Electricity Derivative Portfolio Management

Lyhyt kuvaus

Fingrid Oyj (Fingrid) is the transmission system operator in Finland. Apart from its duties as the system operator, Fingrid is responsible for acquiring the electrical power to cover the losses of the main grid, which consists of about 14 400 km of 400, 220 and 110 kV lines. The average annual losses of the main grid total to about 1,1 TWh. Fingrid procures the physical power to cover the losses by using the power exchange’s physical markets (Elspot and Elbas). The procurement price is hedged using financial contracts both in the Nasdaq OMX and in the OTC market. The procurement of physical power is carried out by Fingrid. In price hedging, Fingrid has since 2001 been using the expertise and services of an external portfolio manager.

Hankinnan kuvaus

1) Fingrid's hedging strategy, goals and principles: due to its role as a TSO, Fingrid has selected a conservative strategy. The goal for price hedging is to manage cost risks and ensure predictable and stable and reasonable costs. Fingrid's overall risk policy and main grid tariff policy, which favours tariff stability, form the basis for the hedging strategy. In practice, price hedging is carried out according to these main principles:
— hedging horizon is approximately the next 3 years,
— loss power procurement shall be 100 % price hedged in advance,
— price hedging is carried out against system price and area price,
— only Euro contracts are used,
— the power exchange's system price and area price futures are used (corresponding OTC products may also be used),
— an external portfolio manager carries out price hedging according to rules set up by Fingrid,
— the portfolio manager decides independently the exact timing of hedging contracts within the agreed time span, Fingrid does not in any way take part in these decisions,
— Fingrid supplies the portfolio manager with a monthly loss forecast for the entire hedging horizon. Fingrid reserves the right to add or change the principles listed above, this list is not comprehensive.
2) Portfolio manager's tasks At minimum, the portfolio manager shall:
— based on Fingrid's hedging strategy, maintain a detailed hedging plan including monthly amounts and products to be hedged,
— independently carry out the price hedging of the loss power procurement based on the guidelines and hedging strategy provided by Fingrid,
— carry out the price hedging at the best available price utilising both the electricity exchange and the OTC market and report concluded transactions to Fingrid by email as soon as possible, however not later than 12:00 Finnish time the day after the trading day,
— clear all OTC contracts at the clearing house,
— deliver price forecasts on a monthly basis for the next 5 years,
— deliver price forecast for the next 10 years upon request,
— deliver a report of the margin and collateral evaluation, margin requirement details, variation margin details and cash settlement propagation from the NASDAQ OMX on business days,
— deliver once a month a report of previous month’s daily collateral requirements,
— act as Fingrid's representative towards the power exchange and the clearing house,
— arrange electricity market reviews to the Fingrid's personnel 1-2 times a year at the Fingrid's offices,
— report monthly to Fingrid, in the agreed format, matters related to price hedging actions and status of Fingrid's portfolio,
— be in monthly telephone contact with Fingrid (more frequently if needed),
— not take part in the procurement of physical power,
— in option, contracts reporting in accordance with the EMIR regulation.
3) Fingrid's tasks Fingrid shall:
— be responsible for delivering the loss forecast to the portfolio manager,
— define the hedging strategy,
— be responsible for the adequacy and monitoring of the guarantees required by the clearing house.

Uudistusten kuvaus

Fingrid is through this invitation looking for a portfolio manager to provide the services for the next 3 year period (1.5.2019 — 30.4.2022). An option for 2 additional years will be included in the contract.

Before the negotiations, Fingrid reserve its right based on its sole discretion to provide the tenderers with preliminary call for tenders and a preliminary specification for the hedging strategy. The tenderers must submit their preliminary tenders before the negotiations on the grounds of the preliminary call for tenders. Upon completion of the negotiations, the Contracting Entity shall request a binding tender from the tenderers on the basis of the discussions and the negotiated terms and conditions. Making an application, an offer or participating in the procurement in other ways will not be compensated to the companies. Procurement documents related to the procurement are available in English. If the company wants the documents in another language, the company is responsible for the translation and the costs involved. The procurement is carried out in English. The conduct of the negotiated procedure is following:
— 14.1.2019: procurement notice,
— 3.2.2019: applications for participation,
— Week 6: verification and comparison of the applications. Selection of the candidates for the negotiations,
— Week 7: submission of negotiating invitations and a preliminary call for tenders to those selected for the negotiations,
— Week 9: submission of preliminary tenders,
— Week 10-12: negotiations on the basis of the preliminary tenders and preliminary call for tenders,
— Week 13: submission of the final call for tenders to the tenderers participating in the negotiations,
— Week 15: submission of the binding tenders,
— Week 16-17: possible clarifications and further negotiations,
— Week 18: verification and comparison of the tenders, procurement decision and notification of the decision,
— Week 20: contract for the procurement Fingrid reserves the right to change the process and/or the timetable of the negotiated procedure at its own discretion. The abovementioned procedure is indicative. Negotiation invitations will tentatively be submitted to the candidates by the end of Week 7. After preparing, Fingrid will provide the candidates with a preliminary call for tenders and other preliminary tender documents. The submission of the documents will be as soon as possible, so that the candidates will have enough time to submit a preliminary tender before the negotiations. The initial negotiation period will be during the Weeks 10-12, 2019. Fingrid negotiates separately with each candidate. Negotiation requires signing of an NDA. During the negotiations, the preliminary tenders and call for tenders with its appendices will be further developed and the agreement including terms and conditions specified. The candidates should be well prepared to the negotiations by reading up on the tendering material sent to the candidate before the negotiations and sending the preliminary tenders by the proposed time schedule. The negotiations may cover the following issues:
— the objectives for both parties (at the start of the negotiations),
— contents of the procurement,
— pricing criteria,
— contractual issues,
— reporting, schedules, and
— hedging strategy.
Fingrid will inform the candidates of the end of the negotiation round. Upon completion of the negotiations, Fingrid will update the preliminary call for tenders on the basis of the negotiations and aims to send a final call for tenders to the tenderers by March-mid April 2019. Binding tenders must be submitted according to the final call for tenders, estimated at the mid-April or end of April 2019. Before the tenders are compared, Fingrid will check the compliance with the tender specifications. Tenders that are not compliant with the specifications shall be excluded from the tender comparison. Compliant tenders will be evaluated in accordance with the criteria indicated in the call for tenders. Fingrid aims to make selection of the provider in May 2019. Fingrid reserves the right not to choose any of the submitted tenders.