Renewable Energy and PPAs: Hedging with EEX Power Futures...The expected value of the production is sold (risk of market value development) Additional risks must be evaluated and priced

Renewable Energy and PPAs:

Hedging with EEX Power Futures

© EEX AG, 2020 2

32% June 2018: new binding 2030 renewable

energy target for the EU

€62bn Feb 2018: IRENA report of estimated

average investment in renewable energy

per year to reach 34% capacity in the EU

17% 2016 estimated share of renewable energy

in the EU's gross final energy consumption

A few key figures

Source: EU Commission, Bloomberg

https://ec.europa.eu/energy/en/topics/renewable-energy

https://www.bloomberg.com/news/articles/2018-02-19/europe-can-double-renewable-energy-share-by-2030-irena-says

PPAs: Nothing new, but now a Key Driver of

Renewable Energy Investments

3

Power Purchase Agreement (PPA)

Long term contract between a party generating and selling electricity and a

party purchasing electricity. Have existed for decades.

Corporate PPA

Corporate PPAs enable businesses to source electricity from generators at

an agreed price, while giving producers a reliable, guaranteed buyer at a

stable price.

© EEX AG, 2019

Utility & Corporate PPAs

Electricity traded between the two parties comes from a Renewable Energy

power plant. PPAs are necessary to be in place prior to a RE asset

developer securing financing from a bank for their project. Purchasers

can be wholesale buyers/Utilities or Corporates, and are attracted by lower

prices and the ‘green credentials’ in having their power supply come from

100% renewable sources. RE PPAs are often fixed for long periods, up to

15 years, to ensure revenue security for the developer.

Framework and preconditions for PPAs to be

realized in a Power Market

© EEX AG, 2020 4

Less attractive

or no revenue

alternatives

(from RES

support

schemes)

Trust from

banks and

investors

Decreasing

RES LCOE*,

increasing

competition

Demand from

large

consumers for

long-term

(green) PPAs

Expectation of

sufficient

power market

revenues to

cover LCOE

*LCOE = Levelized cost of electricity generation Source: enervis energy advisors (Berlin)

Financial / Synthetic PPAs create Spot Price Risk

Exposure

© EEX AG, 2020 5

Future-based agreement

from 10 up to 20+ years

Production is sold at the

Spot market, offtaker

procures via wholesale

market, no physical delivery

via balancing accounts

Different options for

structuring such as CfDs,

Options, Index-based

In combination with GoOs

to qualify as “green power”

as no direct access to

renewable power from a

certain generator

Due to Spot price risk exposure, a long-term hedge can be made on the Futures

market to offset risk, ideally to the same tenor of the PPA

Market<PPA

Market>PPA

Offtaker Generator

Financial PPAs as a first guarantee of revenues for the Generator and long-term price

certainty for the Offtaker; but physical flows are executed on the Spot market

GoOs

Financial /

Synthetic

PPA

Source: enervis energy advisors (Berlin)

Synthetic PPAs and Merchant Renewables in the

Energy Value Chain

© EEX AG, 2020 6

Producer

Corporate PPA

Remaining Consumption

Merchant PPA

Large Customer

Wholesale market provides valuation benchmark for revenues (producer) and cost

(off taker) that are reflected in a PPA

Value of the “greenness” is mirrored by value of Guarantees of Origin (GoO)

Structuring

(Base Profile)

ConsumerWholesale Power Market

Risk

Hedging

Sales/

Trading

BalancingIntra-

dayDay-

AheadFutures

GoOs


EEX Power Derivatives are listed in 20 EU market

areas and benefit from a wide network of traders

© EEX AG, 2020 7

Power Futures

Belgian Future Bulgarian Futures

(PXE)

Czech Future

Dutch Future

EEX GB Power Future

French Future

German Intraday Cap/Floor Future

Greek Base Future

Hungarian Future (PXE)

Italian Future

Nordic-Future

Phelix-AT Future

Phelix-DE Future

Phelix-DE/AT Future

Polish Future

Romanian Future (PXE)

Serbian Future

Slovakian Future (PXE)

Slovenian (PXE)

Spanish-Future

Swiss-Future

Power Options

Phelix-DE Options

Phelix-DE/AT Options

French Base Options

Italian Base Options

Spanish Base Options

EEX connects

287 trading

participants

from 30

countries

8

EEX Power Derivatives Curves

© EEX AG, 2020

Base Peak

Day WkEnd Week Month Quarter Season Year Day WkEnd Week Month Quarter Season Year

