Generation
capacity
Unit cost
[EUR/MWh]
SRMC
LRMC
FR-ATC
Capacity
of the
unit
RES &
CHP
Nuke Lignite CBC
imports
CCGT OCGT Market
generation
capacity
Unit price
[EUR/MWh]Typical CCGT Supply curve / Merit order
Year ahead
BL demand
curve
Market price
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary26
Example: What is the year-ahead supply decision of an
individual price-taking CCGT for Q3 next year?
Price taker CCGT year ahead decision (2/2)
Generation
capacity
Unit cost
[EUR/MWh]
SRMC
Capacity
of the
unit
RES &
CHP
Nuke Lignite CBC
imports
CCGT OCGT Market
generation
capacity
Unit price
[EUR/MWh]
Typical coal plant Supply curve / Merit order
Implied
YAQ3 BL
demand
curve
Market priceLRMC
FR-ATC
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary27
LRMC time horizon: typically year ahead, along corporate
business planning/budgeting cycles
Type of business decisions along price curves
LRMC time horizon: typically year ahead, along
corporate business planning/budgeting cycles
• Do unit prices cover the total fixed and variable
cost structure of the plant? Will the plant make
operating profit?
• If not, can the plant change the fixed and/or
variable cost structure, to improve profitability?
• Can unit prices (e.g. under a PPA) be
renegotiated to favourable terms?
• If not to all of the above, should the plant be
mothballed or decommissioned?
Generation
capacity
[MW]
Unit cost
[EUR/MWh]
SRMC = AVCATC = LRMC
FR-ATC
Capacity
of the
unit
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary28
Dunamenti case: the once grandiose Dunamenti’s corporate
restructuring, the benchmark plant was a competing compact 400
MW CCGT plant
Land: 110 ha vs 10 ha
FTE: 102 vs 28
Capacity:860 MW on 7 generators vs 400 MW on 2 gen.
Fix opex: HUF 4293 m vs HUF 1800 m
Dunamenti (2014) Benchmark plant
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary29
Dunamenti case: Decrasing the LRMC of the plant involved
measures both on the fix cost and the standby revenue side
Target
Opex
-49%
Strategic
projects
Admin
support
transform.
Fac.Man.
Impr.
O&M perf.
Impr.
O&M org
transform
OPEX
base caseTarget
standby revenues
Base case standby
revenues
Increase
Targeted OPEX improvements of power plant restructuring project
The cost of real option in 2017 is
expected to be 2 mEUR
High coverage of fixed costs enables
DERT to increase profit margins
and/or price more competitively
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary30
Dunamenti case: the program was achieved through 100+ measures
with different complexity, risk and implementation characteristics
High
Low
Low High
Medium
Medium
The size of the bubble is
proportionate with the
estimated potential
Chem.plant outsourcing
Kraft
Insurance
G1 withdrawal and sale
G1 withdrawal
Maintenance outsourcing
G2-3 common operation (4 shifts)
Oil station withdrawal
Real estate taxes
Downsizing the Asset team
G2-3 common operation (5 shifts)
Security service
Self-consumption reduction (power)
Implementation time / Complexity
Operational
and
business
risk
FacMan
O&M
Admin and
horizontal
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary31
Dunamenti case: the program lowered the LRMC of the plant and
redesigned commercial strategy refocused on select competitive
productsImpact of LRMC reduction of a price taker CCGT
Generation
capacity
Unit cost
[EUR/MWh]
SRMC
Capacity
of the
unit
RES &
CHP
Nuke Lignite CBC
imports
CCGT OCGT Market
generation
capacity
Unit price
[EUR/MWh]
Typical CCGT Supply curve / Merit order
Implied
YAQ3 BL
demand
curve
Market priceLRMC
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary32
A CCGT can also be regarded as a real option on the clean spark
spread
Option value of gas fired power generation
CSS
[EUR/MWh]
Option:
Out-of-the-money
Op
tio
nvalu
e [
EU
R/M
Wh
]
Peaker or standing
reserve
Peak loader,
occasional
spinning TSO
reserve
Baseloaer & constant
TSO spinning reserve
Option:
At-the-money
Option:
In-the-money
Option
premium
Strike
price of
option
Option premium is the price
to pay for the option. The
LRMC or the FR-ATC of the
unit can be considered as
the premium
Strike price is where the
plant turns in the money. The
higher the plant’s efficiency,
the lower the strike
CSS: Clean Spak spread is
the difference between the
market price of electricity
and its cost by way of gas
fired generation, which can
be negative or positive.
