The roles of electricity producer and supplier are often confused, with the idea that an electricity supplier must necessarily rely on a fleet of generating stations. This is not the case!
It is quite conceivable that an electricity producer (operating nuclear, gas or coal-fired power plants, or even wind turbines or hydroelectric power plants…) would sell all its production on the “wholesale markets” for electricity.
Similarly, an electricity supplier can perfectly supply its customers without owning a single power plant: it must then source its electricity from the same “wholesale markets”.
Electricity, a product like no other…
How does this market work? In much the same way as for any other product (a stock, oil, or wheat…), i.e. via an organized stock exchange, or over-the-counter exchanges between actors. With a major specificity: electricity is not stored, which has consequences on the way electricity is supplied and on the evolution of prices.
Electricity cannot be stored, hence the need to adjust production and consumption in near real time. However, electricity demand can fluctuate during the day and over the year (time-seasonal variations) in a way that is sometimes difficult to predict (2003 heat wave). Balancing supply and demand is only possible if permanent “overcapacities” can be mobilized quickly during peak periods. To optimize electricity production, the generating fleet must be diversified. To meet basic demand (minimal and predictable, known as “the ribbon”), high fixed-cost and low-variable-cost techniques are preferred. On the other hand, for peak demand (fluctuating and unpredictable, “lace”), coal, oil or gas power plants are used, which are more flexible, have low fixed costs but high variable costs. Thus, in France, when nuclear or hydraulic production capacities prove insufficient to satisfy all demand, which is the case almost 90% of the time, the use of fossil fuels becomes essential. The specificities of the electricity market and the diversity of technologies used to produce electricity have a direct impact on the expected effects of the market’s functioning.
There are two types of electricity purchases on wholesale markets :
- forward purchases, which correspond to future consumption, for example in the year following the purchase. We are talking about the purchase of “Forward” (in the case of an over-the-counter purchase) or “Future” (in the case of a purchase on an organized stock exchange) products;
- run-of-river balancing purchases, commonly referred to as “spot” purchases, which correspond to tomorrow’s consumption. The specificity of the electricity product is strongly linked to these “Spot” purchases, which serve to balance.
Supply… Anticipate consumption.
Consider the case of an electricity supplier who wants to supply its portfolio of customers but does not have a generating plant. It must then source its supplies on wholesale markets.
Main difficulty: electricity cannot be stored. This supplier will therefore have to buy electricity, for a quantity corresponding to the energy consumed by its customers, at an hourly rate!
That is, throughout the duration of its end customers’ contracts, and for each hour, the supplier must buy the right amount of electricity. Reminder: there are 8,760 hours in a year….
First thing to do: plan your consumption! Once this forecasting work has been carried out, the supplier has the projected consumption of his portfolio over the entire duration of the contracts.
He can then buy: it is said that he “covers”, or that he “hedges” his consumption. Let us continue our example of the supplier wishing to cover its consumption and, to simplify, let us place ourselves in 2014 for consumption in 2015, on a calendar year.
The initial purchase, “in the long term”: securing your consumption forecast
The supplier therefore makes forward purchases to cover this consumption.
These purchases can be made either by mutual agreement with an electricity producer (referred to as an OTC exchange for “Over The Counter”, or via an organised exchange, such as EEX in Europe (https://www.eex.com).
The principle is simple: it involves buying quantities of electricity in several traditional formats. We are talking about “market products”:
- “Base” product: quantity of electricity with constant power all year round;
- “Peak” product: quantity of electricity with constant power from 8am to 8pm Monday to Friday, zero at other times of the year.
We can also talk about “Off Peak” product, it is all hours except “Peak”.
These products can be purchased over several time horizons: a calendar year, a quarter, a month…
But according to certain rules: for example, you can buy an annual product up to 3 years in advance (2014 for 2017). These are future products. For quarterly or monthly products, the deadline is shorter.
The supplier must therefore constantly adapt his purchases according to the products available on the market. In practice, this can be likened to a construction game: covering your consumption with the products available on the market. Be careful, in some cases, you also have to resell the energy purchased in excess! The graph below shows what a result of this building set can look like :
This “true building game” is one of the suppliers’ trade secrets. Indeed, it is clear that there are several methods to cover the same consumption profile: several products to buy or sell, at different time horizons… This is called the “hedging strategy”. Each supplier determines its own and constantly seeks to optimize it (to optimize its supply costs): a good hedging strategy means competitive prices…
A pure supplier must therefore permanently solve the equation
the following: optimize its supply costs (which play a critical role in
its financial equilibrium) by minimizing its risks.
