GNE - Genesis Energy

[PSE]

I am with Jantar over snoopy in terms of understanding the electricity market.
Snoopy you are welcome to take any approach you like and I wish you well but won't bother arguing with you.

Our approaches may be different and yet still both correct.

[Snoopy]

For this discussion I shall ignore line losses, but in practice that does add about 4% to the amount of generation required.

lets imagine that GNE have a customer demand of 700 MW (350 MWh) in a single half hour. Under the NZEM system they must buy those 700 MW from the market at what ever the wholesale price is for that half hour. Normally, a generator will endeavor to generate that 700 MW by offering that quantity into the market at SRMC or less, so they are neutral on their portfolio, and offer excess generation into the market at higher prices. If the amount of generation dispatched exactly matches their customer demand then they are neutral as far as wholesale price is concerned and their revenue will be constant. E.g Generate 700 MW at SRMC of $70 ($49,000 per hour), and buy 700 MW at $70 ($49,000) is the same net result as generating 700 MW at $100 and buying 700 MW at $100. The amount being charged to the customers is fixed so they are indifferent to wholesale prices.

Take a situation where the wholesale price is considerably less than their SRMC, say $40, so that that they are only being dispatched 400 MW. Their wholesale revenue is now 400 MW @ $40 - 700 MW @ $40, or -$12,000. But they are still selling 700 MW to their retail customers at $70 so earning an extra $37,000 ($49,000 - $12,000).

GNE's trader looks at the offer stack and sees that if another 50 MW is offered at a low price then the wholesale price could drop to $30. That generation will be gas fired and will cost him $70 per MW to generate, so will increase his costs by $1500 per hour. BUT:

GNE are buying 700 at $30 ($21,000), and are now being dispatched 450 MW of generation ($13,500), so a wholesale loss of $7,500 and an extra $1,500 in gas, so a total loss of only $9,000. They are still selling to their retail customers at $70 so their net income is now $40,000. Generating that last 50MW at a loss has actually made an additional profit of $3,000.

It is these situations where we traders earn our salary.

Just clarifying the highlighted bits Jantar

"so that that they are only being dispatched 400 MW. Their wholesale revenue is now 400 MW @ $40 - 700 MW @ $40, or -$12,000."

I think you mean

"Genesis are only generating (dispatching) 400 MW. Their wholesale revenue is now 400 MW @ $40 - 700 MW @ $40, or -$12,000."

'Being dispatched' would imply they are getting 400MW energy from elsewhere in the grid, which doesn't make sense in context?

SNOOPY

[Jantar]

Just clarifying the highlighted bits Jantar

"so that that they are only being dispatched 400 MW. Their wholesale revenue is now 400 MW @ $40 - 700 MW @ $40, or -$12,000."

I think you mean

"Genesis are only generating (dispatching) 400 MW. Their wholesale revenue is now 400 MW @ $40 - 700 MW @ $40, or -$12,000."

'Being dispatched' would imply they are getting 400MW energy from elsewhere in the grid, which doesn't make sense in context?

SNOOPY

Transpower dispatches the load to the generators according to results of their RTD model. The generators then set their plant to generate the quantity dispatched.

Incidentally, while I just chose those numbers as examples, GNE are currently generating 689 MW.
CEN are at 1039 MW
MRP are at 882 MW
MEL are at 1845 MW
TPW are at 200 MW
NWF are at 22 MW

[Snoopy]

My previous post didn't answer your question

For this discussion I shall ignore line losses, but in practice that does add about 4% to the amount of generation required.

lets imagine that Genesis Energy have a customer demand of 700 MW (350 MWh) in a single half hour. Under the New Zealand Electricity Market system they must buy those 700 MW from the market at what ever the wholesale price is for that half hour. Normally, a generator will endeavor to generate that 700 MW by offering that quantity into the market at Short Run Marginal Cost or less, so they are neutral on their portfolio, and offer excess generation into the market at higher prices. If the amount of generation that Transpower asks them to dispatch exactly matches their customer demand then they are neutral as far as wholesale price is concerned and their revenue will be constant. E.g Generate 700 MW at Short Run Marginal Cost of $70 ($49,000 per hour), and buy from the Transpower controlled market 700 MW at $70 ($49,000) is the same net result as generating 700 MW at $100 and buying from the Transpower controlled market 700 MW at $100. The amount being charged to the retail customers is fixed so Genesis are indifferent to wholesale prices.

Take a situation where the wholesale price is considerably less than their Short Run Marginal Cost, say $40, so that that they are only being told to dispatch by Transpower 400 MW. Genesis's wholesale revenue is now 400 MW @ $40 - 700 MW @ $40, or -$12,000. But they are still selling 700 MW to their retail customers at $70 so earning an extra $37,000 ($49,000 - $12,000).

