Contact Energy - CEN Chart

[Snoopy]

Well, yes and no.

Lets say that CEN are dispatched 1000 MW, and the spot price is $80, then for that 1/2 hour period they would receive from the market $40,000, (1000 x $80 x 0.5). If at the same time their retail side was buying 900 MW at that same price of $80, they would pay to the market $36,000, (900 x $80 x 0.5). The spot exposure being the remainder of 100 MW for which they would recieve $4000.

You could say that they have generated all that they need and sold an additional 100 MW into the market at the spot price. But that does not truely reflect the cost of generation, so they would have an internal price transfer, being the price at which the generation side charges the retail side. For the sake of this example lets say that transfer price is $76. In this case the generation side would re-imburse the retail side the sum of $1,800 (900 MW x ($80 - $76) x 0.5).

It is also highly like that they would have a number of CFDs with other companies, which may or may not net out in their favour.

Leaving out the CFDs, which I acknowledge but which are not relevant to the point I would like to make, I am having trouble digesting the rest of your explanation Jantar.

The true incremental 'cost of generation' for a hydro station is surely close to zero? Granted this ignores the depreciated capital costs which arose from the depreciating capital value of the dam and associated electrical ancillaries. (Although I do note that, at least in the in the case of Mercury Energy, these costs are usually clawed back in subsequent years via generation asset revaluations anyway). But: -

With 'spot market power' costs determined by the lowest cost incremental offer to generate power by switching on some more generating capacity, THEN the spot price, particularly when a thermal power station has just been brought on line, does not affect the cost of running a hydro dam, does it? Our power pricing system pays all of those who are supplying power in any 'half hour period' the same price, equal to that of the highest cost provider of the instant, that is true. But I see that as an 'artificial market construct' in terms of costs.

If Contact chooses to see the electricity they generate from hydro as 'costing' the market price, then their retail arm may indeed have to reimburse the generation arm for 'market costs' as your example outlines. But surely an equally valid way of viewing things would be to take all of the internal transactions, where Contact generator sells to Contact retailer, 'off market' and let the pricing system handle the transactions between different generators and retailers only?

With a purely 'internal transaction', I can't see the point in valuing it at 'market levels'. Because in reality the perfect match of 'Contact Energy Buyers' and 'Contact Energy Sellers' means that you could price the transaction at whatever price you like. The price you chose could make it look like one arm of Contact was doing really well while the other arm was doing equally and oppositely badly. But since buyer and seller are both 'Contact Energy Parent', whether 'Contact Generator' takes all the profits or whether those profits are shuffled across to 'Contact Retailer' makes no difference to 'Contact Energy' at 'parent' or 'shareholder' level, does it?

SNOOPY