Consequences for the customer :
To compose your price, the supplier therefore buys 2 products on the electricity market :
Baseload (BL) : constant power over the full period
Peakload (PL) : power from Monday to Friday, from 8am to 8pm
The more you have peaks in consumption (lace, unpredictable), the closer your price gets to the PL product, i.e. about 56 €/MWh (e.g. a factory whose production schedules are punctual over a day from 7am to 5pm with variable power demands)
The more stable your consumption remains at all times (in ribbon, predictable), the closer your price is to the BL product, i.e. about 43 €/MWh (e.g. a company with cooling units, servers etc…)
However, it is clear from the graph above: it is impossible to cover exactly one consumption profile at an hourly rate with standard market products. This is one of the major difficulties for suppliers: they must constantly supplement/adjust their supply by purchasing at an hourly rate, in spot (lace coverage). However, the only way to buy electricity at an hourly rate is to wait (electricity is not stored)… the day before the day of consumption (spot products)!
Buying « au Spot » : balancing as you go
Every day, the supplier must adjust his consumption forecast, at an hourly rate, for the next day. He can then make the purchases and resales, at an hourly rate, necessary to exactly cover his customers’ consumption, for each hour. In this case, unlike “forward” purchases, it no longer has a hedging strategy: you have to hedge everything, at any price. Any MW consumed and not covered will otherwise be paid even more.
Spot prices are the result of a so-called “Fixing” mechanism: every day, all market players (producers, suppliers, traders…) centralize their electricity needs, in purchase as in sale, at an hourly rate. The Spot Exchange(http://www.epexspot.com/) then calculates the price resulting from supply and demand, at an hourly rate.
For example, a supplier who wishes to buy 1 MWh, from 6pm to 7pm, for the next day, informs the Spot exchange the day before in the morning. In the afternoon, he is informed that he will have to pay this MWh at a price determined by Fixing. Consequence: prices can change very sharply, depending on the variation in consumption. It is said that the price of electricity is very “volatile”.
Spot vs Future
The supplier therefore buys for a:
hedging with forward products (based on consumption forecast) -> Annual / quarterly and monthly;
hedging with spot products (for forecast balancing) -> Peakload, Baseload, Offpeak.
The exchange therefore offers different products for different needs:
Spot market —> provides a short-term price reference for managing “volume risk” (Day-Ahead Markets);
Derivatives market —> provides a medium-term price reference for managing “price risk”.
The supplier can also obtain ARENH
Concept : l’ARENH (Accès Régulé à l’Energie Nucléaire Historique – translated Regulated Access to Historical Nuclear Energy) has been set up to improve competition. Indeed, the fact that there are regulated tariffs and that alternative suppliers cannot access economically attractive sources of electricity such as the nuclear fleet used by EDF (in a quasi-monopoly situation), are obstacles to the emergence of real competition. This consists in making part of EDF’s nuclear rent available to alternative suppliers on behalf of their customers.
Price : the ARENH price is decided by decree. It is currently at 42 €/MWh.
ARENH right : the generation of a customer’s ARENH right is conditioned by his way of consuming. The more you consume during ARENH off-peak hours, the more important your right is.
Calculation of ARENH duties in 2015 :
ARENH duty = average of the power consumed every hour of July and August and the power consumed during off-peak hours from 1am to 7am from April to June and from September to October + all hours of Saturdays, Sundays and public holidays.
As a result of lower prices for CO2 and coal, and then oil, wholesale electricity market prices have fallen below the ARENH.
The purchase suffered: the “gaps” and balancing of the electricity network
And it’s not over yet! Because if the sum of purchases made on the futures and spot markets perfectly cover the consumption forecast… Well, the forecast is never perfect!
If, for example, a supplier forecasts a consumption of 100 MWh for a given hour, he logically covers 100 MWh (he buys 100 MWh of electricity for that hour). What if its customer portfolio finally consumes 101 MWh? Are his customers cut off? Of course not, no.
