Energy production optimization for a utility
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Situation
A German electricity producer sells its production of energy in both the futures market and the pool.
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Complication Its current method for nominating volumes to be sold in the futures market needed improvement, as there are frequent opportunity costs related to this hedging strategy. Moreover, if any of the generation units fails, the producer may have to buy energy in the pool to meet its contracting obligations.
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Solution In a simulation-based framework, we redefined the producer's objective by maximizing its expected profit over a given planning horizon, while controlling the risk of profit variability, by means of the Conditional Value-at-Risk. This resulted in a 40% increase in risk-adjusted profit over 3 years.
More details
- The futures market allows the producer to sell its energy production at fixed prices through forward contracts. On the other hand, the pool market allows the power producer to sell energy on a short-term basis taking advantage of periods of high prices, but at the cost of suffering high price volatility.
- The actual production of the producer is constrained by the technical limitations of its generating units. Moreover, if any of these units fails, the producer may have to buy energy in the pool to meet its contracting obligations.
- Decisions related to forward contracting, which are made on a monthly or quarterly basis, are decided prior to the knowledge of pool prices. These decisions are called here-and-now decisions, and are identical for each possible realization of pool prices.
- Once forward decisions are made, the operation of the generating units and the amount of power traded in the pool are settled for each period of the planning horizon. These decisions are made close to the time when pool prices are realized. These are called wait-and-see decisions.
The inherent uncertainty of pool prices, together with the sequential evolution of price data over time, leads to a sequential optimization-under-uncertainty.
A realistic and trader-intuitive decision framework for the producer to maximize the value of the generation assets, consists of the following:
- At the beginning of the planning horizon (say 1 year), the producer decides whether or not to sign the available traded contracts (week-ahead, months-ahead, quarters-ahead and year-ahead). The volumes underlying these decisions should be optimized taking into account all possible scenarios of pool prices (simulated), physical constraints of the generating units, the probability of shut-down and subsequent decisions throughout the considered planning horizon.
- For each realization of the hourly pool prices during the first week of the planning horizon, the producer should decide on the amount of energy to be sold in the pool each hour of this first week.
- At the beginning of the second week of the planning horizon and for each realization of the pool prices during the first week, the producer should decide whether or not to sign the weekly contract pertaining to this second week, as well as any available trading contracts. In making such decision, the producer needs to adjust the previous positions in months-ahead, quarters-ahead, etc. This decision should be made taking into account subsequent decisions throughout the remaining period of the planning horizon.
- During each hour of the week throughout the planning horizon, the producer should repeat the same kind of decisions described in step 2 until the last week of the planning horizon.
- At the beginning of each week during the planning horizon, the producer should repeat the same kind of decisions described in step 3 until the next to the last week of the planning horizon.
What clients said aboutour projects
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Bron Sharman Senior Oil Trader “Unlike many advisers I’ve worked with, Trading Integral Solutions don’t have to pretend to be interested in their clients: they focus on what really matters and strive to add value in an optimal way.” Bron Sharman, Senior Oil Trader at SOCAR Trading -
Olga Kutuzova IFRS Group Manager "Trading Integral Solutions applied high quality standards when they delivered their project to us. We benefited greatly from our interaction with their highly skilled team of experts!" Olga Kutuzova, IFRS Group Manager at Novatek Gas & Power -
Jaroslaw Wajer Partner "I have cooperated with Trading Integral Solutions several times. They supported us during the design and implementation of trading departments and company strategies for our power utilities clients. I appreciate their trading expertise and profound knowledge of risk management. I would truly recommend cooperation with Trading Integral Solutions." Jaroslaw Wajer, Partner Performance Improvement at Ernst & Young