Power plant operators and energy traders have been able to hone their skills using realistic computer simulation ‘war games’. Now the rules of engagement are changing with environmental factors coming to the fore.
Andy Boston, E.ON UK Power Technology, UK
Energy companies are tackling climate change by using the power of competitive computer simulations to help achieve their environmental responsibilities and business targets.
Trading, retail and power plant staff are grappling with the impacts of emissions limits through advanced market games run by Power Technology, E.ON UK’s international energy consultancy.
The events, based on real-life generation portfolios and trading scenarios, enable players to experience the complexities and interactions of trading carbon and sulphur and the market in Renewable Obligation Certificates (ROCs).
Understanding legislation such as the EU Emissions Trading Scheme (ETS) and its Large Combustion Plant Directive (LCPD), which comes into effect in 2008, is now at the heart of the simulations, which Power Technology has run for more than a decade. They combine experience of the UK’s competitive electricity market with Power Technology’s business modelling services backed by its engineering, technical and scientific expertise.
Current steps by the EU and governments to combat climate change, including tighter environmental constraints, have seen the simulations evolve into events that provide more than a commercial challenge based around fuel and generation costs.
The simulations now place the trading activity in the context of asset-owning utilities featuring emissions permits, profits and losses, investments, new plant construction and mergers and acquisitions.
The games are run using integrated computing systems running on a suite of lap tops, with up to ten pairs of players, each representing one energy company.
The long term aim is to offer the simulation via the internet
The teams control companies for up to ten years, managing their generation, trading and retail businesses in competition with other teams and under the watchful eye of environmental and industry regulators. Trading takes place either anonymously on screen, or through face-to-face negotiation among players, who say they have gained significant insights into how markets are affected, particularly by environmental factors.
For carbon emissions, Power Technology calculates allowances for each team’s generation portfolio. Annual emissions are compared with the permitted figure, taking account of any sales or purchases.
As in the ETS, shortfalls are penalised at the current rate of €40 ($48) per tonne until 2007 and €100 per tonne in the period 2008-12 and, also in line with the scheme, have to be made up the following year. Rules for the carry-over of carbon credits are varied by Power Technology according to the game plan.
The first key realisation for many players is that power and carbon are essentially equivalent commodities – meaning that positions in each must be managed together.
Power producers wishing to generate without incurring penalties need carbon permits. On the other hand, permit holders can only achieve value from them if they are backed by generating plant or the permits are sold on.
Exploiting this dilemma, the simulations include scenarios in which the teams have to make decisions on whether to buy carbon permits thus allowing their plant to run, or simply purchase power into which the carbon value will already have been factored. Simulations have shown that a variety of market trends may emerge as players react in different ways at different stages of the sessions.
It is common for ‘companies’ with surplus allocations of carbon permits to cling on to them only to sell in the closing stages, precipitating spectacular price crashes. On occasions this has led to large fluctuations in power prices and opportunities for arbitrage between power and carbon.
Another response, in the face of steeply rising power and carbon prices, has been to withdraw completely from the industrial and commercial retail market.
However, in this instance Power Technology business modellers feel that such a dramatic step may be more a product of the simulation’s short timescale and results-driven atmosphere, rather than predictive of real-life behaviour.
Whatever scenarios emerge, players have the same range of options as their counterparts in the actual market place.
They can see the results of investing in post-combustion capture of carbon and sequestration, or build renewable or nuclear generation. Other choices are to introduce higher efficiency gas or coal plant or re-plant coal power stations to burn gas.
Players choosing to concentrate on their existing portfolios gain experience of reducing carbon emissions by intelligent scheduling of plant, such as running gas before coal. But they again have to balance the value of the carbon saved against the cost of operating more expensive gas-fired plant.
The ‘live’ environment of the simulations is enhanced by reflecting developments within the industry. As the simulation years roll on, carbon allowances, in line with government-imposed limits, are reduced. Likewise any impacts that are expected from the 2008-2012 stage of the Kyoto Protocol can also be fed in.
The pan-European nature of the power industry also plays an important role. Additional carbon allowances could become available on the market from, for example, the likely displacement of coal plant by gas-fired generation in Italy.
There is also the chance for Power Technology to play the wild cards that might emerge, theoretically, with the unexpected release of carbon permits from, say, a large cement manufacturer in France. In these instances, the allowances are usually offered anonymously on the games trading screen. By entering additional volumes at increasing prices a realistic price-volume curve is created resulting in opportunities and pressures for players.
Power Technology’s simulation training sessions are often used by clients as ‘team-building’ exercises
The kaleidoscope of situations becomes even greater with the potential impacts of the LCPD provisions for reducing sulphur, nitrogen and particulate emissions from fossil-fuel generation.
The legislation will bring a two-tier approach to controlling these emissions, with plant that has been opted in to the scheme requiring credits, which might be traded on UK-only markets. Plant that is opted out can run for only a limited number of hours.
In both cases, plant emissions will be limited on several fronts: instantaneous emissions – but excluding start-up and shutdown; an annual figure; and as part of an overall bubble for the company fleet.
To date, Power Technology has focused LCPD activity in its simulations on the effects of sulphur emissions. While in reality exceeding the tonnage or hours would bring the risk of prosecution, financial penalties are imposed in the game scenarios.
The responses of players so far suggest that experience is needed to be able to meet the requirements of the LCPD. In particular, they have found that how they operate plant in one time period can impact on their ability to respond to customer and market demands in another. Failure can leave them breaching their limits or exposed to buying high-priced power in rising energy markets.
Outcomes have also highlighted the differences with the carbon market and the prospect that both commodities may well have to be managed together. This would have to take account of a UK-only sulphur market not having access to surplus sulphur allowances from Europe.
Among the steps players can take to reduce their sulphur production is the fitting of flue gas desulphurization equipment, which is obligatory for all plant opted in to the LCPD.
Other options, such as using more costly, low sulphur imported coal are also being brought into the simulations, along with facilities to allow NOx and dust emissions to be monitored and traded.
Renewable capacity can again play a role in helping players stay within sulphur limits. It also contributes to another key element – obtaining sufficient ROCs to back the supply business.
As in real life, companies with insufficient ROCs must pay the cash-out price and the percentage of renewable generation required also rises each year.
This area presents the opportunity for players to benefit from a double incentive. Investing in renewable biomass co-firing on coal plant brings the advantages of a carbon-neutral fuel in terms of saving carbon allowances and currently also counts towards the ROC requirements.
However, there are secondary considerations that players also have to evaluate. For instance, burning biomass and coal to deliver ROCs still produces more carbon than gas-fired generation.
The simulations reflect an ever-changing industry and one where the environmental considerations are always at the forefront.
Staff from a wide range of roles in energy companies are now turning to these events to better understand the bigger picture of how their actions impact on their businesses and its environmental performance.
They range from graduate recruits and newcomers anxious to build up their knowledge and confidence to more experienced staff, including energy traders, wishing to expand their skills and increase their appreciation of environmental complexities. Players have included power station managers, senior executives and an IT department keen to see what drives one of its main customers, a trading team.
While the interactions and conflicting constraints between carbon limits, the LCPD and ROCs can be modelled with the advanced computing capability of Power Technology, it would be a time consuming exercise. But some of the less obvious and even counter-intuitive results and trends are crystal clear after just a day’s gaming.