The transmission system operator, RTE, is responsible for the physical balance of the network and ensures that each customer is supplied continuously. But, for all that, someone has to buy it, this missing MWh!
This is the role of the Balance Responsible Entity, or “BR”. In order to have the right to supply customers, any electricity supplier has the obligation to designate its BR vis-à-vis RTE. Most of the time, a supplier is his own BR.
RTE invoices each BR, for each hour, for the missing or excess electricity.
For RTE, this means buying or reselling, for each hour, the difference between the expected consumption and the supplier’s actual consumption.
Of course, it’s not cheap! By construction, these prices cannot be more interesting than the Spot price, for a given hour….
If the difference in the BR was in the “right direction” (to balance the network), the price invoiced by RTE is the Spot price. On the other hand, if the difference in the BR tended to worsen the overall balance of the network at that time… The bill can be high!
Each supplier / BR is thus encouraged to plan its consumption as well as possible in order not to unbalance the electricity grid.
Forecasting electricity consumption is an art!
In order to be able to obtain electricity, each supplier must estimate its future consumption. The aim is to forecast the electricity consumption of its customers, at an hourly rate, over several years (some electricity supply contracts may last 3 years).
It is a central subject for any electricity supplier: no good purchase without good forecast. Forecasting is a difficult art, especially when it comes to the future….
It is a question of estimating the number and size of customers, of course, but also the temperature, wind, cloud cover, etc. These are all parameters that make mathematician forecasters happy. Some even go so far as to follow the divorce rate! The reason: a single household uses less electricity than two separate households….
Another essential parameter for industrial customers’ consumption is the economic situation. It is a fact: the measurement of electricity consumption is a particularly reliable indicator of a country’s economic activity. “Tell me how much electricity you use, I’ll tell you who you are.”
Creation of a marlet offer
1/ Cost of supply (the price varies according to the supplier)
- Cost of sourcing (price of the electron)
- ARENH share —> Regulated
- Complementary ribbon valued at market price
- Lace valued at market price
- Mark-up (increase) of risks to cover :
- Customer volume issues
- Industrial disasters of customers
- Adjustment mechanism, arbitration risks, validity period of bids.
- Customer volume issues
- Commercial costs
You can therefore opt for:
A price with or without ARENH: your alternative supplier must be able to offer you a guaranteed ARENH level.
A single price over the year or price according to the hours: your alternative supplier must be able to offer you a fixed price or an indexed price, depending on your way of consuming and your purchasing strategy.
NB: Fixed price offer with ARENH: Arenh volume x Arehn price + high curve volume x Market price, but the Arenh price will certainly increase and the volume may be modified during the contract, requiring the customer to take a new market position during the contract (in the case of an unsecured ARENH level).
2/ Transmission (> 50 kV) / Distribution (≤ 50 kV) -> Regulated (same price for all suppliers)
You can opt for :
THE DISTRIBUTION NETWORK ACCESS CONTRACT
(CARD) (2 contracts, 2 invoices) :
an invoice issued by the supplier for the energy supply part,
an invoice issued by the grid operator for the transmission part.
This type of contract has a higher annual management cost than the single contract (ratio of 1 to 10)
THE SINGLE CONTRACT: A UNIFIED MANAGEMENT (1 contract, 1 invoice)
This contract covers both energy supply and access to the distribution network. As its name suggests, this possibility consists of signing only one contract with the supplier. This is the recommended solution to simplify management. The latter shall have the same rights vis-à-vis the network operator as if it had concluded a CARD. The supplier then acts as an intermediary. It invoices both the supply of energy and the transmission (TURPE) which it pays to the grid operator. The customer therefore receives only one invoice.
For CARD sites, the Balance Responsible Entity is freely chosen. It is not necessarily the supplier, as the customer may be his own Balance Responsible Entity. The cost of deviations (corrective measures) will then be invoiced directly to the customer by the grid operator.
For sites under SINGLE CONTRACT (recommended), the law requires that the supplier is in fact RESPONSIBLE FOR BALANCE.
In a single contract, when the price covers both supply and delivery, it is called an integrated price. When prices are distinct, we speak of dissociated prices.
