Producer Points Contract by vrs19107

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									ENERGY FUTURES MARKET
                ASPECTS OF PRICE VOLATILITY


 PRICE ADJUSTMENTS
   • SUPPLY/DEMAND CHANGES. The obscure period of oncoming growth
   of power consumption, which reduction was caused by conditions of the
   economic crisis.
   • INFRASTRUCTURAL        LIMITATIONS      (structure     of    generating
   equipment, repairs, power lines). The time needed for structural
   changes in power sector which will help to cut the price volatility, is
   significantly longer.
   • OPERATING TROUBLES. Annually growth of accident risks.
   • FUEL. Uncertainty of fuel prices, beginning of gas exchange trading.
   • CLIMATE. Climate variability.
                    Risks of market members




PLANNING.
 PRODUCERS
   • GUARANTEE OF FIXED INCOME (execution of an actual business-plan).
      Day-ahead market price is variable. It affects the income statement, an
      essential document for stockholders, creditors and prospective investors.
   • LONG-TERM CONTRACTS (FORM OF PRICE).
 CONSUMERS
   • GUARANTEE OF FIXED PRICE. Reducing the risk of cash deficiency.
     100% market pricing along with keeping the current system of
     translation for guaranteed supply companies, will cause the end-
     consumer to pay for all the price variations for a fully liberalized
     volume.
   • LONG-TERM CONTRACTS (FORM OF PRICE).
                            The purpose of hedge


   Decrease of energy price variation risk, that offends :
         1. The price of capacity in NECC (СДЭМ) (Non-regulated Electricity & Capacity Contract) .
         2. The buy/sell price at the day-ahead market.
   Organization of predictable money flows.
    On all markets worldwide hedge is operating by signing a financial contracts
    which do not intend material delivery/consuming of energy, negotiated at the
    exchange or on bilateral basis, in combination with buying/selling the same
    volumes of energy on a spot market.
    The lack of mechanisms & practice of price risks insurance leads to situations
    when in case of unpredicted natural disasters or global accidents on a crucial
    energy objects, a government has to interfere in pricing for solution of a
    social problems. In countries where financial contracts are well-developed, a
    consumers have a lot more protection and problems are solved using a
    market methods.
                         What can you achieve?


A producer of energy will be able to:
 Stabilize the money flow of income from selling electricity & capacity.
 Make a perfect forecast of volume of future money income from selling
   electricity regardless of price variations on a day-ahead market.

A consumer of energy will be able to :
 Decrease the dependence of payments for energy from variations on day-
   ahead market.
 Execute business-plans in a part of energy costs regardless of price variations.


Sales company will be able to:
 Offer to its clients a new products with fixed prices on electricity for schedule
   dates.
 Receive an additional income from difference between futures price and sale
   price.
                         Instruments for hedging your risks




  Non-regulated Bilateral Contract (СДД). Its disadvantages:
1. Non-payment risk.
2. Distribution of imbalance of the market.
3. There’s no possibility to close a position in case of negative price change.
4. Tax risks (particle 40 Tax Codex of RF)
 Futures.
Advantages:
Standardization. Liquidity. A market basis of prices. Guaranteed payments.
The only disadvantage is a need of partial deposition of money (initial margin) for
   contract execution. However this is a guarantee of payments.
                       Practical application of futures


1. Fixation of capacity price on exchange for NECC .
 A members of exchange, negotiating a NECC contract , form a NECC
   with 2 parts : electricity & capacity. In that way they fix a needed
   price of capacity and forecast an electricity price for month of delivery.
 An actual price of capacity on NECC is a difference between the price
   level of NECC and cost of electricity, which is part of NECC, on a day-
   ahead market in a period of delivery.

