EGL23400 - Generation receipts: hedging and other risk management adjustments

EGL liabilities are calculated for a generating undertaking as a whole, and where the undertaking is a group, relevant transactions of all group members are to be taken into account when identifying the undertaking’s generation receipts. In this exercise the undertaking must use a fair and reasonable approach to identify the amount of the group’s generation receipts. The starting point for this exercise will generally be take the amount that is receivable by any company in the group from the wholesale purchasers of its power where these are sold to a third party. In some cases, however, it may be appropriate to take the intra-group sale of electricity – for example, where electricity is sold to a licensed energy supplier for onward sale to the retail market.

In other cases, the amount that a group realises from wholesale purchases of its relevant generation output might be the arm’s length amount paid for an intra-group sale of generation output to a downstream electricity supply business, or a separate commodity trading business that is acquiring output on wholesale terms as part of a standalone energy trading function rather than acting as a market interface.

Adjustments to the receipts should be made where for example –

  • The undertaking has entered into financial arrangements to mitigate the impact of wholesale market price volatility. It is the net receipts that is to be taken into account, so where a generator sells forward and then buys part back, as part of managing generating risk, then it is the net receipt that is attributed.
  • Where a third-party power purchase agreement (PPA) is bundled and includes value of ROCs and REGOs, then a fair value of these can be deducted from receipts, as these items are not generation receipts. `
  • The undertaking receives additional amounts under a balancing and settlement code for accepted offers to increase its generation, or
  • it is required to pay any imbalance charges because it has failed to generate the amount that it has contracted to supply to the network. Imbalance can at times be positive so whilst charges will be a deduction against receipts, credits may also arise and are to be added to generation receipts.

The largest electricity generator groups often have sophisticated procedures in place to manage market risk, often across a portfolio of diverse generating assets. These risk management functions may well be centralised in a specific business unit that is responsible for trading the group’s generation on the market. It will be common for power from generating stations in the group to be sold internally at rates that may or may not reflect current wholesale market terms. Under these circumstances the undertaking can be expected to have sufficiently sophisticated accounting and financial control procedures to be able to arrive at an amount representing the price that the group achieves for its wholesale power output taking into account the group’s trading and hedging strategies. However, the methodology applied to arrive at the figure of generation receipts gives a fair and reasonable attribution of their receipts to the attributed generation.

Where a group undertakes trading activity on the wholesale electricity market that is unconnected to activities intended to manage its generation business, the results of such trading activity should not be taken into account in assessing the undertakings generation receipts for the EGL. This will include activity as an off-taker for other generating undertakings.

Examples:

A windfarm operator sells 2000 MWh of its power output through a third-party supplier, under a 12-month PPA whereby they receive the day-ahead wholesale market price for the power. The amount paid by the supplier is the generation receipt.

A windfarm operator sells 2000 MWh of its power output through a third-party off-taker, under a PPA whereby they receive the day-ahead wholesale market price for the power, less a discount of x% in return for which the off-taker will sell the power to suppliers on its own account, and also assume any imbalance risk if the power generated is subject to imbalance charges under the settlement code. The windfarm’s generation receipts will be the net amount received from the off-taker.

Any subsequent profits or losses arising to the off-taker from trading that power it purchases in the example above will not be within scope of the EGL as (or to the extent that) this does not relate to generation that is attributed to the off-taker undertaking.