14. For baseload generation, the EMR White Paper set out the preference that the year ahead market should be the market segment from which the reference price is drawn. The reasons for this preference were:
year ahead prices effectively represent an average of market prices across the year of delivery, and averaging prices to derive the reference price sends a strong signal to baseload generation to carry out maintenance when market prices are low and ensure it is operating when prices are high;
a year ahead reference price places an incentive on baseload generators to sell ahead of delivery, which in turn retains a commercial incentive for reliability13, and also allows suppliers to meet the needs of their customers who are looking for longer term stability; and
using a forward market should help to enhance liquidity in that market, which may have benefits for small or independent suppliers.
15. For these reasons, Government remains minded to use the year ahead market.
Given the anticipated changes in GB market liquidity due to ongoing Ofgem initiatives, indicating the precise source of prices, based on current price publications, in detail today would not be useful.
16. Ofgem’s most recent consultation on enhancing liquidity in the wholesale electricity market14 highlights a lack of liquidity in ‘products further along the curve, such as those beyond a month out’. The consultation proposes ‘focussing
13 This is not to imply that technical reliability is a function of contracting. However the same incentive does not apply to intermittent generation due to its inability to control the timing or volume of its output.
14 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Liquidity%20Feb%20Condoc.pdf
41 on the development and delivery of a Mandatory Auction selling key longer-dated products’. This would involve regular auctions with a requirement on obligated parties to sell specific products, ‘with sufficient volume in each product to potentially meet demand and produce robust prices’.
17. Subject to decisions by the Gas and Electricity Markets Authority later this year on the development of the Ofgem Mandatory Auction proposal, and on a modification of the licence, the Mandatory Auction could be a strong candidate for the reference price source for the baseload CfD.
18. In the absence of a Mandatory Auction, the Government remains minded that the reference price would be calculated as the average of the Summer & Winter EFA15 baseload contracts calculated each business day in the year (April-March) for the following year’s delivery based on OTC, Market Assessments and Exchange Transactions. Season ahead remains the longest contract with adequate liquidity, although the Government notes that calendar contracts are now quoted more often.
19. A more technical translation of these emerging proposals, to give a greater indication of what the actual CfD terms might look like, is set out in Box 1.
Box 1: illustrative terms for the CfD reference price Intermittent
GB Market Reference Price under NWE Market Coupling
The Market Reference Price for GB located CfD plant shall be the hourly day ahead auction price as determined by the NWE price coupling algorithm for the GB Price Zone for delivery the following day:
F1 MRPt = DAP_GBt,(BD-1)
Where:
DAP_GBt(BD-1) Is the GB Day Ahead hourly price applicable to Settlement Period (t) as determined under the EU price coupling algorithm for the GB Price Zone.
GB Market Reference Price in the absence of NWE Market Coupling
In the event that NWE Market Coupling arrangements are delayed, not implemented as planned, or for any other reason the GB Day Ahead Price is not available, the Market Reference Price will be calculated as follows:
15 Electricity Forward Agreement.
42 F2 MRPt = ∑e(DAPe,t * DAVe,t/∑eDAVe,t)
Where:
DAPe,t Is the Day Ahead price for delivery on the following day in settlement period t (a particular hour) as determined in the auction conducted by GB exchange e;
DAVe,t Is the gross volume transacted in the auction conducted by GB exchange e for Settlement period t on the following day; and
∑eDAVe,t Is the sum of gross volumes traded for delivery the following day in Settlement Period t in the auctions conducted by all GB exchanges.
Baseload
GB Market Reference Price
The Market Reference Price for Baseload CfDs shall be set in advance of each year and calculated as the average of Summer and Winter Baseload EFA contracts quoted daily in the preceding year. For example, the MRP for 2013/14 (April 2013 to March 2014) is the average of daily quotes in the preceding year (2012/13) for (delivery in) Summer 2013 and Winter 2013/14 for each index from which quotes have been sourced.
In the event that it is determined that price quotes should be obtained from a single source (Price Index), the MRP shall be calculated as follows:
F3 MRPey = ∑d(ey-1) BPd (ey-1)/∑d (ey-1)
Where:
BP Is the time weighted average of Summer and Winter Baseload EFA contract prices quoted on day d in the preceding EFA Year (ey-1) for delivery in the current EFA Year (ey), defined as:
F3A BP d (ey-1) = (BP_Sd(ey-1) * ED_Sey + BP_W d(ey-1) * ED_Wey)/EDey
Where:
BP_S Is the Summer Baseload Price for EFA year ey quoted on day d in the preceding EFA year (ey-1).
BP_W Is the Winter Baseload Price for EFA year ey quoted on day d in the preceding EFA year (ey-1).
ED_S Is the number of days in the EFA Summer Season in EFA year ey as defined by the EFA calendar.
43 ED_W Is the number of days in the EFA Winter Season in EFA year ey
as defined by the EFA calendar.
ED Is the number of days in EFA Year ey as defined by the EFA calendar.
∑d(ey-1) Denotes the summation of price quotes (BP) for all EFA days in
EFA Year ey-1 as defined by the EFA calendar.
∑d (ey-1) Denotes the total number of days in EFA Year ey-1.
In the event it is determined that the MRP shall be calculated as a basket, each source (Price Index) shall be included at determined weights. Accordingly, F3 above is expanded as follows:
F4 MRPey = (∑j, d(ey-1) BPj,d (ey-1) * Wj)/∑d (ey-1)
Where:
BPj,d (ey-1) Is defined as in F3A for each Price Index (j).
Wj Is the weight attributed to Price Index j such that the sum of all weights for all Price Indices included in the MRP equal 1.
∑j,d(ey-1) Denotes the summation of price quotes (BP) for each Price
Index on all EFA days in EFA Year ey-1 as defined by the EFA calendar.
44