Genesis Energy's trader looks at the offer stack and sees that if another 50 MW is offered at a low price then the wholesale price could drop to $30. That generation will be gas fired and will cost him $70 per MW to generate, so will increase his costs by $1500 per hour. BUT:

Genesis Energy are buying 700 at $30 ($21,000), and are now being told by Transpower to dispatch 450 MW of generation ($13,500), so a wholesale loss of $7,500 and an extra $1,500 in gas, so a total loss of only $9,000. They are still selling to their retail customers at $70 so their net income is now $40,000. Generating that last 50MW at a loss has actually made an additional profit of $3,000.

It is these situations where we traders earn our salary.

I have altered Jantar's post to remove as much electricity market jargon (difficult to follow if you are not in the industry) as I can. Alterations are in bold. I hope I got it right!

I think what Jantar is saying is that

1/ provided Genesis is buying a lot more power from the wholesale market than they are feeding into it THEN
2/ They can offer a trickle of gas generated power at such a low price the Transpower controlled market will buy it. THEN
3/ The hydro generators, awash with water will have to match that lower price because if they don't their alternative is to spill their excess hydro water and earn nothing from it. THEN
4/ Genesis can profit from this by making up the power shortfall they need to service their retail customers by buying from other gentailers at a much lower (hydro) price than if they had not intervened.

It has taken a while, but I think that is the gist of what you are saying Jantar?

SNOOPY

[Beagle]

I have altered Jantar's post to remove as much electricity market jargon (difficult to follow if you are not in the industry) as I can. Alterations are in bold. I hope I got it right!

I think what Jantar is saying is that

1/ provided Genesis is buying a lot more power from the wholesale market than they are feeding into it THEN
2/ They can offer a trickle of gas generated power at such a low price the Transpower controlled market will buy it. THEN
3/ The hydro generators, awash with water will have to match that lower price because if they don't their alternative is to spill their excess hydro water and earn nothing from it. THEN
4/ Genesis can profit from this by making up the power shortfall they need to service their retail customers by buying from other gentailers at a much lower (hydro) price than if they had not intervened.

It has taken a while, but I think that is the gist of what you are saying Jantar?

SNOOPY

Yes but are GNE any better off using this convoluted process rather than simply coining it when wholesale prices are much higher than $70 mwh and what impact on 2016 profits if wholesale prices stay consistently very low along with oil ?

[Xerof]

Fascinating discussion thanks guys. Jantar, is there anywhere online where Joe Public can monitor the wholesale price in realtime, or does it trade on a closed platform?

[MAC]

Fascinating discussion thanks guys. Jantar, is there anywhere online where Joe Public can monitor the wholesale price in realtime, or does it trade on a closed platform?

http://www.electricityinfo.co.nz/com...in_prices.main

http://www.electricityinfo.co.nz/comitFta/ftaPage.main

[Xerof]

http://www.electricityinfo.co.nz/com...in_prices.main

http://www.electricityinfo.co.nz/comitFta/ftaPage.main

Thanks MAC

[bull....]

trying my luck for an oversold bounce

[Snoopy]

Yes but are GNE any better off using this convoluted process rather than simply coining it when wholesale prices are much higher than $70 mwh

Genesis will continue to 'coin it' when wholesale prices are high, by just generating as much power from gas as they can. The method Jantar was explaining is what the likes of Genesis could do when wholesale power prices are low. The different strategies are complementary because they would be used in different circumstances.

and what impact on 2016 profits if wholesale prices stay consistently very low along with oil ?

Genesis had a recent profit downgrade because wholesale power prices are lower than expected. With wholesale power prices low, then Genesis could use the strategy as described by Jantar. But you can take it from the profit downgrade that this alternative strategy is not as good for Genesis as when wholesale power prices were higher.

Genesis has their own policy on hedging for their share of oil from Kupe. From p64 AR2014

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Light Crude Oil Sales

The group manages price risk with respect to oil sales by entering into oil options which provide a minimum price for future oil sales or oil price swap contracts that apply a fixed price for future oil sales. The groups treasury policy sets minimum and maximum control limits ranging from between 50% and 75% of the first twelve months to between 25% and 50% for the months 13 to 24. The aggregate notional value of the outstanding oil swaps and options at balance date was USD50.3m (FY2013 USD51.4m).

The sensitivity analysis is based on the assumption that the relevant market prices (oil price path) had increased/decreased by 10% with all other variables held constant.

----

The above text is accompanied by the following sensitivity table

Oil Swaps and Options	FY2014	FY2013
Post tax Impact on Profit or Loss +10%	$(1.7)m	$(0.8)m
Post tax Impact on Profit or Loss -10%	$1.7m	$0.8m

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At first glance that looks odd because an increase in oil prices means a decrease in profits. But options are a profit smoothing strategy. So it does make sense that if oil prices strengthen, then some of that increased profit is given away.

I guess the answer to your question Roger is take the increase in oil revenue in dollar terms then adjust that using the above hedge sensitivity table.

SNOOPY