DE/AT

(Phelix)14 2 5 10 11 6 14 2 5 10 11 6

DE

(Phelix)14 2 5 10 11 6 14 2 5 10 11 6

AT

(Phelix)10 11 6 10 11 6

FR 14 2 5 7 7 6 14 2 5 7 7 6

IT 14 2 5 7 7 6 14 2 5 7 7 6

ES 14 2 5 7 7 6

NL 14 2 5 7 7 6 14 2 5 7 7 6

BE 7 7 6

CH 14 2 5 7 7 6

Nordic 5 7 7 6

UK 14 2 5 4 4 4 2 5 4 4 4 2

GR (TR only)

7 7 6

CZ 14 2 5 7 7 6 14 2 5 7 7 6

PL 7 7 6 7 7 6

SK 7 7 6 7 7 6

HU 14 2 5 7 7 6 14 2 5 7 7 6

RO 5 7 7 6 5 7 7 6

SI 5 7 7 6 5 7 7 6

RS 5 7 7 6 5 7 7 6

BG 5 7 7 6

It is already possible to hedge up to 6 years in advance in most

EEX Power Derivatives Markets.

How are EEX Members active in PPAs?

EEX Members buy Power

via Long-Term PPAs

and build RE assets

EEX Members provide

balancing services on Spot

& hedge via Futures

RE Developers sell Power via

Long-Term PPAs

EEX Members sell Power

via LT Corporate PPAs

Banks provide financing

once PPA is in place

€

€

€€

€

© EEX AG, 2020 9

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Pri

ce (

EUR

)

MW

MW Price

Renewable Energy financing extends the hedging

profile of EEX Members to the long-term

10

Old hedging horizon to Cal+3

New hedging horizon to Cal+10

EEX Members are now seeking to hedge longer term in order to help secure

financing from Banks and/or manage Merchant Risk from RE assets

EEX is will list further calendar expiries to support long-term hedging of

Renewable Energy assets

10-Year PPA Fixed Price and Volume Profile

Current EEX Futures to Cal+6

© EEX AG, 2020

Renewable Energy and PPA Risks: Price Risk is the

most important

© EEX AG, 2020 11

Futu

rem

ark

et/

price

exp

ecta

tion

Pro

file

losses /

shape

risk

Mark

etvalu

e

ofgenera

tion

Tra

din

gand

bala

ncin

g

Uncert

ain

ty in

weath

er

year

Adju

ste

dvalu

e

ofgenera

tion

Ris

k h

edg

ing

PP

Apri

ce

("fa

ir v

alu

e")

GoO

reve

nue

Price risk

(vs. Spot)

Shape risk

Credit risk

Weather

risk

Volume risk

Short-term

balancing risk

GoO value


How do EEX Power Derivatives help to mitigate

Renewable Energy Price Risk?

12

Since 29th May 2018, 28 long-term hedges of calendar contracts up to 2024

have been registered OTC in Spanish Power, with a total volume of 14.9 TWh.

© EEX AG, 2020

Market participants who enter into long-term PPAs can register a strip of cash-

settled calendar futures out to Cal+6 for clearing with EEX.

This means that sellers can lock in a secure cash flow for up to 6 years,

for the sale of electricity in the respective market area

Buyers lock in a guaranteed price of purchase for up to 6 years, providing

certainty on their future electricity price and protecting against upswings

Therefore the purchase or sale of electricity derivatives provides long-term price risk

hedging together with counterparty risk mitigation through the ECC clearing

house.

Managing Renewable Energy Price Risk with Base

Futures requires a Hedging Strategy

© EEX AG, 2020 13

Base Futures are a best-fit product and attract the most liquidity, creating a strong price signal

and opportunities for trading at fair market prices

To use the Base Futures to manage the risk of a wind or solar profile, a Hedging Strategy needs to

be designed to translate the variable generation profile into a constant Base load profile

Different Hedging Strategies can be employed, such as a value-neutral hedge

Market Revenues for Wind and Solar Projects takes

into account Hourly Capture Prices vs. Base

© EEX AG, 2020 14

Hourly: hourly revenue (€) = hourly prices x hourly production

Annual: sum of all hourly revenues, sum of hourly production volume

Average Revenue (annual) = (sum of all hourly revenues/annual production volume) =

specific market value (€/MWh)

Market value factor (vs. Base) = Percent Value (…%) x Base price

1

Annual revenue = Base price x market value factor (…%) x annual production

1 Day-Ahead marketing of Wind production – Status Quo

Project-specific!