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary33
Trade #1:
Buy: ’18q3 CSS ( =
sell: power 18q3 CSS
buy: gas 18q3 CSS
buy: EUA Cal18 )
PnL: 0.5 EUR/MWh
Trade #2:
Sell: ’18q3 CSS ( =
buy: power 18q3 CSS
sell: gas 18q3 CSS
sell: EUA Cal18 )
PnL: 1.0 EUR/MWh
Trade #3:
Buy: ’18q3 CSS ( =
sell: power 18q3 CSS
buy: gas 18q3 CSS
buy: EUA Cal18 )
PnL: 1.5 EUR/MWh
Trade #4:
Sell: ’18q3 CSS ( =
buy: power 18q3 CSS
sell: gas 18q3 CSS
sell: EUA Cal18 )
PnL: 2.0 EUR/MWh
Trade #4:
Buy: ’18q3 CSS ( =
sell: power 18q3 CSS
buy: gas 18q3 CSS
buy: EUA Cal18 )
PnL: 2.2 EUR/MWh
Cal18 EUA
18q3 Gas
18q3 Power
18q3 CSS
Depending on the volatility of its components, the CSS of a specific
tenor can be traded in and out a number of times before delivery
CSS trading strategy (illustrative example)
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary34
0. Microeconomics
1. Cost structure of different power plant technologies
2. Short run (production) decisions
3. Long term market impacts
4. Long term (investment) decisions
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary35
FR-ATC time horizon involves capital allocation decisions from
five years to decades
Type of business decisions along price curves
Generation
capacity
[MW]
Unit cost
[EUR/MWh]
SRMC = AVC
ATC = LRMC
FR-ATC
Capacity
of the
unit
FR-ATC time horizon: from five years to decades
• Do long term market prices provide enough
stability to:
• new/greenfield investment?
• Lifetime extension investment?
• Repowering investment?
• If not, are there any creditworthy long term PPA
schemes available to provide price and volume
risk support?
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary36
The European energy transition of the past decade has been the
perfect storm for conventional power generators
Power market trends on the merit-order curve
A
B
C
D
Expansion of renewables
Decreasing power price
Lower CO2 cost
Decreasing demand
SR
MC
[E
UR
/kW
h]
Gas
Coal
Nuclear
RES Nuclear Gas Oil
D1D2
S1S2
Oil
Coal
Q1Q2
P1
P2
P
B
A
CP3
B
Available capacity [MW]
Weather dependent RES generators
have almost zero SRMC therefore they
push the supply curve to right
Low emission costs squeeze the
power prices with the switching from
gas based generation to coal
The competitiveness of larger
pollutants is raising with the low level
of emission costs
Decreasing (waving) demand pushes
the equilibrium price to left.
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary37
0
50
100
150
200
20302019201820172016 20242023202220212020 20292028202720262025
Small PV
Large PVOnshore wind
Offshore wind
Brown coal
Hard coal
CCGT
2013 2030
LCOE of technologies1) Baseload price forecast
MIN-MAX range
Source: Fraunhofer ISE, REKK
1) LCOE of technologies assuming German location, and typical load factors for each technology. LCOE sums up all accumulated costs for
building and operating a plant and compares this figure to the sum of the annual power generation.
