Power Market Analytics: Evaluation of future prospects for the electric power industry through market analytics

With the introduction of renewable energies and the acceleration of decarbonisation efforts, such as hydrogen and ammonia, carbon capture, utilisation and storage (CCUS) and storage batteries, electric power business opportunities are expanding. On the other hand, further deregulation and the growing complexity of the marketplace have brought about new changes along with decarbonisation, making it increasingly challenging to predict future electricity prices.

At PwC, we support our clients engaged in new business opportunities in the supply-and-demand balancing market and long-term decarbonising power capacity auctions by utilising our in-house models. We offer analyses of Japan’s future electricity prices and power curtailment volumes with renewable energies and evaluate their feasibility.

Support for feasibility evaluation of various electric power projects

Electric power plants are normally expected to operate for decades, and it is critical to assess their cash flow projections at the time of investment. At PwC, we use our in-house models to make long-term predictions of market prices through 2050-2060 to assist our clients’ decision making on power sales mechanisms, estimated revenue streams in various markets and risk analysis.

Future market forecasts based on prediction/optimisation models

Wholesale electricity market prices	Compute hour-by-hour electricity market prices for each region using a fundamental model Compute future unit sales prices for solar and wind power generation (capture price)
Power curtailment rate (supply-and-demand balance and grid constraints)	Compute future power curtailment rates induced by supply-and-demand balance constraints for different regions using a fundamental model Forecast future power curtailment rates using power flow analyses based on more granular datasets that take into account grid congestion due to non-firm interconnection (jointly with a partner company)
Supply-and-demand balancing market prices	Estimate future prices quantitatively from existing markets (tertiary balancing market, balancing auctions)
Optimal operation of storage batteries	Analyse battery operations that maximise income using an optimisation model that takes into account charge/discharge constraints by mixed integer linear programming (MILP)
Non-fossil fuel energy certificate prices	Estimate future trading prices based on the historical data of non-fossil fuel exchange markets, the Green Transformation (GX) League plan and future supply-and-demand projections
Capacity market prices	Analyse from projected future Net Cost of New Entity (CONE) trends

Financial modelling/strategy development based on prediction results

Profitability analysis for grid-integrated storage batteries	Evaluate profitability of battery projects by combining forecasts for wholesale electricity market prices and supply-and-demand balancing market prices with simulation results of optimal battery operation
FIP income analysis and support for long-term decarbonisation power capacity auctions consideration	Estimate income while taking into account such complex mechanisms as FIT and long-term decarbonisation power capacity auctions
Future feasibility studies for various power sources	Estimate overall balance of payments/profitability based on estimates for wholesale electricity prices, power curtailment, non-fossil fuel energy certificates trading and capacity
Fair value assessment	Perform fair value assessments required in accounting treatment for virtual Power Purchase Agreement (PPAs)

Extensive experience

Our professionals at PwC have extensive experience in supporting equity and debt finance and M&A with various power generation and retail power projects, both in Japan and abroad. Furthermore, given our comprehensive knowledge in income prediction and risk analysis, by performing detailed quantitative assessments using models, we can appropriately evaluate the feasibility of any opportunity.

Client	Purpose	Services
Electric power company	Consider investment into a renewable energy project	Forecast wholesale electricity prices and power curtailment rates (supply-and-demand balance constraints)
Electric power company	Consider investment into a wind power project	Forecast wholesale electricity prices and power curtailment rates (supply-and-demand balance and grid constraints) Analyse FIT income
Power generator	Consider investments into renewable energy projects (with storage batteries)	Forecast wholesale electricity market prices and power curtailment rates (supply-and-demand balance constraints) Analyse FIP income analysis/consider storage battery integration impact
Power generator	Structure a corporate PPA	Forecast demand-side power prices, including wholesale electricity market prices, non-fossil fuel energy certificate prices, wheeling charges and renewable energy charges, etc.
Power generator	Consider bidding for an offshore wind power project	Forecast wholesale electricity market prices and power curtailment rates (supply-and-demand balance and grid constraints)
Trading house	Consider investment into a grid-integrated storage battery project	Forecast wholesale electricity market prices, supply-and-demand balancing market prices, optimal operation of storage batteries and capacity market prices
Trading house	Consider electric power business strategies	Forecast wholesale electricity market prices, non-fossil fuel energy certificate market prices and capacity market prices, and evaluate impact of storage battery diffusion when carbon neutrality is achieved in 2050
Financial institution	Develop market entry strategy for non-FIT renewable energies, grid-integrated storage batteries and microgrids	Forecast wholesale electricity market prices, supply-and-demand balancing market prices, storage battery optimisation and capacity market prices Shortlist partner candidates and estimate business feasibility
Financial institution	Consider investments/loans to fossil fuel power plants	Forecast wholesale electricity market prices
Manufacturer	Consider strategic bid prices for solar power generation equipment trading	Forecast wholesale electricity market prices and power curtailment rates (supply-and-demand balance constraints)
Manufacturer	Consider strategies for green energy procurement and renewable energy investment	Forecast demand-side power prices, including wholesale electricity market prices, non-fossil fuel energy certificate prices, wheeling charges and renewable energy charges, etc.

Building proprietary models

At PwC, we use our own in-house fundamental models in analysing future power markets. By building a database of information about electric power plants across the country and calculating supply capacity and demand matching, we estimate hour-by-hour marginal costs (i.e. for electric power plants operating at that hour with the highest variable costs). Simultaneously, because the availability of power generation is determined for each plant, we also compute curtailment rates for renewable energies based on supply-and-demand balance constraints.

The model is capable of area-by-area analysis as per the electric power companies’ service areas (i.e. nine regions excluding Okinawa). Scenarios about renewable energy volumes, nuclear power capacity factors and fuel costs may be customised.

We support business strategy development by evaluating the profitability of renewable energies and storage batteries, forecasting long-term decarbonisation power capacity auctions and assessing for fair value based on the electricity market’s supply, demand and price data. When considering optimal operation of storage batteries, we perform detailed analyses using such inputs as future market price forecasts and an operation optimisation model (MILP) that takes into account operational constraints.