The way the price of electricity offends the real price of capacity can be
  seen on a next slide.
                                   Practical application of futures


   A change of capacity price in exchange NECC related to price of electricity on
    a day-ahead market

                 Dynamics of capacity price changing at the Exchange ( FPTZ Ural )

       200 000
                                                                               178 059    183 381        182 254
       180 000
                                                                 164 262
       160 000                                    152 360
                                 140 594
       140 000                                                                133 299
                                                                                                                      126577
                       138 326                                                             133390
                                    121 414                     121521        128842                     126365            124 401
       120 000                                109 922               115 211
                 103 703         102540                                                                   110 511
                                                                                          110 047
       100 000     99437                            94 809

        80 000
        60 000
                  ИЮЛЬ           АВГУСТ       СЕНТЯБРЬ        ОКТЯБРЬ         НОЯБРЬ     ДЕКАБРЬ    ЯНВАРЬ 2010    ФЕВРАЛЬ 2010




                 Initial price (KOM 1)                       Weighted average price(KOM 2)                    FPTZ "Ural"
                        Practical application of futures


Example for buyer:
  In July of 2009 he negotiates a NECC on August of 2009 for 232 095 RUR.
  NECC consists of 1 MWT of capacity and 147 MWH of electricity in peak hours.
  At the same time buyer plans to buy a capacity at KOM1(initial average) price
  – 102 000 RUR and forecasts the electricity price at 885 RUR / 1 MWH,
  predicting its seasonal growing. So for the date NECC has been signed,
  the prices do fit both – a consumer and a producer.
   To fix a price of a capacity (102 000 RUR) a buyer sells futures for 147 MWH
  at the price of 885 RUR. He has an option of making a two-sided deal with the
  same producer.

   In August of 2009 a price for electricity instead of growing, has a downward
   trend and it is 740 RUR. Therefore an actual price of capacity gone up to 123
   220 RUR. However buying futures a consumer receives an income of 21 315
   RUR : (885-740)*147 – so the total price of buying a capacity is 102 000 RUR.
                       Practical application of futures


An example for a producer:
   In November a producer negotiates a NECC for December of 2009 for 252 000
   r. NECC consists of 1 MWT of capacity and 156 MWH of electricity in peak
   hours. Let’s assume that he wishes to sell his capacity on KOM-1 price (133
   440 RUR) and predicts the price of electricity at the level of 760 RUR fo 1
   MWH, forecasting its growing. So for the date NECC has been signed, the
   prices do fit both – a consumer and a producer.

   To fix the capacity price of 133 400 RUR he buys futures on 156 MWH at the
   price of 760 RUR. He has an option of making a two-sided deal with the same
   consumer.

  In December of 2009 a price has gone up ( 907 RUR). Therefore an actual
   capacity price is 110 500 RUR. But selling futures a producer receive an
   income of 22 932 : (907-760)*156 and the final capacity price is 133 440
   RUR.
                    Practical application of futures


2. Electric power spot price hedging

                            Hub «Ural» forward index   Hub Index

                                                       Forward Index

       800,00
       750,00
       700,00
       650,00
       600,00
       550,00
       500,00
       450,00
       400,00
                                Practical application of futures


     Electric power spot price hedging by consumer
               Change in hub «Ural» index hourly values, for the period 11.2009-03.2010

    1,300.00

    1,200.00

    1,100.00

    1,000.00

     900.00

     800.00

     700.00

     600.00
                                                           Январь 2010 г.
                                                           January 2010
     500.00

     400.00
                         Practical application of futures


   Example.
    Assume that consumer plans to buy 744 MWH (1 MWH for every hour of
    January) at the price not above 720 RUR/MWH.
    Total contract value – 535 680 RUR.
    Prices at GTP of buyer correlates to the «Ural» hub index.
    Average electric power price in December 2009 – 750 руб.

Consumer risks:
    Spot market price in January will rise above 720 RUR/MWH. (consumer will
    have to buy at higher price).
    To hedge (insure) the risk of price rise at spot market, consumer buys 10
    EUBM-1.10 future contracts that will settle in January 2010г.

    Exchange transaction date – 30th of December, 2009
    Contract price – 715 RUR/MWH
    Total contracts value – 531 960 RUR
                           Practical application of futures


At the time of this calculations the spot price in January in «Ural» hub is 854
RUR/MWH

Financial result:
Without hedging:
Spot market expenditure = 854*744=635 376 RUR, that is 99 696 RUR (535 680-
635 376) more than planned expenditure.

With hedging:
Spot market expenditure = 854*744=635 376 RUR.
Variation margin payouts = (854-715)*74,4*10= + 103 416 RUR.

