ERCOT Summer 2018 Was a Game of Zones: Did you win or lose?… Do you even know?

by: Ian Palao

In the Spring of 2018, Ian Palao wrote an article summarizing steps to be taken for hedging ERCOT summer 2018 amidst high forward supply prices.

Ian recommended the following 5 steps retailers could take to mitigate their summer exposure while maximizing margin. The following is a brief re-cap of this article.

#1) Know your expected fixed-price forward position. Preferably through Winter 2018/19. In order to hedge, you must be able to quantify your future expected load. There are numerous techniques for forecasting expected load, some of them, more advantageous than others. Using the similar-day technique often leads to inaccuracies which then can lead to ineffective hedging. It has been our experience that weather-response functions lead to a more accurate quantification of expected load.

#2) Quantify the swing risk of that forward position.
Your expected load likely will not be what is actualized. One useful technique in the hedge strategy process is the use of scenario analysis. This will provide numerous data points of potential load based on various assumptions. 

#3) Do NOT rely on the Day-Ahead Market (DAM).
Extreme price volatility is not limited to the real-time market. Increasingly, it has been shown that the day-ahead market is not a safe-harbor for acquiring supply.

#4) Modify your risk policy to allow for bilateral hedging above 100% of fixed load.
Extreme weather conditions often times require a hedge strategy which may not be in-line with your risk policy. Nimbleness in your hedging strategy can lead to further cost-savings an increase your bottom-line. It is our recommendation to have language in your policy that allows for temporary changes during extreme conditions.

#5) Spread the cost of supply. Socialize the high August bilateral costs over more volumes.

As a result of the April 2018 ERCOT notice, July and August bi-lateral supply prices were exorbitantly high. However, the extreme price move did not extend into the fall and winter of 2018. By socializing the high August costs across multiple months, the financial impact to cash-flow could be lessened.

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During the summer of 2018, ERCOT Set a system-wide all-time peak of 73,259 MW on July 19.  According to RTO Insider, “…real-time prices briefly peaked at more than $2,000/MWh” If you were short those particular hours, your real-time costs exceeded your expected retail revenue by a factor of 20+.

“One competitive retailer was forced to surrender tens of thousands of customers to the provider of last resort when it was unable to meet collateral requirements in early summer.” — RTO Insider.

Analyzing The Aftermath

By now, you’ve most likely begun analyzing your 2018 settlement data to see how you fared.

A good settlements product will delineate cost categories by focusing on daily outliers such as occurred on July 19th. You’ll know instantaneously whether or not you were fully covered by your bilateral supply. Some of the applicable line items include: revenue, bilateral purchase costs, day-ahead costs, real-time costs, capacity costs (where applicable), etc.

A complete settlements package will automatically alert you as to those days/line items where your costs were different than your historical norm. Often times, with daily settlements the quantity of numbers to investigate can seem insurmountable This advanced feature highlights the problem spots for further investigation at a simple glance.

If your settlements process does not account for these detailed alerts, we highly suggest researching software packages that incorporate this functionality. Doing so, will allow for better analysis and investigation into the drivers of your business costs.

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Ian Palao |  Director of Portfolio Management, POWWR