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Report

Teaser, summary, work performed and final results

Periodic Reporting for period 1 - AIx (Automated Trade Execution Engine for Power Markets)

Teaser

Summary

Electricity is bought and sold on the electricity market, either on the exchange or over-the-counter. EPEX spot exchange is the biggest European market for electricity trading. The trading can be long term, where contracts for delivery of electricity over the next week, month or year are traded, or it can be short term, where contracts for delivery over the next hours are traded. The intraday market is especially important for renewable generators such as wind farms or solar panels as their production cannot be accurately forecasted far in advance. With the rise of renewables, more and more electricity is traded on the intraday market instead of on the long term market.

Due to expertise required for building real-time trading systems and substantial exchange membership fees, access to the electricity markets is expensive, especially for small (renewables-based) participants. Consequently, these companies are required to sign long term offtake agreements for their electricity with large utilities which oftentimes include substantial commission fees.

The goal of AIx is to create cheap and reliable access to the electricity market without the need for any trading knowledge. When developed, it will have significant environmental impact by stimulating construction of smaller renewable power plants and it will have a positive effect on the electricity bills of end users.

The goal of this report is to determine the feasibility of the project from a business and technical standpoint.

The viability of markets in certain countries needs to be analysed and a go-to-market strategy must be developed. Research of sales channels and partnership options has to be performed. To evaluate the financial viability of the business, a financial plan is required. Furthermore, contact with initial customers should be established. Management strategy related to a fast growing team must be investigated and a branding strategy and competence portfolio have to be developed further. On the technical side, the API connection to the M7 exchange interface must be completed and tested, together with the research on the API capabilities of other European exchanges.

The detailed financial model shows high profitability of the business model once AIx is in operation. The business is highly scalable and can operate globally with minimal additional cost.

Work performed

The markets of European countries present on the EPEX spot exchange were analysed to determine their viability. Specific focus was given to the three biggest participants which are Germany, United Kingdom and France.

An analysis of the current trading volumes on these markets was performed, together with research on the size of generator and supplier markets. Specific focus was put on the middle-sized market segment.

Countries participating on other European exchanges were also analysed in terms of viability. Furthermore, Australian and U.S. exchanges were investigated as an option for future expansion.

Using information obtained by the feasibility study, we were able to determine the go-to-market strategy. We will first enter the United Kingdom market, due to both the size of the market and our business presence there. Before the analysis, the plan was to enter the French market in the second year after completion of AIx, however the analysis revealed that Germany is a better market to enter as the second. The EPEX intraday market for Germany is the biggest in Europe and in addition, due to less centralizatized electricity ecosystem, there is a significant share of middle-sized renewable generators. France will be entered in the third year. The electricity market in France is more centralized, since over 60% of electricity is produced by nuclear power stations operated and owned by EDF. There is also a relatively smaller number of middle-sized companies operating in the electricity business. However, France is still the second biggest generator and supplier of electricity in the EU and as such has a huge market potential.

Based on the market analysis and the customer base that was identified in this report, a direct sales approach was deemed to be the most appropriate. Sales channel building strategy was identified and the internal structure of the sales department was defined. Benefits from collaboration with power exchanges were also investigated.

Implementation of the M7 API client was completed. This includes qualification testing demanded by the exchange which was performed successfully. Moreover, research on the API capabilities of the other exchanges was performed.

A detailed financial strategy analysis was performed, both for the period before the completion of the product (2019-2021) and for the three year period after the completion of the product (2021-2023). The projected revenue was calculated, based on assumptions that are in line with the market analysis. Operating costs were forecasted on a monthly basis, both for the personnel related and other expenses. Cash flow calculation was developed in order to determine if additional funding is required in the months after product launch. The preparation of a pitch deck presentation was completed.

The financial analysis allowed us to align the projected personnel and other expenses with the estimated revenue. We were able to determine the amount of trading required through AIx to be profitable. Furthermore the biggest costs were analysed.
The management and branding strategy was identified, together with the risk management related to a fast growing team.

Final results

We have been collaborating closely with leading experts in the field of optimization and machine learning and have contributed to the advancement of the scientific field. AIx contains cutting edge artificial intelligence technology that has never been applied to the energy markets before. We expect our algorithm to trade better than a human trader while also participating on multiple markets at once, which would previously require a team of traders. The expected impact of AIx is a drastic reduction in market access cost for renewable (and other) generators and suppliers. Consequently, this will reduce the price of green energy and make the investment into small generators more affordable.