Seasonal forwards considered temporarily the most appropriate indexes for baseload reference price in the UK FIT CfD
Thursday, 15 August 2013 07:53

 

The reference price for baseload generation under the UK FIT CfD contracts scheme (implementation thereof is intended in summer 2014 already) will initially be calculated from the two reference prices each year; one set every six months, however, the concrete set of indices and their weightings are yet to be confirmed, thus financial assessments are still not viable.

 

Moreover, the longer term intention is to move in that regard to year-ahead forward prices and the  unknown mechanics of this transition adds to the investors' risks.

 

 

There is common agreement that the market reference price under the UK FIT CfD contracts scheme should be a fair representation of the price of electricity in the market (intermittent and baseload generators treated separately) for the term of the CfD.

 

Recent version of the UK "Electricity Market Reform: Contracts for Difference" updated on 12 August 2013 has retreated from the previous preference for the baseload reference price to be based on annual forward prices, giving a single market reference price for each year.

 

Baseload contract is defined as a contract providing for delivery of a constant volume of power for each settlement period in the period for which such contract is in force - as opposite to intermittent generation for which different rules are established (the reference price for intermittent generation will be the GB day-ahead hourly price published under the GB European market hub coupling arrangements with backup solution utilising prices from the two constituent auction platforms for the GB Hub day-ahead price – N2Ex and APX-UK).

 

Arguments against year-ahead forward price

as the market reference price for baseload generation

under the UK FIT CfD contracts scheme

 

1. low liquidity and consequent basis risk i.e. of not being able to sell their output at the reference price,

2.  high cost of collateral,

3. inability to trade in a way that matches the reference price, due to restrictions on the minimum volumes which are traded,

4. greater risks to investors,

5. increase in costs to consumers.

 

 

 

Arguments against day-ahead index price as the market reference price

for baseload generation under the UK FIT CfD contracts scheme

 

1. potential for distortion of trading decisions,

2. reduction of incentives to time maintenance appropriately,

3. increase in overall costs.

  

 

Consequently, the reference price for baseload generation will initially be calculated from a forward season index / indices selected using objective criteria to be set out in the contract (i.e. that there will be two reference prices each year; one set every six months). The criteria for selecting the index / indices are still being developed and as such are not included in the Draft CfD Contract Terms. Index / indices used as a price source will be based upon actual, auditable trades.

 
In simplified form, baseload reference price formula involves the following calculation (capitalised terms are defined in the Draft CfD Contract Terms):
 
BPj,d x BQj,d x Wj
 
where

BPj,d  - the single price quoted in £ per MWh by the relevant Price Index on the relevant Trading Day in the Reference Price Sample Period for electricity to be delivered on each day of the EFA Season for which the Baseload Market Reference Price is being calculated; multiplied by
 
BQj,d - the quantity of traded power in MWh used by the relevant Price Index to determine the price referred to in paragraph 4(a) of this Annex for the relevant Trading Day; multiplied by
 
Wj - a specified weighting established for the relevant Price Index.
 

A move from a baseload reference price based upon season-ahead prices to the one based upon year-ahead prices is planned to occur when suitable indices are available in the market to achieve a robust reference price, however the formulae currently set out in draft CfD Contract Terms do not allow for such changes to be factored in to the way in which the reference prices are calculated.

 

 

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