Wind to trade on the wholesale market -- Attractions of trading option greater than fixed purchase prices

Spurred on by government incentives, wind power producers in Spain are preparing to join forces and trade their production directly on the wholesale market. The aim is to avoid "imbalance" costs. Two wind power trading agencies have announced their intention to start trading soon, one headed by the Asociación de Productores de Energías Renovables (APPA) and the other by Gamesa, the country's dominant wind power company.

APPA says its trading agency, which remains as yet unnamed, will be ready to kick in before the end of the year. It will be run by Factor Energía, an already active power market trader. APPA's 250 members have a combined installed capacity of around 3000 MW, much of it wind power. One member alone, Corporación Energía Hidroeléctrica de Navarra (EHN), operates 950 MW of renewables, 872 MW from wind power. APPA's Sergio de Otto says APPA can easily pool production from the 500 MW considered the minimum needed to launch the trading agency.

New division

Gamesa remains much more tight-lipped on its rival agency, "Wind to Market," a new division to be run by market specialists and headed by Carlos Eizaguirre, formerly of utility Hidrocantábrico. Large wind plant operators such as ACS and Corporación Eólica (CESA) are reportedly willing to abandon fixed purchase prices and join Gamesa's initiative, as are Desarrollos Eólicos (DESA), owned by Dutch company Nuon, and Eurovento.

As well as boosting earnings by reducing imbalance costs, both trading agencies also see the potential in sales of green power directly to consumers using renewable energy certificates (RECs). APPA's Sergio de Otto believes that collective trading by a group of companies, instead of each striking out on its own, adds credibility to a green energy label. Spain's two major utilities, Iberdrola and Endesa, are already offering green power to customers at a premium rate. However, there are accusations that the content is not as green as it should be. APPA president Jose Mará Velez assures that it will "trade exclusively in green kilowatts from our own installations."

Reducing costs

The attraction of power pool trading lies in Spain's revised market regulations for wind power, introduced in March, which require all wind plant operators to schedule their generation on the system in advance of delivery (Windpower Monthly, May 2004). Only those who choose to sell power on the wholesale market -- instead of opting for the fixed purchase price that has been the mainstay of Spain's wind market until now -- may pool their production.

By aggregating output, wind power generators can smooth out the fluctuations of each wind plant's production, making deviations from scheduled production much less likely. This means they can reduce the volume of power they have to buy to make up for deficits in promised deliveries to the wholesale market. Although some of that cost is recouped at times when they sell wind generation in excess of that scheduled, the sales price for excess power is generally lower than the purchase price. As a result, "imbalance" costs mount up for individual generators that cannot precisely control output. Wind association Plataforma Eólica Empresarial (PEE) estimates the cost averages EUR 3.1/MWh of wind generation.

Forecasting output

The reduced collective cost from selling aggregated production into the market will be shared out among the participants in proportion to their individual imbalances. In this way an incentive is retained for each wind plant operator to invest in fine tuning of its output forecasting techniques. Six different forecasting models are now being tested in a program operated by PEE. So far, however, the average forecasting error is proving to be as high as 60%, double that expected. "It's early days yet and the error is mainly due to the need to fine-tune the statistical data collected in this initial phase. Results will improve," says PEE's Alberto Ceña. "But in any case, the benefits from aggregation easily offset any losses through poor forecasting," he adds.

Spain's revised wind market regulations are focussed on drawing wind plant operators into the market and weaning them off fixed power purchase prices. The market option pays wind the going pool price plus an incentive of 50% of the average price of all electricity sales on the wholesale market, currently at EUR 72.1/MWh. Coupled with the option to reduce imbalance costs, the market is looking like an increasingly attractive alternative.

"The final move to market en masse depends mainly on breaking the better-the-devil-you-know inertia throughout the sector," says Ceña.