NORDIC POWER
Figure 1: SRMC Coal & Hydrological Balance Nordic Power Markets, 2007-2010
seen in Figure 1. Only during two periods since the start of 2008 has the system price deviated over a longer period of time from the SRMC of coal. Those were during the wet first and second quarters of 2008 and during the dry and cold first and second quarters of 2010. Looking at derivatives it is clear that
when the hydro balance is relatively stable and the marginal cost of coal is trending, the front quarter contract, the forward contract for the coming quarter, will be mostly influenced by the coal market (Figure 2). However, when the hydro balance really starts moving, the traders will follow like a flock of sheep. Last winter cold and dry weather led to
Source: Point Carbon Thomson Reuters
all about hydro. But during the 2007- 2008 boom, the system price was lifted mainly by the rise in the coal price. Notice that despite a worsening of the hydro balance during the autumn and winter of 2008 and 2009, the Nord Pool system price fell, and it did so in close correlation to the SRMC of coal. The same trend is apparent when looking at derivatives. However, the marginal cost of coal will often be an important indication of future water values as hydro producers will always try to keep the value of their water around the SRMC of coal. Only in very dry or wet situations will they deviate over time. This is also
a rapid worsening of the hydro balance, pushing the front quarter up before slightly milder and wetter weather in
March eased the situation somewhat.
Evaluating the Risks So, is there any way of evaluating the future risks related to the
uncertainty of both future inflow and changes in the marginal cost of coal? The Stochastic Dual Dynamic Programming, (SDDP) model is a very powerful tool for evaluating risk, especially in a hydro-dominated power system like the Nordic system. SDDP is a stochastic hydrothermal dispatch model used in medium and long-term operation studies. The model minimises the cost of operating a power system with both hydro and thermal capacity taking into account the uncertainty of inflow to the hydro reservoirs. The SDDP model was developed by Professor Mario Pereira at
Figure 2: SRMC Coal & Hydrological Balance
PSR, formerly known as Power System Research, in Brazil. The SDDP Nordic model has a weekly resolution and a two year horizon. To capture the stochasticity of inflow, the model uses 75 years of inflow scenarios for 15 hydrological regions in the Nordic power market. Based on these historic data, 150 inflow scenarios are generated. In addition, to capture the current state of the hydrological system, Point Carbon’s in-house hydrological models are used to generate inflow scenarios for the first 35 weeks. In order to model the exchange between the Dutch and German power markets, the respective forward curves for these two markets are used.
Base-Case Scenario: Q1-2011 The price scenario for Q1-11 presented
Source: Point Carbon Thomson Reuters 54 December 2010
below is from Point Carbon’s weekly price prognosis from week beginning October 25, 2010. In order to illustrate the key point, the focus is only on the front quarter contract (Q1-2011). As mentioned above, 150 inflow scenarios
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