Market benchmarks for the value of flexibility

31 Oct, 2011

One of the biggest analytical challenges in European energy markets is the valuation, hedging and optimisation of the complex flexibility that is inherent in assets, contracts or portfolios.  Whether it is a power station, transportation capacity, gas swing or storage, it is common for analysis to focus on ‘bottom-up’ detailed modelling that attempts to capture the key dynamics of a problem.  Whilst the logic of this focus is clear, it is equally important to supplement detailed modelling analysis with publicly available market benchmarks for the value of flexibility.

The core principle of any valuation analysis should be to look first to available market price information, particularly with assets that operate in a traded market.  No-one would consider valuing a simple fixed price gas forward contract against a price forecast, when a transparent market forward curve exists.  Whilst the methodology is less obvious, the same principle should apply to the use of market benchmarks for the analysis of gas and power flexibility.  These benchmarks provide a valuable insight into the current market value of flexibility as well as an opportunity to calculate market implied values for key model input parameters that may not be directly observable.  Importantly, market benchmarks can be used both to inform an ‘in-house’ view of value and to provide insight into the view of competitors or counterparties.


Data sources are surprisingly plentiful…

The pace of liberalisation in the European gas and power markets has been slow and the markets are generally considered to be somewhat opaque.  Given this it is somewhat surprising that there is actually quite a wide range of publically available data that can add insight into the value of different types of flexibility.  In most cases, the information comes from published auction results for different flexibility contracts (which in some cases must be provided for regulatory purposes).  Table 1 gives an overview of some of the publicly available data sources that can be used as market benchmarks for the value of flexibility.

Table 1: Publicly available market benchmarks for European gas and power flexibility



French virtual power plant capacity

First run in 2001, EdF auctions off approximately 5.4 GW of virtual power plant capacity. Capacity is auctioned on a range of terms with a set predetermined fixed strike (so essentially a call option).

UK – France power interconnector capacity

The full 2 GW of bidirectional power interconnector capacity between France and UK is made available in a series of rolling auctions. Participants can submit bids for capacity products of several durations.

UK – Netherlands power interconnector capacity

The recently commissioned BritNed interconnector was financed on the basis that is would operate on a purely merchant basis with all capacity auctioned. The first annual auction was undertaken earlier this month (Oct-11).

UK LNG storage

Capacity in the National Grid owned and operated Avonmouth LNG storage facility is made available in annual auctions. This provides a good benchmark for the value of short term gas flexibility in the UK.

Rough gas storage

Centrica Storage runs rolling auctions for Standard Bundled Units (SBUs) of capacity in Rough depleted field storage facility. Secondary services (such as incremental space and interruptible injection/withdrawal capacity) are also available.

Czech gas storage

RWE Gas Storage auctions both firm and interruptible capacity for long-term and short-term storage in its Czech facilities. The results provide a good proxy for the value of German gas storage.

Spanish gas storage

OMEL administers the auction of capacity in the Spanish underground gas storage facilities.

German gas storage

E.ON provides a web based quotation service for bundled units in its German storage facilities. Although the prices are based on E.ON tariffs and not auctions they still provide a useful benchmark.

There are a range of other useful benchmarks (please feel free to highlight additional sources via the comment box below).  The table above highlights some of the publicly available data sources, but active market participants have access to many additional sources that are generally more current and up to date.  These come from participation in auctions where the results are not made public and through access to counterparty or customer quotes and negotiations for structured contracts.

There are a surprisingly high number of market value benchmarks for the different types of flexibility in the European gas and power markets.  These provide a valuable source of data to inform and sense check bottom-up analysis in an environment where pricing of flexibility is becoming increasingly important.  Given the broad range of assets and bespoke contract structures in European markets, the challenge is to use these market benchmarks in an innovative and meaningful way.  We will publish a second article on the effective application of market benchmarks shortly.

Relevant articles:

Robust analysis of energy asset value and risk

Timera Energy analytical principles