1. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. PPA Route to Market Imbalance Risk Analysis An Update Oliver Rix 12 th April 2013

2. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Introduction Outline Methodology Historic Imbalance Prices Modelling of Probabilistic Distributions Future Imbalance Cost and Risk (On-Going Analysis) Questions Imbalance Risk Analysis Agenda

3. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Introduction In response to recent evidence that independent generators are finding it increasingly difficult to secure commercially viable power purchase agreements (PPAs), the Department of Energy and Climate Change (DECC) issued an open call for evidence to the industry in April 2012. This analysis supports the qualitative findings from the call for evidence responses and looks to quantify the present and future risk associated with imbalance costs and the materiality of this for generation projects. An empirical data set of historic generation volumes and cash-out prices is used to build probabilistic distributions of the key variables for different asset types to enable simulation of imbalance costs. Appropriate sensitivities can then be applied to assess potential future imbalance cost and risk. An insight into historical imbalance costs A modelled imbalance risk for different generation types based on historic data Future potential imbalance risks and costs for different generation types

4. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Context Market participants buying and selling physical power are responsible for their own balancing on a half-hourly basis. To the extent that a participant’s net position based on generated volumes, customer demand and wholesale purchases and sales is not zero, this is treated as an imbalance and settled against ‘cash-out’ prices. The cash-out price that is applied to the imbalance depends on the direction of the imbalance relative to the overall system imbalance: where the imbalance ‘helps’ at the system level, a market-related price is applied, whereas if the imbalance exacerbates the overall system position, a price is applied reflecting the System Operator cost of balancing (“System Buy Price” or “System Sell Price”). SBP/SSPs can be at a significant and volatile premium/discount to the underlying wholesale price. GB balancing arrangements recap GRAPH – sample time series of MIP/SBP/SSP System long System short Participant long SSPMIP Participant short MIPSBP

5. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Wind asset assessment The actual imbalance accruing to participants will be a function of their portfolio and trading strategy. We are aiming to isolate the element of imbalance that can be attributed to uncertainty in relation to the level of outturn generation from an asset. We have used public domain data for transmission-connected assets (BM Units). Final Physical Notifications (FPNs) represent the information on expected output provided by generators to the System Operator at gate closure, 1 hour ahead of delivery – we use these as our proxy for the forecast information. We compare this to Metered Output, and treat the difference as a ‘forecast imbalance’. We then calculate an imbalance cost by applying the appropriate cash-out price for that half-hour (depending on the relative direction of the forecast imbalance. Historic data set

6. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Definitions We define imbalance risk as the potential for increased costs associated with uncertainty around the expected level of imbalance cost We propose to quantify this using a simulation model to derive a probability distribution and define a metric based on the difference between the mean (expected) and a 95 th percentile worst case Imbalance Risk Imbalance Cost MV = Metered Volume (MWh) FPN = Final Physical Notification (MWh) MIP = Market Index Price (£/MWh) ILLUSTRATIVE

7. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Outline Methodology Calculate the Probabilistic distributions for our characteristic assets’ generation volume and cost variables Found from empirical data sources For each asset type Use our characteristic generation assets and modelled distributions to calculate historic imbalance risk and associated cost Check model sensitivities and calibration for different asset types and sizes Develop changes to distributions representing potential: - Evolution of balancing arrangements - Changing supply/demand fundamentals Modelled historic imbalance volumes and prices Identify trends in asset sizes, types, generators Investigate collated data for trends in imbalance prices and volumes Investigate patterns in FPNs and how to treat these in the modelled distributions Modelled future imbalance volumes and prices for different scenarios and time horizons

8. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Historic Imbalance Prices Wind forecasting insights –Imbalance costs vary between generators and asset sizes –Smaller assets tend to accrue larger imbalance costs Weighted Historic Imbalance Prices and costs - 2012 By GeneratorBy Wind Asset Type and Output –Patterns of FPNs relative to metered output suggests different strategies for managing forecast uncertainty To Add: Other years Possibly remove this graph – difficult to explain! To Add: Show as % of annual revenue

9. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Probabilistic Methodology Develop Characteristic Generation Assets –For different asset types the model defines probabilistic distributions of the asset FPN, NIV and Metered Output (MO) values –These are developed from a sample of empirical data with distributions calculated for ½ hourly periods, for 6 double month groups over a year e.g. Final Physical Notification (FPN), Metered Volume (MV), Net Imbalance Volume (NIV) e.g. Cash out agreements, Changing characteristic generation asset fundamentals For WE, WD, different generation types, optimal trading strategy Simulate for different imbalance price scenarios

10. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Probabilistic Distributions for Different Asset Types - historic Onshore Wind Mean Imbalance Price: £2.14 /MWh Offshore Wind Mean Imbalance Price: £1.4 /MWh ILLUSTRATIVE – TO BE UPDATED WILL STATE ASSUMPTIONS AROUND STRATEGY ETC

11. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Probabilistic Distributions for Different Asset Types - future Onshore Wind Mean Imbalance Price: £2.14 /MWh Offshore Wind Mean Imbalance Price: £1.4 /MWh REPLACE WITH SENSITIVITIES STRESSING DISTIBUTIONS OF IMBALANCE PRICES

12. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Imbalance Risk Analysis Questions?