Actual expenditure including variation margin = 635 376 – 103 416= 531 960 RUR.
Actual value of 1 MWh including variation margin = 531 960/744= 715 RUR/MWH
                            Practical application of futures


   Electricity spot price hedging by producer

             Change in hub «Ural» index hourly values, for the period
                               09.2009-12.2009
    950.00

    900.00

    850.00

    800.00

    750.00

    700.00

    650.00

    600.00
                                     October 2009 г.
    550.00

    500.00
                         Practical application of futures


   Example.
    Power producer plans to sell 3720 MWH at price not lower than 700
    RUR/MWH in October 2009.
    Total contract value – 2 604 000 RUR.
    The price at GTP (group of delivery points) of the producer correlates to the
    «Ural» hub index.
    Average electricity price in September – 768 RUR.

Producer risks:
    Producer forecasts seasonal drop in price, but not less than 700 RUR/MWH.
    The risk is that spot price will drop lower 700 RUR/MWH.
    To hedge (insure) the risk of price decline at spot market, producer sells 50
    EUBM-10.09 futures that will settle in October 2009.
    Exchange transaction date – 25th of September, 2009
    Contract price – 710 RUR/MWH
    Total contracts value – 2 641 200 RUR
                          Practical application of futures


At the time of this calculations the spot price in «Ural» hub is 693 RUR/MWH.

Financial result:
Without hedging:
Spot market revenue = 693*3720=2 577 960 RUR., that is 26 040 RUR less than the
revenue objective.

With hedging:
Spot market revenue = 693*3720=2 577 960 RUR.
Variation margin payouts = (710-693)*74,4*50= + 63 240 RUR.

Total revenue including variation margin = 2 577 960 + 63 240 = 2 641 200 RUR
Actual value of 1 MWh including variation margin = 2 641 200/3 720= 710
RUR/MWH
                    EXCHANGE INFRASTRUCTURE


 TRADING ORGANIZER. EXCHANGE

    • «АРЕНА» EXCHANGE
 CLEARING CENTER

    • FUNCTIONS CENTRAL COUNTERPARTY, TRADE SETTLEMENT
    GUARANTEE
 BROKERS

    • ENERGY COMPANIES
    • FINANCIAL INSTITUTIONS
 PARTICIPANTS (BROKERS’ CLIENTS)

    • ENERGY COMPANIES
    • PHYSICAL PARTIES
                            BROKERS


   Brokers are companies holding a license of exchange intermediary that
    gives authorization to conclude transactions on the exchange

   Broker’s clients – individuals and organizations

   Broker’s services:
     –   Portfolio management,
     –   Assets controlling,
     –   Reporting results for clients,
     –   Trading systems providing,
     –   Analytics.
                        INSTRUMENTS AND TECHNOLOGY


   Financial, non-deliverable future is the financial contract that is settles
    by paying variance margin – difference between the contract price and
    the price of the underlying asset.
   Underlying asset for futures is the average price of electric power in
    Center and Ural hubs of the first price zone and Kuzbas hub of the
    second price zone on certain delivery hours (base-load hours and peak
    hours).
    Why hub index is used? Close to 99% correlation of the hub index
    to the price of the GTP (group of delivery points) included in hub
    index.
   The trading technology is similar to the EEX exchange technology that
    makes the trading mechanism multipurpose for the Russian and
    foreign participants.
                PRICE FORMATION

 A METHOD OF PRICE FORMATION – CONTINIOUS TWO WAY AUCTION.
 SUBMISSION OF ORDERS TO THE EXCHANGE SYSTEM.
    • ANONIMOUS ORDERS:
        AT MARKET PRICE.
        AT SPECIFIC PRICE.
    • ADDRESS LIMIT ORDERS:
        AT SPECIFIC PRICE.
 TRADING HOURS 10:30-23:50 (MOSCOW TIME)
 CLEARING – SYSTEM OF THE PARTIES’         OBLIGATIONS   DEFINITION   UNDER
TRANSACTIONS:
    • CLEARING TIME: 14-00, 18-45.
    • VARIATION MARGIN RECALCULATION.
    • SETTLEMENT PRICE DETERMINATION (TWICE A DAY).

								
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