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CRR Offsets in DAM

CRR Offsets in DAM. MCWG 1/26/2011. 1/26 Agenda. Identify Problem Examples Identify Possible Solutions Obtain Implementation Suggestions from ERCOT. Identify Problem. Potential CRR revenue is not included within the DAM exposure calculation

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CRR Offsets in DAM

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  1. CRR Offsets in DAM MCWG 1/26/2011

  2. 1/26 Agenda • Identify Problem • Examples • Identify Possible Solutions • Obtain Implementation Suggestions from ERCOT

  3. Identify Problem • Potential CRR revenue is not included within the DAM exposure calculation • DAM Exposure calculation requires collateralization of PTP bid prices without regard to an expiring CRR with the same Source/Sink/TOU/MW • Market Participants must bid into the DAM to continue a forward hedge into the real time market • Some PTP bid strategies can be classified as being a “Price Taker” due to the desire to ensure a forward CRR hedge expiring in the DAM is maintained into real time market • Some Market Participants are risk adverse to real time congestion risk

  4. Risk Aversion ExampleHB_South to LZ_South Data from the 48 Hour South PTP Disclosure Report Market Participants that are risk adverse to real time congestion risk, may bid aggressively for PTPs in DAM to ensure the continuation of a CRR hedge that expires in the DAM Data from the 48 Hour South Disclosure Report identifies that market participants were bidding up to $230 / MWh for a PTP in the DAM, even when the DAM Settlement Price averaged near $0 Real time risk avoided can be illustrated by the congestion observed between HB_South and LZ_South on operating days 1/12 and 1/13 Real Time Congestion Risk

  5. Forward Hedge pre DAM: Resource Position 10 MWh Load Position 10 MWh CRR Position (Bus-Zone) 10 MWh DAM Transaction and Exposure: PTP DAM Bid(w/ Uth%ile =$5) PTP Bid Details: Q= 10MWh , P= $50 , Bus-Zone DAM Credit Exposure =[Max[ 0, Pbid] + Uth%ile ] * Qbid= $50 + $5] * 10MWh = $550 Net Day Ahead Risk to ERCOT versus Collateral Requirement Ex: Posting Requirements related to a QSE representing load and generation Net Position 0 MWh Settlements & Invoices post DAM: (Zone SPP = $100; GenBus SPP = $50) @ Resource = $50 * 10MWh = $500 @ Zone = $100 * -10MWh = $-1000 @ CRR = [$100-$50] * 10MWh = $500 $550 Collateral vs. $0 DA Settlement Discussion Points What is the net risk to ERCOT in the DA market ? What is the net risk to ERCOT in the RT market ? Net Exposure $0.00

  6. Potential WD Working Capital Reduction to Market Participants Assumption: CRR Jan-2011 Auction Awards offset RT Congestion Risk; thus, PTP DAM Bids are required to continue hedge to RT

  7. Discussion Points • In respect to DA Credit Risk to ERCOT, is it necessary to collateralize the PTP bid price where a CRR offset is present? • Would it be necessary to identify if a PTP is likely to clear? • Should PTPs with negative bid prices receive the same treatment? • In respect to RT Credit Risk to ERCOT, is it necessary to collateralize the potential OTM RT exposure where a CRR offset is present? • What if a MP has a RT physical obligation at the Source and Sink? • Should CRR Options and Obligations receive different treatment? • ERCOT’s Opinion on Implementation • System Impact • Timeline (MCWG/CWG goal for implementation = Q2) • Other ?

  8. Possible Solutions

  9. Next Steps • NPRR ? • Next sub-group Meeting • Finalize DAM CRR Offset Issue • Start Addressing CRR Auction Concerns • Date: 2/10 ? • Time Permitting • Review CRR Auction Concerns • Review FCE Concerns

  10. Appendix • Settlement Example

  11. Settlement Example Positive DA Congestion Value Negative D A Congestion Value

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