The Complexity of Power Markets
Power markets are notoriously complex involving large asymmetries of information between buyers and suppliers. The main reason for this stems from the fundamental laws of physics on which our grids must run, namely that the grid must be balanced at any point in time and that electricity is not inexpensive to store. Power grid operators must organize multiple markets, day ahead, intraday and balancing which along with paper markets for longer time contracts ensure that the lights stay on, most of the time at affordable prices.
Factors Affecting Power Prices in Europe
Consumers are at a real loss in every liberalized market on how this intricate system works, but mostly as we have seen recently they care about prices, fair and affordable prices. 2021 and 2022 have seen record power prices all over the European continent due to Russia restraining gas deliveries to the continent which were replaced by more expensive LNG imports. Power prices are intricately linked to gas prices due to the large use of the fuel in power generation and the flexibility of gas power plants.
A Platform for Fair Prices
We launched our platform in Romania to facilitate the transactions between consumers and suppliers, with the intent to provide both ends of the transaction with an independent view of what a fair price should look like, a price that includes and allocates all costs and risks of such a contract in a fair manner. The main costs a power contract should include are the generation/acquisition costs, profile costs, imbalance costs, hedging costs, margin, and counterparty risk costs. Our algorithms price in all these costs in order to estimate fair prices.
Figure 1: Fair price for a one year contract in Romania as of March 2023
As of March 2023, our platform quotes a fair price for electricity only (no tariffs or VAT included) in Romania for an industrial consumer of more than 1000 MWh per year of a minimum of EUR 156/MWh, a maximum of EUR 212/MWh and an average of EUR 183/MWh. A more detailed overview of how our platform works can be found in the linked video. In a nutshell, an industrial consumer provides us with their hourly consumption and our artificial intelligence algorithms underpinned by fundamental modelling provide us with ranges of fair power prices. In a liquid market, this utility grade information will serve buyers to better navigate contractual decisions. We will thus be able to monetize on the value created, ultimately providing high quality leads to utilities and level the playing field between buyers and suppliers who have all the resources and the incentive to develop the sophisticated analytical capability that our algorithms replicate at a fraction of the costs.
Challenges of a Highly Illiquid Market
The market we deal with is highly illiquid though as suppliers cannot bill the power to end consumers by roughly more than EUR 110/MWh, some EUR 45/MWh lower than the lower band of fair prices due to current cap price in place until 2025. The implication of this regulatory environment is that most suppliers have liquidated large parts of their portfolios, clients being served by designated suppliers of last resort who will have to recoup the money from the state, ultimately.
However, we know that high prices cure high prices and the day when suppliers portfolios will be remade will arrive rather soon than later. In that environment, our platform will be leveraged by large buyers of electricity to obtain fair contracts from suppliers. Meanwhile, we are focusing on helping large buyers of power navigate long term Power Purchase Agreements for renewable energy. We will be able to help developers who are bringing online large renewable energy assets to extract maximum value out of their assets.
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Our platform based on artificial intelligence helps buyers of electricity get fair prices from suppliers. Despite this market being currently highly illiquid in Romania, we believe the future is bright for such a platform in a highly complex market such as electricity anywhere where liberalized markets are the norm.
We are also building an advisory practice to help large buyers of electricity navigate more complex and tailored contracts such as PPAs under the current volatility and a large renewable energy buildout. If you are a large buyer of electricity, please get in touch with us.
Last but not least, if you are a developer of renewable energy projects, we will be able to help you in the very short future to extract maximum value out of the projects you bring to the market. We are here to help, so please get in touch with us.
We are three founders, Andrei Ilaș, with deep experience in renewable energy cost analysis and commercial analysis spanning 10 years internationally, Vlad Iliescu a Microsoft MVP on Artificial Intelligence building all our suite of models and Florin Grosu, a fintech entrepreneur with large commercial experience across industries such as insurance and banking.
Get in touch with us via the form down bellow, and follow us on LinkedIn, where we post #energymarket updates and NRGI.ai platform news.