RES technology and site


Cannibalization of Onshore Wind capture prices

@ EEX AG, 2020 15

Analysis of technology specific average wholesale capture prices based on historical hourly wholesale

prices per bidding zone and historical hourly production data (2018). Graphs show average capture

prices relative to Base

Revenues of Onshore Wind are under pressure with higher penetration rates, resulting in

specificaverage market revenues slightly - and up to two-digits - below Base

Therefore Market Value Factor for wind is taken at 80%

84,2%87,5%

89,2%89,3%89,8%

91,5%

93,1%92,6%92,0%

95,3%95,1%94,5%94,4%

93,6%93,5%93,2%

97,6%97,3%97,3%97,2%

96,4%96,3%96,3%95,9%95,9%95,8%95,6%95,5%95,5%

97,8%

99,6%99,0%98,9%98,4%97,8%

0% 20% 40% 60% 80% 100% 120%

80%% ( B a s e )

SI

GB

IT_CNOR

IE

NO2

NO4

IT_NORD

CHGRSE1

IT_CSUDLV

EE

AT

FR

NL

NO3

BG

SE2

HU

IT_SARDSE3

FI

BE

SE4

IT_SUDCZ

LT

ES

PT

PLDK2

RO

DK1

IT_SICI

DE

Market

Value

Factor


Example for Hedging Wind Revenues on Futures

using a Value-Neutral Hedge

© EEX AG, 2020 16

2 Basis for marketing wind production in the Futures market: "Value-neutral Hedge"

560,000 € = 50 €/MWh x 80% x 14,000 MWh

Trader

40 €/MWh x 14,000 MWh

The expected value of the production is sold (risk of market value development)

Additional risks must be evaluated and priced in and reduce PPA price

Base Futures Sales volume (Base load of ~ 1.3 MW)

x 11,200 MWh50 €/MWh

Generator

Annual Value = Base price x market value factor (…%) x annual production volume

€


Value-Neutral Hedge for Wind is one way of

Managing Market Risk

© EEX AG, 2020 17

By buying / selling electricity volumes on the futures market, seasonal fluctuations of market

value and supply volume can be offset and trading volumes on the spot market are reduced

Futures market: 50 €/MWh

Expected specific market value: 40 €/MWh

Market value factor (wind profile) 80%

Expected annual production volume: 14.000 MWh

Expected annual revenue:

14.000 MWh x 40 €/MWh = 560,000 €

Corresponding volume of a base product at the

Futures market:

560,000 € / 50 €/MWh = 11.200 MWh

(corresponds to 80% of 14.000 MWh)

11.200 MWh corresponds to ~ 1.3 MW base load

1,40

1,20

1,00

0,80

0,60

0,40

0,20

0,00

Jan

21

Feb

21

Mrz

21

Apr

21

Mai21

Jun

21

Jul 21

Aug

21

Sep

21

Okt21

Nov

21

Dez

21

MW

60

50

40

30

20

10

0

Jan

21

Feb

21

Mrz

21

Apr

21

Mai21

Jun

21

Jul 21

Aug

21

Sep

21

Okt21

Nov

21

Dez

21

€/M

Wh

Average MVFutures

Sold volumeSource: enervis energy advisors (Berlin)

Cannibalization of PV capture prices

© EEX AG, 2020 18

97,4%

97,4%

100,6%

100,2%

100,1%

99,9%

98,9%

98,8%

98,6%

98,3%

98,2%

102,0%

104,8%

104,8%

103,7%

103,5%

103,4%

106,2%

105,1%

109,2%

107,4%

115,2%

117,5%

0% 20% 40% 60% 80%

91,2%

100% 120%140%

PL

LT

DK2

BG

SK

DK1

RO

SI

PT

ES

NL

FR

IT_NORD

EE

CZ

IT_CNOR

BE

AT

DE

GB

GR

IT_CSUD

IT_SARD

CH

IT_SUD

IT_SICI

%(Base)95,4% 95%94,7%

PV generally secured revenues around or well above base prices. Varying capture rates reflect

different penetration rates, resulting in a range from discounts in southern Italy up to a substantial

premium in Poland.