– The integrated price:
It includes the supply price and the cost of electricity transmission, and results in invoicing lines covering these two items. We talk about “made site” prices. In this case, the prices commit the supplier to both aspects: supply and delivery of electricity (excluding variable elements: reactive, overrun, etc.). The supplier will have previously covered itself: its routing price will include a margin to cover changes in routing rates (TURPE) during the term of the contract (in the event that the supplier plans to guarantee the price regardless of the changes -> Guaranteed prices).
– The dissociated price :
On the same invoice, it translates into specific lines for supply and delivery. Depending on the supplier, the cost of transport and price changes decided by the public authorities can be passed on to the customer, to the nearest euro, on the invoice. In this case, the differentiated price guarantees transparency on the invoicing of the routing for each site according to
the current TURPE tariff schedule.
For greater transparency, it is advisable to use differentiated prices: the price of the supply, on the one hand, and that of the delivery, on the other hand, the cost of the delivery being re-invoiced almost on the basis of the TURPE in force.
3/ Taxes -> Regulated
The transmission tariff contribution (CTA): this tax varies according to the supplier
Other taxes: same taxes for all suppliers.
The key to understanding electricity prices lies above all in the consumption profile, i.e. the combination of power demand and
the time of consumption (day/night, winter/summer). This last element is decisive in the construction of the price. On the other hand, the volume effect on the price only occurs at the margin, contrary to what one might think.
The end of TRVs
The end of the TRVs has been decided for compliance with European law
Regulated selling rates are proposed by historical suppliers (GDF Suez and LDCs in natural gas – EDF and LDCs in electricity) and are set by the government.
LDC = local distribution companies
Article L. 337-9 of the Energy Code:
Provides that as of January 1, 2016, customers will no longer benefit from TRVEs for their sites in continental metropolitan France whose subscribed power is strictly greater than 36 kVA.
Article 25 of the law of 17 March 2014 on consumption:
Amended Article L. 445-4 of the Energy Code by introducing provisions for the gradual phasing out of GRTs for non-domestic consumers, in three stages:
three months after the publication of the law for consumers connected to the transmission system (18 June 2014);
by 31 December 2014 at the latest for non-domestic consumers whose annual consumption exceeds 200 000 kWh;
by 31 December 2015 at the latest for non-domestic consumers whose annual consumption exceeds 30 000 kWh.
Consumers must have subscribed before the end dates of the RVRs concerning them to a new contract as a contract offer with the supplier of their choice.
What arrangements should be made in the event that a contract is not concluded before the date of cancellation – of the RVRs?
How to change your offer?
The exit of the TRVs is free of charge* and without notice of termination:
With its current supplier
Or with a new supplier
* Except in electricity, in the event of a modification of the subscribed powers less than 12 months before leaving the TRV
In this case, the incumbent supplier is entitled to claim compensation corresponding to the amounts of fixed premiums due for the electricity actually consumed.
This is to avoid a benefit to the customer with a reduction in power over convenient periods and a withdrawal over periods of high power calls.
Deregulated world :
Production = open to competition (90% EDF, CNR, ENDESA FRANCE)
Transport = regulated, RTE = highways
Distribution = regulated ERDF = TURPE = roads
Transmission is based on the power subscribed for withdrawal and the energy for injection.
Regulated rate VS Applied rate
Green A = connected to the distribution network
Green B and C = connected to the transmission system
1/ : Rates calculated on the basis of a profile (profiled or indexed):
their consumption is sufficiently characteristic to be modelled through a standard consumption profile. They are invoiced on the basis of the indexes recorded by the distribution system operator. This information (consumption by time zone and subscribed capacity, etc.) is included on the electricity bill and the annual management sheet at the regulated selling rate, available free of charge from your historical supplier as part of the regulated selling rates.
The vast majority of meters in France; they are read 1 to 12 times a year.
The supplier does not know your exact way of consuming and presents you with a price based on a standard profile proposed by the network; you are regularized on the basis of the actual consumption known during the survey carried out by the network.
2/ : Rates calculated on the basis of a remote reading (remote reading):
(reading of the power demand every ten minutes). All these points constitute the load curve
Reading by telephone link during the night, of the energy consumed during the previous 24 hours, in “10 minutes” format.
1-year remote readings are a “load curve”: your supplier knows exactly what you are consuming and offers you a price that is as close as possible to your way of consuming.
While the vast majority of green-priced sites have a remote reading meter on their site, when the subscribed power of the meter is less than 250 KVa, the network does not keep the remote readings and the calculation of the tariffs is based on a profile, as for the yellow or blue tariffs.
