Originally Posted by
fletty
I have only recently retired from this industry and can confirm that, as evidenced by all of the earlier posts, it is an incredibly complex business model and, within that complex model, large and diverse components of it, are contrived to suit various political and social needs. The discussions in the posts above are like studying the very end of a dog's wagging tail and, by that, trying to understand the dog itself?
At this point it is worth introducing the term 'arbitrage'. Arbitrage can be likened to legalised gambling and this is a constant that runs right through this complex model.
This whole model starts with forecasting and buying forward. To create these forecasts, this industry is one of the largest industrial users of pure mathematicians in the country. Their role is to create models that predict future power consumption in incredible detail, complexity and accuracy. It takes into account temperature, time of day, day of the week, season, socio-economic circumstance etc, and I'll discuss just one of many examples of this. On (say) a 40 degree day, the power consumed in a single hour can vary by a factor of up to 10 fold. If the 40 degree hour is at 2 to 3pm on a Sunday in early Summer after a cooler prior day then the power consumed would be 1 UNIT per customer. IF however the 40 degree hour is on a Wednesday between 5 and 6pm after a series of 40 degree days, then the power consumed across the same socio- economic group would be at least 10 UNITS per customer. A different socio-economic group can apply a further multiplier of up to 4. So, let's say you are a retailer, the weather bureau forecasts a 40 degree day, your mathematicians go to work and forecast a power usage of 32.845 MILLION UNITS ( being somewhere between 1 and 40!) for 2 - 3pm. Your purchasing group then go to the market to buy 32.845 MILLION UNITS of power for that hour which might be in 2 hours time.
Now, as a retailer, you know that the mix of your industrial, residential and commercial customers pay an average of $15 per unit for 2 - 3 pm on a Wednesday so your aim is to buy from the generators at a price of less than $15 per unit because the difference will be your profit.
Now, let's say you are one of the multiple generators that this retailer will approach to buy the power for an hour in 2 hours time. You don't know that the retailer is trying to purchase an entire package at less than an average of $15 per unit. As you can see above, I am using anonymous UNITS but my real World experience is that, in relative terms, generators can, and do, offer power at NIL to $10,000 per UNIT for fixed amounts. So, the retailer WHO MUST BUY 32.845 MILLION UNITS tries to buy across all of these offers to get a total of 32.845 MILLION UNITS at less than $15 per UNIT. Traditionally, base load power stations will offer a low price to encourage retailers to buy enough to enable them to keep running their plant continuously and at an efficient operating level because they can't ramp up or down easily. However, 'peaking plant' CAN turn on and off quickly but costs more to generate so they will offer in the middle range of prices but for a smaller volume. Now, let's look at the generator who sells at $10,000 per UNIT to a retailer who can only sell to their customer at $15 per UNIT. This doesn't appear to make any sense but, if the retailer can't get 32.845 MILLION UNITS from other sources, then they MUST buy enough at $10,000 to top up their quantity or they face crippling penalties both commercially and reputationally because there will be blackouts. Is $10,000 a real World number? YES! There is a hydro generator in Australia who can offer power at that sort of price. If a retailer needs them to generate, they push a button, release the water, generate the required units for the required time and then stop. Later, when the high load period has passed, THE GENERATOR will buy power from another ( say) base load generator at say $12 per UNIT and pump the water back up to a high reservoir to await the next high load period and repeat the process at ( say) $10,000 per UNIT again!
Jetlag is setting in so I'll stop for now and continue later this week if anyone is interested. If not, I'll go back to wood work?
(recently returned) fletty