2018

Analysis of technology specific average wholesale capture prices based on historical hourly

wholesale prices per bidding zone and historical hourly production data (2018). Graphs show

average capture prices relative to base price

Market

Value

Factor


475,000 € = 50 €/MWh x 95% x 10,000 MWh

Example for Hedging PV Revenues on Futures

using a Value-Neutral Hedge

© EEX AG, 2020 19

2 Basis for marketing PV production in the Futures market: “Value-neutral Hedge”

Base Futures

47.5 €/MWh x 10,000 MWh

50 €/MWh x 9,500 MWh

Sales volume (base load of ~ 1.1 MW)

The expected value of the production is sold (risk of market value development)

Additional risks must be evaluated and priced in and reduce PPA price

Annual value = base price x market value factor (…%) x annual production volume

Trader

€

Generator


Motivation for Long-term Hedging from the

perspective of the Offtaker: Price Movements

© EEX AG, 2020 20

Without a Hedge:

Decreasing procurement cost

With a Hedge:

Limited cost reduction in case

of decreasing power prices

Generator OfftakerPrice

Without a Hedge:

Increasing procurement cost

With a Hedge:

Costs are partly fixed

Remaining procurement

becomes more expensive


Example 1: 23rd Long-Term hedge on Spanish

Power cleared on 10.01.19

© EEX AG, 2020 21

A 2 MW long-term hedge was cleared in Spanish Power on 10 January 2019, with an

initial margin requirement of 167,877 EUR

The execution price of each trade was 52.54 EUR

The Initial Margin percentage of the notional value of the trade was 3.71%

Trade

DateProduct

Expiry

Year

Expiry

MonthTrade Price

Initial

Margin per

Contract

Lots

(MW)

Initial Margin

(in EUR)

Trade Volume

(in MWh)Notional Value

10/01/2019

Spanish Power Base Month 2019 2 52.54 € 2,903 € 2 5,806 € 1,344 70,614 €

Spanish Power Base Month 2019 3 52.54 € 2,608 € 2 5,216 € 1,488 78,180 €

Spanish Power Base Quarter 2019 4 52.54 € 6,880 € 2 13,759 € 4,368 229,495 €



Spanish Power Base Year 2020 12 52.54 € 15,196 € 2 30,393 € 17,568 923,023 €




167,877 € 86,160 4,526,846 €

Initial Margin in % of Notional Value 3.71%

Example 2: 26th Long-Term Hedge on Spanish

Power cleared on 06.11.19

22

A 2 MW long-term hedge was cleared in Spanish Power on 6 November 2019, with an



Trade

DateProduct

Expiry

Year

Expiry

MonthTrade Price

Initial

Margin per

Contract

Lots

(MW)

Initial Margin

(in EUR)

Trade Volume


06/11/2019

Spanish Power Base Year 2020 12 52.00 € 12,648 € 7 88,536 € 61,488 3,197,376 €






345,768 € 289,392 € 14,091,660 €


© EEX AG, 2020

EEX Spanish Power Derivatives

Long-term Hedges

© EEX AG, 2020 23

Trade Date Product Trade Price LotsTrade Volume

in MWh

Notional Value

in €

Initial Margin

in €

Initial Margin

in % of

Notional Value

1 29/05/18 Q3 up to Cal24 € 48.75 20 1,139,760 € 55,563,300 € 1,876,198 3.38%

2 18/06/18 Cal20 up to Cal24 € 45.50 20 876,960 € 39,901,680 € 1,831,118 4.59%

3 28/06/18 Cal19 up to Cal24 € 47.10 10 526,080 € 24,778,368 € 1,079,420 4.36%

4 05/07/18 Aug18 up to Cal24 € 48.90 20 1,125,720 € 55,047,708 € 2,594,360 4.71%

5 12/07/18 Aug18 up to Cal24 € 49.85 50 2,814,300 € 140,292,855 € 6,543,286 4.66%

6 18/07/18 Cal20 up to Cal24 € 46.40 20 876,960 € 40,690,944 € 2,036,400 5.00%

7 19/07/18 Cal20 up to Cal24 € 46.60 5 505,165 € 10,216,584 € 505,165 4.94%

8 19/07/18 Cal20 up to Cal24 € 46.60 5 505,165 € 10,216,584 € 505,165 4.94%

9 31/07/18 Cal20 up to Cal24 € 46.70 20 876,960 € 40,954,032 € 1,840,080 4.49%

10 10/09/18 Cal20 up to Cal24 € 49.60 2 87,696 € 4,349,722 € 217,154 4.99%

11 13/09/18 Q3 up to Cal24 € 53.35 50 & 25 1,424,700 € 76,007,745 € 4,529,442 5.96%