What changes ?
– Price breakdown :
What elements are required for a quotation request?
The “10-minute points” file (or load curve, or measurement curve) is a computer file containing remote power readings taken every 10 minutes over a one-year period; it allows the supplier to know exactly how you consume and to offer you a price accordingly.
The levers to buy energy in a deregulated market
Good purchasing practices:
Tracking the energy price
— > check that the supplier’s margin does not increase from one period to the next
Buying at the right time
Contracting by taking advantage of opportunities.
— > prices are volatile, electricity exchange
Responsiveness of the offer (as short as possible)
— > the shorter the validity period, the better the price. Indeed, for the supply of electricity, this period of validity can have an impact on the price awarded: between the time the offer is submitted and the time the customer awards the contract to the supplier, market prices continue to fluctuate. It is at the moment when the contract is notified that the supplier will reserve the necessary energy for his customer. It must therefore include in its offer a hedge on the price given to protect itself from any increases.
Limiting your consumption :
- Be familiar with its distribution of consumption in off-peak and peak hours, and see how to shift consumption to off-peak hours (-favourable impact on the volume of electricity at the bottom of the curve that can be purchased at the ARENH price set by the public authorities).
- A predictable and stable profile (smoothed load curve)
- Provide reliable consumption forecasts to the supplier
- Possibility of multi-site or grouping: expansion
- Possibility to commit to a volume (take or pay)
— > Obligation to stay in a consumption tunnel, if you leave this commitment consuming less or more than your commitment, you pay penalties that are defined in the contract (seasonalized or annualized).
- Possibility to withdraw
- Weight of the contract (duration and volume)
- Examine the possibilities of capping the CSPE.
Optimizing your electricity purchase therefore requires a good understanding and evaluation of your main uses to best define your needs.
Optimize your distribution contract
Good optimization practices:
1. Decrease in subscribed power :
— >Decrease in the fixed portion of Distribution and CTA
2. Optimization of the subscribed powers per period, respecting the following rule:
Example of necessary means :
Analysis of past consumption
Programming of equipment operation
— -> Decrease in the fixed portion of Distribution and CTA
— -> Decrease in the variable portion with identical consumption
3. Avoid power and reagent overruns.
4. Perform several distribution cost simulations to choose the best option.
In any case, it is necessary to know your consumption profile. The distribution contract is single-site. No expansion possible with other sites
– Annual single price or seasonally adjusted price?
As already mentioned, the price of electricity results from the moment when it is consumed and the means of production implemented at that time to satisfy demand. It is therefore necessary to have a price structure organized by seasonally adjusted period. For example, during peak consumption periods, more expensive means of production are started to satisfy demand and avoid a supply disruption.
Seasonality (e.g. Peak hours vs. Off-peak hours, Summer versus Winter) favours better control of consumption: it is in your interest to consume at the lowest cost hours when possible, and to control your consumption during the most expensive hours.
To find the optimum technical and economic solution, it is therefore better to favour a time-seasoned price structure that will generally be more competitive.
– Firm/fixed price or indexed price?
The choice between firm price and indexed price depends on the expectations and commitments that the customer is willing to make.
In the case of the firm price, the customer benefits from a stable price over the duration of the contract, in return for risk coverage integrated into the price. However, this does not mean a firm budget for the customer, which also depends on the volume consumed. Nevertheless, if the volume is stable and controlled, it is possible to plan a “supply budget envelope” for the coming years (management in advance and without surprises).
The apparent simplicity of the annual single price (not seasonally adjusted) may seem attractive both in terms of invoicing and in terms of comparing offers. But this price may actually be higher because it includes an additional cost linked to the risk that the supplier wants to cover in order to protect himself against a possible distortion of his customer’s consumption profile.
For the indexed price, and as with any purchase, the revision formula must reflect the cost structure of the product purchased (in this case, electricity). As mentioned above, the legislator has provided in the framework of the NOME law for all suppliers to benefit from the competitiveness of the cost of producing the electricity produced
by the historic nuclear park. This benefit is called “right to ARENH”. ARENH entitlements are based on the average power demand at certain off-peak times of the year. The price of ARENH is set by the public authorities. It is currently 42€/MWh. The unit prices of an electricity supply offer indexed to the ARENH include a specific rate, depending on the proportion of hours that each supplier can benefit from in this context, according to the composition of its customer portfolio.
