Välj din region och ditt språk



How to increase portfolio profits and reducing market and operational risk in a volatile power market

By Hugo Stappers
01-02-2023 | 7 min read

With the advancement of renewable energy into the energy mix, power production, planning and trading becomes more challenging and volatile. Digital transformation is the driver that can help address these challenges and achieve higher value from optimal usage of assets for improved performance. A reliable portfolio optimization tool delivers the foundation as decision support tool, starting from planning to trading to scheduling and balancing. However, to realize the goal of maximizing revenue or minimizing cost, the optimization tool should be tightly integrated with an Energy Trading and Risk Management (ETRM) system: How to increase portfolio profits and reducing market and operational risk in a volatile power market?

The requirements for portfolio optimization in the energy market are becoming more and more complex with increased volatility due to a higher frequency of extreme events. The price of electricity is, in large part, determined by the prices of natural gas. In addition, decarbonization efforts are driving more renewable energy generation and therefore volatility in electricity prices will surge. Other challenges in the transition towards electrification includes congested transmission grids, and an evolving wholesale market – balancing a network with different types of supply and demand including dispatchable renewable generators, battery storage, and prosumers. This is also driving more hedging needs.

Operating a multi-commodity / multi-asset portfolio in this environment requires critical insights to make informed operational and trading decisions and constant adjustment in changing conditions. This considers power markets, markets for ancillary services, imbalance energy, emissions, renewable energy, co-generation and more.

In terms of commercial optimization, market participants’ ability to capitalize on performance now depends on effective collection, access, management, and utilization of data from assets, information providers and the various power markets, such as:

  • The Day-Ahead market: involves sellers (typically generators) and buyers agreeing on contracts for the delivery of power the following day.
  • Intraday market: Within the day, the market offers participants an opportunity to modify the injection and withdrawal commitments.
  • Ancillary Services (including Balancing) market: The grid operator buys services to balance demand and supply and confirm the security and quality of electricity supply across the transmission system. Example services include frequency response, reactive power, demand response (up/down), congestion.

Balancing services markets, especially for available capacity, provides a stable source of income and alternative to trading in the DAM for generators. Balancing services markets will continue to be important as more intermittent renewable generation come online and coal power plants are retired.

Most wholesale energy market participants are aware of their risk exposure, and understand it takes a sophisticated ETRM system to manage these risks to maximize profits. A more holistic approach to optimize overall profits is considering the whole portfolio including all relevant market prices, flexible assets with their technical and economical attributes, market constraints such as the transmission grid and capacity shortages and align the strategies of the traders with the overall company goals.

Optimal strategies can be calculated for short or longer time horizons considering market volatilities. Accurate modeling of the whole portfolio would consist of various components including the different type of generation (thermal, hydro, wind), spot markets, storages, network constraints as well as maintenance scheduling, startup, reserve conditions and more.

Optimization starts with the development of a wholesale market bidding strategy for the day-ahead market that incorporates weather, production, demand, and market price forecasting. Optimization continues with the intraday bidding operations that considers the day-ahead market results, updated forecasting information, as well as the latest operation condition of the unit(s).

As a result, it helps address business challenges of:

  • How to operate an entire portfolio at minimum cost through the scheduling of generation portfolio based on economic optimization to maximize profits across multiple electricity market products (i.e. day-ahead, intra-day, balancing market products).
  • How to determine whether to reduce the number of times units are started to reduce maintenance frequency or help make business critical decisions.
  • How to make the most of generation assets by making informed and optimized physical trading decisions while complying with plant, portfolio and system-level constraints.

Hitachi Energy’s Portfolio optimization software facilitates this optimization and allows the exact modeling to provide realistic estimations of possible profits across the portfolio. It uses a Mixed Integer Linear Programming (MILP) modeling algorithm solver, which is a critical concept to provide a truly optimal solution for difficult to model assets such as Combined Cycle Gas Turbines (CCGTs)_ and cascading hydro topologies. Traditional simulation algorithms perform what is called a least-cost dispatch, which attempt to find local optimal solutions to a simplified problem. These methods cannot guarantee the level of optimality, nor can they perform a simultaneous optimization.

The outputs of the portfolio optimization provide the optimal utilization for all assets with the goal of maximizing profit However, given the constant changes, uncertainties and increased market volatility, no optimal market strategy can be assumed without risk assessment.  For that reason, these outputs should be enhanced with capabilities for ‘what-if’ analysis, stress testing, risk management and hedging. This can be realized by tightly integrating optimization software with an ETRM, streamlining workflows that provide the trader with all required information on planning, allowing review on potential deal opportunities, and the risk associated with decisions.

This can be further expanded by creating tight connections between optimization and risk tools using statistical scenarios for volatile generation / demands and/or prices. Monte Carlo simulations provide a probability distribution of the P&L results to evaluate the financial risk exposure based on an optimized solution for each scenario.

This larger end-to-end footprint – “ETRM +” - brings a substantial reduction of operational risk due to a single point of entry for price and trades, automation of the processes through all the operational steps from deal entry to optimization risk valuation, to scheduling/dispatch and settlement. This as a result will improve system adoption and user acceptance.

The widespread adoption of renewable energy resources into the worldwide electric power grid has drastically increased the complexity and risks involved in the daily operations of market participants. Renewables are now competitive to natural gas and coal generation. There is also the opportunity of the growing volume of ancillary service markets required by systems with a larger share of variable generation. Renewable generators are shifting from a focus on production capacity to concentrating on getting the most margin per megawatt-hour. To achieve this, additional capabilities in commercial optimization are required

The Portfolio Optimization solution typically achieves around 0.5% saving on annual fuel volumes (for a $500M annual fuel budget, that’s a savings of $2.5M). When combined with ETRM, the Return On Investment may be within 1 year.

In the future, the ability for digital to move the integration of commercial optimization processes to the next level is a key factor that will distinguish the industry’s successful players. The power of digitalizing commercial optimization through the implementation of a tightly integrated Portfolio Optimization and next-generation ETRM solution lies not only in improving productivity and efficiency. Such solution allows companies to monetize their data by leveraging the integration, automation, and information at their fingertips to extract value and drive growth. This is the only way they can continue to compete and succeed in a fast-paced and changing market.

Learn more about energy trading and risk management (ETRM) from Hitachi Energy.

businesswoman looking at futuristic interface screen.

Learn more about our award-winning C/ETRM software

Hugo Stappers
Global Sales Leader

Hugo Stappers is a global sales leader, in Energy Portfolio Management at Hitachi Energy. He has more than 30 years of experience in sales management, business development, and sales support roles in technology companies. Hugo helps energy industry decision makers understand the options for energy market intelligence services and commercial energy operations software that can enable organizations to maximize operational value and mitigate risk. You can connect with him at LinkedIn.

See more ETRM blogs