12 16/10/18 Cal19 up to Cal24 € 45.91 12 631,296 € 28,982,799 € 1,508,724 5.21%

13 22/10/18 Cal21 up to Cal24 € 47.70 7 245,616 € 11,715,883 € 630,945 5.39%

14 22/10/18 Cal20 up to Cal24 € 48.65 7 306,936 € 14,932,436 € 732,396 4.90%

15 23/10/18 Cal19 up to Cal24 € 51.65 5 263,040 € 13,586,016 € 606,360 4.46%

16 16/11/18 Cal20 up to Cal24 € 48.50 4 175,392 € 8,506,512 € 394,667 4.64%

17 07/12/18 Cal19 up to Cal24 € 51.35 5 263,040 € 13,507,104 € 561,204 4.15%

18 12/12/18 Cal19 up to Cal24 Variable 6 315,648 € 16,367,134 € 672,391 4.11%

19 12/12/18 Cal19 up to Cal24 €51.85 5 263,040 € 13,638,624 € 560,326 4.11%

20 20/12/18 Cal19 up to Cal24 €52.05 1 52,608 € 2,738,246 € 112,679 4.11%

21 27/12/18 Jan19 up to Cal24 Variable 10 526,080 € 24,738,852 € 1,233,678 4.99%

22 27/12/18 Jan19 up to Cal24 € 51.25 10 526,080 € 26,961,600 € 1,233,678 4.58%

23 10/01/19 Feb19 up to Cal23 € 52.54 2 86.160 € 4,526,846 € 167.877 3.71%

24 06/02/19 Cal20 up to Cal24 € 49.90 1 43,848 € 2,188,015 € 76,482 3.50%

25 02/08/19 Cal 20 up to Cal24 € 51.00 3 131,544 € 6,708,744 € 159,708 2.38%

26 06/11/19 Cal 20 up to Cal25 Variable 5 263,040 € 12,731,160 € 311,275 2.45%

27 02/12/19 Cal 20 up to Cal24 € 47.75 10 438,240 € 20,925,960 € 482,360 2.31%

28 04/12/19 Cal 20 up to Cal24 Variable 5 219,120 € 10,408,476 € 146,165 2.26%

Total Trade Volume in MWh 14,982,264

The 28 deals have contributed to EEX achieving

record volumes and market share in Spanish Power

24© EEX AG, 2020

First ever Long-Term Hedge in Polish Power

cleared on 18 December 2019

25

A 2 MW long-term hedge was cleared in Spanish Power on 6 November 2019, with an



Trade

DateProduct

Expiry

Year

Expiry

MonthTrade Price

Initial

Margin per

Contract

Lots

(MW)

Initial Margin

(in EUR)

Trade Volume


18/12/2019

Polish Power Base Year 2022 12 52.19 € 12,264 € 5 61,320 € 43,800 2,285,922 €




933,294 € 175,320 € 9,149,951 €


© EEX AG, 2020

Long-Term Hedging in Polish Power demonstrates

trust in EEX and ECC as its Clearing House

© EEX AG, 2020 26

EEX Polish Power Volume and Open Interest

18.12.19

Daily Settlement in Illiquid Contracts and Legacy

Trades

27

In illiquid long-dated contracts where there have been no order book trades,

EEX uses two methods to determine settlement prices

Fair Value Providers: ask chief traders from select members what their fair

values are for settlement

Market Structure: take the daily price dynamic of the last liquid expiry and

apply it to the illiquid expiries (ex. Cal21 increases by 30 €ct, then Cal22 –

Cal24 will increase by 30 €ct)

Legacy Trades are possible at EEX, in order to “roll over” a long-term hedge

at the previously traded price, once a new Cal is open

Prices which are out of range must be approved by the respective General

Clearing Member

© EEX AG, 2020

Merchant Renewables are the Next Phase in the

Energy Transition

28

PPAs are one enabler of new Renewable Energy

investments….

Major energy players are already starting to hedge their

long-term price risk with standard EEX products.

…but the market is in need of more standardisation and

better risk management products in order to grow and

meet the EU’s ambitious targets.

EEX will ensure we remain part of our Members’ long-term

hedging strategy, and explore opportunities to build new

products for risk management of Renewable Energy.

© EEX AG, 2019

!

Thank you!

Viviana Ciancibello

Senior Business Developer

European Power Derivatives

[email protected]

mailto:[email protected]

Documents

Renewable Energy and PPAs: Hedging with EEX Power Futures...The expected value of the production is sold (risk of market value development) Additional risks must be evaluated and priced