Market monitoring firm EnAppSys, sees an increased possibility of mergers over the next few years within the flexible generation space, as business models move away from a passive to a more aggressive trading approach.

This comes as the maximum levels of income achievable at flexible assets, from simple operation, has declined from an estimated £114/kW/yr annual equivalent for the 6-month period between October 2016 and March 2017 (inclusive), to £44/kW/yr for the same 6-month period in 2017/18.
These figures are calculated based using the SAP as a basis for gas costs, and then combining these with carbon costs and a 38 per cent real efficiency plus a £5/MWh variable cost. This value has then been compared against the highest of the day ahead, system and within day (MIDP) prices for each half hour in the period, generating at the highest price in the period if profitable to do so.

This drop is by no means unexpected, with the winter period in 2016/17 having always been expected to be extreme ever since assets were removed from the commercial market and put into a reserve service called Supplementary Balancing Reserve (SBR).

The introduction of SBR meant that the system was able to meet its requirements for a minimum level of anticipated margin, but since the 3.5GW of capacity within SBR was unable to act commercially, from a commercial perspective the market had insufficient supply, driving up market prices.

As a result of this, the expectation had always been for a drop in the potential revenues achievable in the 2017/18 period, with EnAppSys’ own forecasts for the period having indicated value of £50/kW/yr based upon the normally expected prices.

2017/18 market pattern has been different than that seen in 2016/17, with periods of undersupply (i.e. shortage of power) increasing in 2017/18 but system prices (cash out) in these periods have been lower than previously seen, indicating the effects of increased margin.

These system prices are a proxy for the cost of balancing the system and so are highly significant as an indication of levels of income available to flexible assets.

One of the more significant trends in 2017/18 has been a 31 per cent reduction in the frequency of system prices – a proxy for the cost of balancing – in excess of £100/MWh. This in part has been driven by the price declines in Fast Reserve and STOR as generators in these markets seek to maximise levels of activity by dropping their prices.

Rob Lalor, senior analyst at EnAppSys told Power Engineering International that while winter 2016/17 saw very extreme market activity – boosting the returns available for flexibility in the market – winter 2017/18 has seen more benign activity, as levels of wind generation have climbed significantly, and as price declines in Fast Reserve and STOR have fed into the market as a whole.

“These reductions are by no means a concern for the market, with outturn values for trading activity – excluding embedded benefits – being only slightly below forecasts for the period [£44/kW/yr vs £50/kW/yr], but do come as part of a progression away from passive flexible asset market operation towards a more aggressive trading approach.”

“Historically, flexible assets could access income from high embedded benefits which are sources of income only available to generators connected in local networks, which act to offset local demand during peak periods. These embedded benefits were high enough to on their own justify the cost of investing in new flexible assets, but with embedded benefits now being in the process of being reduced to significantly lower levels.”

“With flexibility retaining a value in the market, the income streams available should remain sufficient to support the best projects and companies in the market, but with the trajectory shifting further towards active management of assets; providing convergence to more conventional assets in the market, where the best traders typically achieve the best returns.”

“As more active management requires greater overheads, this could in turn drive increased conglomeration of assets into larger portfolios, either via one or two routes to market, or via mergers to create a smaller number of generation portfolios with a more conventional IPP structure.”

“Ultimately, this will see the emergence of a more mature industry that has to act increasingly strategically to prevent over-competition in targeted market segments. This is likely to increase the integration of the emerging market into the wider market as a whole, driving further acquisitions and consolidations.”