A Case Study: Optimal Wholesale Power Buying in ERCOT

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1 A Case Study: Optimal Wholesale Power Buying in ERCOT Abstract With over 150 Retail Electric companies, IOUs, munis, and co-ops, Texas has the most dynamic and competitive retail power market in the United States. A critical challenge for these providers is minimizing the cost of power purchases, while also mitigating risk. This case study uses actual data from June December, 2011 to analyze the cost and risk profiles of the following three buying strategies: Day-Ahead buying Real Time buying Risk-Adjusted buying using Genscape s PowerBuyer service The analysis shows that the Day Ahead and Real Time markets present difficult tradeoffs between savings and risk, but a disciplined program of Risk-Adjusted buying enables power buyers to benefit from significant cost savings available in the Real Time market, while avoiding most of the associated risk. Background Lone Star Power In order to illustrate the impact of various power buying strategies, we ll use a hypothetical company Lone Star Power with 30,000 residential customers and 500,000 MWhs of load for For simplicity, we ll assume that all of Lone Star s load resides in ERCOT s North zone and use only on-peak days (M-F, excluding holidays). Lone Star Power is a risk-averse organization, and hedges most of their short-term price risk through power purchase agreements and term contracts which approximate their load obligation and settle against the dayahead market. Each day, Lone Star uses a supplier to forecast their next-day s load based on forecasted weather. The following chart shows Lone star s ERCOT load during the 6-month study period. As illustrated below, demand fluctuates seasonally and is highest in peak summer periods. For a free trial of Genscape s ERCOT PowerBuyer, contact Susan Frockt: , sfrockt@genscape.com 1

2 The daily load forecast for tomorrow is then bid into ERCOT s Day-Ahead Market. For years, this buying strategy has served Lone Star Power well but with increased competition, the executive team at Lone Star is evaluating whether there are other strategies for bidding load that can reduce their costs and manage risks. Options for Bidding ERCOT Load ERCOT provides its members with two markets in which to bid their daily load the Day Ahead and Real Time markets. Day Ahead Market (DAM) Any load hedged with term/supply agreements is automatically bid into the DAM against which these contracts settle. Incremental load requirements may be bid in to the DAM as firm quantities or price-sensitive bids. Because the DAM closes shortly after bids are submitted, participants have good visibility into where DAM prices will clear, and DAM prices are not impacted by events which transpire after the 10am market close. The tradeoff for low risk is that DAM prices average more than 10% higher than in the RT. Real Time Market (RT) - Conversely, bidding incremental load in ERCOT s RT market results in lower costs for most hours, and lower overall average costs, but exposes buyers to the risk of price spikes which can reach $3,000/MWh, as occurred several times during the summer of Most customers have risk policies that limit their exposure to the RT market. Over the study period, Day Ahead Market costs averaged $59.21 (simple average of all hours), vs. $53.18 in the Real Time market. During the 6 month analysis period, DAM prices were higher than RT prices for 20 of 28 weeks, but in 3 of the 8 weeks in which the RT was higher, the difference exceeded $200,000. The histogram below illustrates the frequency of hours in which prices fell within each price range along the bottom X axis. As the chart below illustrates, RT prices are more tightly clustered around the average on the left of the line, but importantly, RT prices extend to the cap (rightmost bucket) of $3,000 7 times during the period while DAM prices never hit the cap. For a free trial of Genscape s ERCOT PowerBuyer, contact Susan Frockt: , sfrockt@genscape.com 2

3 A Better Way? Ideally, companies like Lone Star would have a tool to identify specific hours in which the RT market offers maximum savings opportunity and minimal risk. Genscape s PowerBuyer service was designed specifically for this purpose. It provides daily forecasts of hourly prices for both the DAM and the next-day RT markets, based on rigorous fundamental analysis of all market drivers including weather/demand, wind generation, generation outages, fuel prices, transmission constraints and congestion risks. In addition to hourly DAM & RT price forecasts, the PowerBuyer service provides an estimate of upside risk in the RT market using a model scenario with 1,000 MWs of additional demand. For every hour, the PowerBuyer report provides a Risk Adjusted Market Call indication of the optimal market (DAM or RT) based on a combination of price forecast and RT risk. For example, if the DA forecast is $46 and the RT forecast is $35 with low risk, the RT market will be indicated. Conversely, if the DA is below the RT or above but within a narrow risk-based range and the RT upside risk is elevated, the DA market will be indicated. By following this Risk-Adjusted Buy strategy, Lone Star Power can identify hours in which the RT market provides the most attractive combination of high savings and low risk. Over the study period, Lone Star Power would have saved over $15 for every hour bid into the RT market based on PowerBuyer Risk Adjusted Market Call compared with their previous DAM-only strategy. Seasonal Analysis As anyone experienced with the ERCOT market knows, the high demand and volatile prices during peak summer periods can make or break a retailer like Lone Star Power. As the chart below clearly indicates, the combination of higher volume and higher prices during peak summer periods cause weekly power costs to jump from below $500,000 to over $3M. Effective strategies to manage costs during such volatile periods are critical to Lone Star Power s overall financial performance. For a free trial of Genscape s ERCOT PowerBuyer, contact Susan Frockt: , sfrockt@genscape.com 3

4 During the 8-week period from July 13-September 6 th when ERCOT load and prices were highest, Genscape s PowerBuyer product excelled saving an average of $53.57 per MWh moved from the DAM to RT and saving money in 6 of the 8 weeks. During this period, the PowerBuyer service successfully identified elevated RT risk and recommended the DAM for fully 67% of hours in which the RT market settled over the DA market by greater than $50. Outside of the 8-week peak summer period, the gains available with PowerBuyer were less dramatic, but still significant and consistent. Over the 21-week non-peak period, each MWh indicated by PowerBuyer for purchase in the RT would have saved $2.34. Clients using this strategy would have saved money 17 of the 21 weeks using the PowerBuyer risk-adjusted buying strategy. The Bottom Line If Lone Star Power had no limit on their ability to bid load into the RT market, and used PowerBuyer to determine the optimal market for each hour, they would have saved $2.94M (14.5%) vs. a DAM-only strategy over the 6- month study period. Such a strategy would have seen 50.2% of all MWhs bid into the RT, which may exceed the risk guidelines for many utilities and retailers. In a more realistic scenario, we ll assume that Lone Star moves only 15% of their load into the RT using Genscape s PowerBuyer service, and continues to bid the remaining 85% into the DAM. Under such a scenario the following benefits would be recognized: Average savings of $15.34 per MWh bid into the RT 23 up weeks (avg $48K savings) and 6 down weeks (avg $32K loss) Cumulative savings of $913,595 vs. DA only strategy For a free trial of Genscape s ERCOT PowerBuyer, contact Susan Frockt: , sfrockt@genscape.com 4

5 Summary For utilities and retailers like Lone Star Power who bid their load into ERCOT s Day Ahead Market every day, this case study illustrates that there is significant opportunity to benefit from limited exposure to the Real Time Market. With a service such as Genscape s PowerBuyer, which identifies the precise hours of maximum RT savings and minimal risk, net savings of up to 14.5% can be realized vs a Day Ahead only strategy. In ERCOT s highly competitive market, this savings may represent the difference between profit and loss or customer rates going up or down. The ERCOT market is dynamic, and the results obtained during the June-December 2011 period should not be taken as indications of future results. For a free trial of Genscape s ERCOT PowerBuyer, contact Susan Frockt: , sfrockt@genscape.com 5