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United Kingdom

United Kingdom

Flexible solution to imbalance risk

Green electricity supplier Good Energy -- formerly Unit-e -- has signed a risk management deal with electricity generation consolidator SmartestEnergy. Under the contract, SmartestEnergy will manage Good Energy's exposure to imbalance costs in supplying customers from its purchases of renewable power. The most innovative aspect of the contract is an accompanying "ROC Repo" agreement: Renewables Obligation Certificates (ROCs) associated with the power are retained by SmartestEnergy as security and bought back by Good Energy to trade, fulfil its renewables obligation, or retire ROCs from circulation altogether to reassure customers that their purchases of green power will make a difference.

Some 75% of the power bought by Good Energy is wind, 25% small hydro and less than 1% solar. Dealing solely in renewables, the company is more vulnerable than most to costs incurred for deviating from scheduled production. Under the UK's electricity trading arrangements (NETA), generators have to bid their output an hour in advance. They must buy power to make up any shortfall at the time of delivery, but receive only a small payment for oversupply. This is where the imbalance costs occur. Small and renewable energy generators -- particularly wind -- are most at risk, and as a power purchaser, Good Energy has little control over generation output projections.

The deal with SmartestEnergy is known as a supply-side electricity trading service agreement (supply-side ETSA). Through trades with counter-parties and brokers it can hedge against imbalances under NETA -- including the added uncertainties caused by wind's intermittent supply. In addition, the contract ensures that any spikes in demand by Good Energy's customers can be met instantaneously.

Juliet Davenport of Good Energy points out that until now, the company has had to balance the supply of 100% renewable power to its customers, while delivering on a round the clock basis whatever the demand profile happens to be. Simultaneously, it has had to ensure that risk exposure is managed as cost effectively as possible. "Through the supply-side ETSA we have been able to roll these critical issues up into a single package and hand over the responsibility of managing our position under NETA to SmartestEnergy, which frees us up to concentrate on building the business," she says.

From SmartestEnergy, Ashley Turner says the contract is really a development of its generation ETSA. "Good Energy was looking for a flexible solution which minimised their risk exposure under NETA," he says. "I hope this innovative supply contract is the first of many."

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