If the price is indexed to the ARENH price:
The price evolution is therefore regulated by law,
This indexation ensures consistency between the cost of electricity purchased by suppliers and the price reflected in the supply contract.
A revision formula that would be based on other indices that the ARENH can make the client take risks depending on the degree of volatility of the chosen index. In addition, indexation to regulated selling rates would have no basis for contracts with a capacity greater than 36 kVA as the corresponding RVRs will be abolished on 31 December 2015.
Analysis of offers, useful precautions
The analysis of bids makes it possible to eliminate bids that are not admissible, to classify those that are, and then to select the candidate(s) at the end of the consultation. It is therefore essential to ensure that the offers are comparable.
Some points of vigilance must be observed:
The price excluding VAT and the price including VAT (all taxes included). Ensure that the price including VAT of each offer includes all taxes (VAT but also TCFE, CTA, CSPE) with the same rates and calculation bases.
The cost of the RTE rapid reserve. The cost of the rapid reserves is a physical withdrawal charge collected by RTE from each balance responsible entity. It is the same for all balance responsible entities and amounts to 0.15 €/MWh since 1 January 2013. It is passed on to all end customers. It must be ensured that all prizes awarded include this fee.
An essential idea: only consume what is strictly necessary
The key word is efficiency, with one essential idea: only consume what is strictly necessary. Suppliers will have to ensure that there is an exact match between the offer and the real needs of consumers, with associated services because many users, and in particular local authorities, do not know their consumption. This is the case, for example, of public lighting, which represents an important and often underestimated energy source.
Another fundamental trend is that pricing is increasingly adapted to the consumer’s profile. Today, we are moving towards a market where flexibility will be
paid. (remuneration by valuing the deletion. Conversely, irrational, inattentive behaviour may be penalized).
Beyond the unit price per kWh, the purchase of electricity is an opportunity to look more globally at how you consume energy. Optimizing your consumption is an essential lever to reduce your electricity bill.
Energy optimization also involves controlling and monitoring consumption.
Energy optimization implies raising consumer awareness of the proper use of energy (training in eco-actions, provision of tools to monitor consumption, etc.).
The other core aspect of the end of tariffs is energy efficiency.
Energy efficiency = ratio between the energy directly used (useful energy) and the energy consumed (generally > due to losses).
It will be necessary to offer a service (energy audit) to help look at all the places where energy optimization actions are possible. To better pass on energy savings, their impact must be visible and positive on finances
It is not the volume consumed that determines the price of electricity, it is the consumption profile.
“Electricity is not a product like any other; it is not stored and, moreover, not all kWh is equal: a kWh consumed during off-peak hours (e. g. at night or in the morning in summer) does not have the same value as a kWh consumed during peak hours (e. g. at night in winter), simply because the production cost of these kWh is not the same. To meet a random demand, the electricity producer will use the various means of production at his disposal, starting, for a given fleet of power plants, with those with the lowest variable costs (in France, run-of-river hydraulics and nuclear power). It then calls coal-fired, gas-fired or even oil-fired power stations and possibly uses imported electricity for the extreme peak, as European grids are highly interconnected. This is the logic of the merit order.
“In addition, this electricity is transmitted and distributed by a network that is expensive to build and maintain, and the “network” component of the price is set by the regulator because it corresponds to the activity of a “natural monopoly”. For a domestic consumer, this “toll” part of network access represents between 40% and 50% of the price excluding VAT”.
“The “kWh production” part is recovered by a binomial type rate: a fixed part (the contract, which depends on the power subscribed) and a variable part (which depends on the quantity of kWh consumed). Any consumer subscribes a power in kW and uses more or less this subscribed power by consuming kWh. But for the producer, 6 kWh sold to a consumer who has subscribed 1 kW of power that he uses for 6 hours, this does not have the same meaning, in terms of constraints and cost, as 6 kWh sold to a customer who has subscribed 2 kW of power that he uses only for 3 hours… More power must be provided in the second case. Economic logic requires that tariffs be set according to the marginal cost of production, i.e. the variable cost of the marginal equipment (the last equipment called). All kWh sold at that time are sold at a price that covers that marginal cost.”