About the products

From the 6th auction, Virtual Power Plant (VPP) capacity has become a hedge against the hourly price of electricity in the daily market – there will no longer be any physical delivery of electricity. The buyer will be compensated up to the capacity of the contract whenever the hourly price of electricity in the daily market exceeds the Exercise Price that is defined in advance. In effect, VPP capacity is now a strip of hourly options for which the buyers will pay a monthly premium (the “Option Premium”). In return for this Option Premium, Endesa and Iberdrola will be responsible for the making of the compensation payments. There are two important consequences of the change from a physical to a financial product:

a buyer of the product no longer needs to be a member of the Spanish electricity market; and
both the premiums and the compensation payments are subject to, but exempt from Spanish VAT.

Products to be auctioned

Endesa and Iberdrola will be offering two different products, base and peak, and for each one, two different durations: 6 and 12 months.

Base product: Hourly options that will be exercised in every hour of the day, for all days of the validity period, whenever the hourly market price exceeds the exercise price. The Exercise Price will be set in EUR/MWh and will be fixed for the entire exercise period and be the same for each hour. The Exercise Price will be set in advance of the auction and communicated according to the Resolution 9155 of 13th May 2008.

Peak product: Hourly options that will be exercised only in the hours defined as peak hours, whenever the hourly market price exceeds the exercise price. The peak hours are the hours between 8h00 and 20h00 CET of all days, except Saturdays, Sundays and national public holidays during the delivery period. Please note that the peak product in the first five auctions was exercisable from 8h00 to 24h00 on those days. The Exercise Price of the peak product contract will be set in EUR/MWh and will be fixed for the entire exercise period and be the same for each hour. The Exercise Price will be set in advance of the auction and communicated according to the Resolution 9155 of 13th May 2008.

Interested parties wishing to acquire electricity at no more than a pre-defined price for a given period would arrange to buy electricity in the daily market and hedge the hourly price by buying a combination of baseload and peakload VPP contracts corresponding as closely as possible to their demand. They will then receive compensation payments whenever the hourly price determined in the market exceeds the exercise price of the contracts and, in return, they will have to pay the monthly Option Premium.

Volumes to be auctioned and exercise period

Following Resolution 9155 of 13 May 2008 of the Secretary General of Energy (SGE), the volumes and exercise periods are set out in the table below. The split between base-load and peak-load will be established by resolution of the SGE at least 15 days before the auction. The division between 6 or 12 months products will be defined by the bidders during the auction.

Auction	Volume in MW semesters	6 month product Exercise Period	12 month product Exercise Period
Nº 6	2230	0.00h of 1 October 2008 to 24.00h of 31 March 2009	0.00h of 1 October 2008 to 24.00h of 30 September 2009
Nº 7	2230	0.00h of 1 April 2009 to 24.00h of 30 September 2009	0.00h of 1 April 2009 to 24.00h of 31 March 2010

The nominal size of each contract will be 10 MW.

Exercising the option

For both the base and peak product the VPP capacity will be exercised automatically whenever the hourly price in the daily market exceeds the relevant strike price.

The total cost of VPP power

The total cost of VPP power consists of two elements:

The Option Premium paid by a Buyer to the Sellers. The Option Premium is the price in euro per MW per month (EUR/MW/month) for having access to VPP power for a certain duration. The level of the Option Premiums is determined in the auction. Since there are two durations (semester and annual) per type of product (base and peak), four different Option Premiums will be determined in each auction. The Option Premium must be paid in advance, according to the rules for settlement and margins established contractually.
The Hourly Compensation paid by the Sellers to a Buyer.The Hourly Compensation is the sum of the positive differences between the hourly price of electricity and the Exercise Price expressed in euro per MWh (EUR/MWh).

C_{h~ = E}h~ * (P_dh – P_e~)

Where:
Ch~ represents the Hourly Compensation
E_{h~ is the energy associated with the capacity acquired in hour h, different for base and peak MW

P}dh~ is the price in the daily market in hour h
P_e is the Exercise Price of the option, different for peak and base

The Exercise Price is set before the auction per product type (for both base and peak). The Exercise Price will remain fixed throughout the exercise period of each individual product. In each auction there will be two different exercise prices: one for base-load and one for peak-load.

The compensation payment will be paid in arrears according to the rules for settlement and margins. Settlement will take place weekly.

Questions

After registration in the web site after having submitted a signed Declaration of Non-Collusion and Confidentiality, Registered Parties may use the Frequently Asked Questions to submit questions to the Auction Manager relating to the auctions