11 Apr Top 7 Guidelines To Managing Your Portfolio Within The PJM ISO
by Ian Palao | Escoware
The PJM Interconnection comprises all or parts of thirteen states and the District of Columbia. The regional transmission organization (RTO) has about 184 gigawatts of generating capacity and serves almost 61 million residential, commercial, and industrial customers.
PJM has a day ahead (DA) offer cap of $2000 per MWh. Although it pales in comparison to the $9000 cap of ERCOT, it still does not provide a guaranteed “safe harbor” from high prices or volatility. Here are some insights and guidelines to managing a portfolio within the PJM ISO.
- The most obvious first…price levels are a function of the spread between supply and demand.
- Prices are strongly correlated to temperature during both the Winter and Summer as demand increases (and the supply-demand spread decreases) as the temperature decreases and increases with each season, respectively.
- Volatility has a strong, inherent recollection of past events. Past events serve as a reminder of “what could be”. Winter 5×8 volatilities can be far greater than summer peak volatilities. This occurred during the Arctic Blast event of 2015. Allowing a substantial portion of your off-peak load to go into DA could be costly even in the winter overnight hours.
- During winter, because of the proximity of one zone to another and because of the large spatial extent of the typical cold air pool from Canada, diversification between zones is not as great as one would think. For example, if PSEG is experiencing cold temperatures and high prices and volatility, ComEd, AEP, and Duquesne probably are experiencing similar.
- A heavy reliance on the DA market, especially during the most volatile season, can and will eat into your profits. Securing forward hedges to lock-in profit margin, especially during the most volatile time of year for a given ISO/market, is prudent risk management.
- A growing portfolio will achieve maximum growth by limiting churn. One of the drivers of churn is price. Churn can be indirectly managed and mitigated by securing hedges outside of the DA market during known historically volatile seasons. Not to mention the advertising content doing so can provide. “After the Arctic Blast, because of our sound risk practices, our prices remain 30% lower than our competitors.”
- Securing some peak supply (7×16, 5×16, 2×16) in the bilateral market in advance and at “reasonable” prices that fit within your average retail price/margin goals will decrease your average hedge costs by decreasing your exposure to the volatility of the DA market. Not only is this a good idea for managing your fixed load, but it can assist in maintaining the profitability of your variable and indexed customers.
Ian Palao is a managing Director of Analytics at Escoware