Energy prices determined by SRMCs, no power plant is expected
to built in EU without non-market component or subsidy
Forecasted European BL power prices vs. LCOEs of technologies in 2013 and 2030 [EUR/MWh]
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary38
Just like on population demographics, the best proxy for future
power plant demographics are past birth rates
EU generation portfolio evolution
Large nuclear capacity
installations based on the
development of the nuclear
industry
The CCGT era:
more than 50%
efficiency, low
emissions
Golden age
of coal
investments
Economical crisis, strong
RES subsidies: end of
CCGT commissionings
Forrás: oilprice.com
Younger coal and nuclear generation is reaching the end of the lifecycle
Unfavorable market conditions: CCGTs are depressed. Second rounders (in early 2000’s) has
written-off the assets
No conventional investments since the beginning of the RES revolution
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary39
The focus turns to digitalisation, decentralisation and customers in
the energy industry
The new world requires a selective and tailored approach from market participants
Old world New world
Centralized
generation
Monopolistic setup,
high margins
Predictable demands and
physical grid connection
Hub-and-spoke
distribution design
Decentralized
generation
Increasing competition,
diminishing margins
Flexibility and
energy efficiency
Digital transformation,
smart technologies and
systems convergence
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary40
Majos risk of power plant construction
Source: Brennstoff-Wärme-Kraft, 64. k. 6. sz. 2012. p. 9.
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary41
Many EU countries have realised the importance of flexible back-up
capacities and introduced some kind of capacity market
Capacity market mechanisms in Europe (2018)
Source: Pöyry Management
Consulting, EURELECTRIC
Ireland
Ongoing price-based capacity
mechanism
Centralised ROs being developed
Portugal
Price-based capacity
mechanism for new units
Spain
Current price based
capacity mechanism being
re-developed
Italy
Replaces current mechanism with
market-wide solution
Poland
Capacity auctions to
be launched in 2018
Germany
Grid stability reserves
Discussions about
introduction of
national capacity
mechanisms
Sweden
Strategic reserve
Belgium
Targeted tender
Strategic reserve
France
Targeted tender
Capacity obligations
Great-Britain
Capacity auctions
Finland
Strategic reserve
Greece
Transitional price
based
Enduring capacity
obligations
Promoting demand
response
Capacity markets can
help to safeguard the
security of electricity
supply, while paying
capacity based fee to
generators.
The European
Commission has
already accepted
several assessed
mechanisms, recently
in February 2018 in
Belgium, France,
Germany, Greece, Italy
and Poland.
The aim is to create the
right investment
incentives and to
enable further
development.
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary42
Off-peak (evening) demands are 20-30% lower than peaks,
especially during the weekends
Weekly Hungarian load curve
Source: MAVIR website
3 000
3 200
3 400
3 600
3 800
4 000
4 200
4 400
4 600
4 800
5 000
5 200
5 400
5 600
5 800
25.04.24.04. 28.04.27.04. 29.04.26.04.23.04. 30.04.
-37,2%
Off-peak
(8pm-6am)
Peak
(8am-8pm)
Workdays Weekends
Fast ramp-up (20-30% of the overall
demand required in 1-2hours) and ramp-
down demand of the power system
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary43
Solar PV changes the conventional meaning of BL/PL
Source: Energiewirtschnaftliche Tagesfragen, 62. k. 1/2. sz. 2012. p. 97-100.
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary44
While addition of RES capacity constantly squeezes out
conventional plants, the intermittent nature will require fast cycling
conventional backupsImpact of solar development – in theory
Source: Energiawirtscheftliche Tagesfragen, 63. k. 1/2 sz. 2013.p.62-65 / Dr. Stróbl
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary45
The proliferation of solar farms in California has led to an oversupply
of power generation in the middle of the day (and steep drop-off in
the evening)The Duck Curve - Impact of solar development
Source: Californian ISO and Bloomberg
6th ERRA Training: Principles of Electricity Markets
May 7-11,2018 Budapest, Hungary46
Thank you for your attention!