Head of Resource Planning/Analytics
Developing a bid strategy for "balancing energy" auctions
Vattenfall's vision is to become one of Europe's leading energy companies. To realize its vision, Vattenfall operates according to five strategic goals: to be environmentally friendly, to exceed customer expectations, to be an excellent employer, to serve as a benchmark for the industry and to consistently see profitable growth.
To deliver reliable power at competitive costs, Vattenfall must optimize the performance of assets and trading decisions placed in the energy markets, including its participation in the "balancing energy" market.
Anyone who attempts to win as many bid invitations as possible and at any price is taking too great a risk and may even end up paying more.
Electrical energy can only be stored in small volume. Its production must balance in real time with consumer demand at any given time. Otherwise, blackouts may occur.
Balancing energy is needed to keep the system in balance. It ensures the ability to meet exact consumer demand for electricity in case of unforeseen events in the power system. A need for balancing energy will occur when, for example, a large coal-fired generation unit is suddenly on outage, or at halftime of a televised soccer match when viewers are opening refrigerators and turning on electric ranges at the same time.
Power stations, where the energy production can be regulated even on short notice, are used for the need-based provision of energy balancing. This includes gas turbine or pumped-storage plants – or even base-load power stations like steam plants.
Energy balancing costs can be considerable, since corresponding capacities have to be kept on reserve to be able to deliver directly and quickly as needed. Since the storage of electricity is expensive and limited, power plant operators can sell energy balancing services to the market in order to exhaust their generation capacities while increasing revenue. However, there are numerous challenges to offering balancing energy – one of the biggest is the ability to participate intelligently on the transmission network operator balancing energy auctions, which guarantee network stability.
Balancing energy is procured through public bid invitations. Energy producers must underbid one another during standardized auction processes. To be precise, bid invitations for balancing energy are offered on a central online platform where they are initiated by the buyers (the transmission network operator). The entire process is transparent and strictly monitored by the Federal Network Agency. The auction surcharges are published after the fact and are anonymous.
An optimal strategy for creating a sound offer with calculated risks is integral to a vendor's successful participation in a central balancing energy auction. Due to the numerous influence factors that must be taken into consideration, stochastic and analytical methods have to be integrated into the software-based process. Otherwise, no conclusions can be drawn from past auctions and no comprehensive assessment of the current risk situation can be made.
"Even if the balancing energy market is extremely competitive, our focus is not on outdoing everyone in the bidding competition; it is on ensuring the best use of capacity at our power plants," says Ralf Kirsch, head of Resource Planning/Analytics at Vattenfall Europe Generation AG. "Anyone who attempts to win as many bid invitations as possible and at any price is taking too great a risk and may even end up paying more.
"After all, a surcharge is also a legal obligation to provide full power when needed. Accordingly, what is important to us when creating an offer is that we always keep feasibility in mind and ensure reliable risk hedging."
So as Vattenfall evaluated the various IT systems on the market for their technological performance, the company did a careful review of each provider's business and mathematical know-how.
"Our goal was clearly formulated. We needed a reliable decision corridor based on a solution that, in turn, was based on market data," says Kirsch.
The added value of such software is in finding the optimal offer strategy for bids and the corresponding optimal utilization of the available power stations. It also creates the transparency that is essential during the standardized audits performed internally and by the Federal Network Agency. The balancing energy market is subject to strict regulations, which also must be consistently observed and should be traceable at any time.
In collaboration with Vattenfall, SAS created an energy-balancing calculation solution. The solution is forecasting, simulation, optimization, costing and planning system to optimize Vattenfall's own power plant specific auction offers.
The balancing calculation used the forward prices of fossil fuels and CO2 emissions certificates, the master data of the power plants and the published results of the previous balancing energy auction to create thousands of auction scenarios. The scenarios were then converted into a holistic offer strategy to limit the risks that are inherent in the auction process.
The objective was to meet demand at optimal efficiency and cost, while making transparent the factors that went into the decision making process. The key enabler of this process was the use of stochastic optimization, a method that generates and uses random variables, like the pricing of volatile fuel inputs, or run/don't-run calculations.
This approach greatly limits the auction-related risks while maximizing surcharge success. The SAS solution for energy balancing thus provides risk-assessed handling options for all upcoming bid invitations.
“The effect is very clear to see. We have already been able to see our success increase 5-15 percent in the field of balancing energy,” says Kirsch.
The analytical complexity of this challenge and the strong relevance of balancing energy issues were decisive factors in choosing SAS.
For Vattenfall, the point was not to make a quick decision, but to bring a software partner on board that could ensure long-term expansion from a business and technical perspective.
That SAS was the right partner was confirmed during a prototype test run using legacy data. The test showed that Vattenfall would have achieved an additional amount – in the millions of dollars – with an extremely conservative and thus low-risk approach. By ensuring the desired target decision corridor, the responsible parties at Vattenfall can now determine exactly how much risk is justified for each quote and which pricing would be most promising, and they can do so before each balancing energy auction.
Vattenfall has the opportunity to consider contribution margins, improve decision and cost transparency, and audit decisions. The solution made transparency a priority so that regulators can be confident about compliance.
Determine an optimum bid strategy for the "balancing energy" auctions in a deregulated market.
Increase profitability through successful auction bids by implementing a data-driven approach that balances operational and market risks.