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How to better manage the cost of the capacity obligation?

One can say, without fear of exaggeration, that the price of capacity guarantees has experienced considerable fluctuations. While during the first two years of its existence, the cost of capacity hovered around €10-12k/MW, it increased to a range of €16-20k/MW in 2019-2020, and then to a range of €29-47k/MW for the 2021 guarantee (prices from the last three auctions). This cost not only represents a significant component of the energy bill, but it is also increasingly difficult to anticipate.

graph capa(2).png

Evolution of the capacity guarantee prices in the AL-1 auctions

One way to control and reduce the cost of the obligation is, of course, to reduce the total volume by lowering or shifting consumption during PP1 hours.

There are also ways to optimize the cost paid per capacity guarantee, and we will try to identify them in this article.

Calculation and monitoring of the capacity obligation

Whether you are an electricity supplier trying to offer competitive supply offers or a consumer trying to minimize capacity costs, the first step is to estimate as accurately as possible the amount of the obligation related to your sites, well before the delivery year, in order to have time to apply your procurement strategy.

Since the forecasted consumption of your sites changes before and during the delivery year, it is necessary to frequently recalculate your capacity obligation to take into account the most recent information (weather, number of sites, activity, etc.). In case of changes, it is necessary to adapt your procurement strategy and potentially buy or sell guarantees.

This is especially important as 2020 demonstrated that the overall system gap can exceed 2 GW and the price of the gap can reach €60k. Even if you have purchased the necessary guarantees to cover most of your obligation before the delivery year, being short on even small volumes can be very costly.

If you are a consumer and your supplier is in charge of purchasing the capacity guarantees, it is essential to verify that the volume of guarantees billed corresponds to the actual obligation generated by your sites.

 

How to find the best price?

 

The price of guarantees from auctions can vary significantly between delivery years, but also between auctions for the same delivery year (as illustrated in the graph above). So, should you focus your purchases on the more liquid December AL-1 auction, or should you spread your procurement over several dates? Should you buy at any price or submit limit orders? And if so, how can you build an optimal bidding curve?

Answering these questions requires a good understanding of market rules and fundamentals. Factors such as the position of the dominant player, regulatory developments, and the forecasted supply-demand balance must all be considered when making purchasing decisions.

You should also consider conducting transactions on the OTC (over-the-counter) market, which allows you to anticipate auction prices or even access forward contracts, enabling you to lock in the cost of part of your obligation in advance. Numerous counterparties, such as producers, aggregators, or traders, can offer capacity guarantees at different prices. It is essential to consult a sufficient number of players to ensure you get the best price.

The solution of Augmented Energy

Whether it is for the regular estimation of your obligation, finding the best price, or timing your purchases, these activities are complex and quickly become time-consuming. Augmented Energy supports electricity suppliers and consumers in managing their capacity obligation.

Several solutions are possible. Augmented Energy can guarantee a price for your capacity guarantees and handle any potential discrepancies, thus taking on all the tasks and risks associated with the capacity obligation on your behalf. Alternatively, we can simply assist you in designing and implementing a strategy to manage your obligation

For more information, contact us at:  sales@augmented.energy

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