How to hedge against Load Resource proration in ERCOT
Of the demand response programs that ERCOT offers, Load Resource offers the most lucrative potential–particularly during the summer months when demand on the grid is at or near its peak.
Simply put, ERCOT’s tight reserve margin is brought about by diminished supply and growing electrical demand, which in turn causes high energy prices in Texas during the summer.
These high prices are welcomed by participants in the Load Resource program, which pays organizations for being available to curtail their energy loads when called on by the grid operator.
The LR program attracts a lot of interest, so ERCOT places a cap on the total amount of Load Resource it buys, typically ranging from 1,400-1,750 MW.
Suppose the cap is projected to be 1,500 MW.
If more than 1,500 MW of Load Resource offer into the market, ERCOT prorates ALL of the MWs down to its 1,500 MW threshold.
Suppose 3,000 MW offer into the market as part of the LR program. ERCOT can only buy 1,500 MW of load resource. In this case, an organization that could otherwise curtail 10 MW would only be awarded five and be paid for those 5 MW. Another organization that could contribute 4 MW will only be awarded two and so forth until the total sum of all LR participants is 1,500 MW. This example illustrates 50% proration.
Historically, LR proration in the ERCOT market hovered around 90%, meaning a 10 MW offering is prorated down to 9 MW.
That started to change in 2017 when proration worsened as more resources sought to enter the market. In 2018, proration averaged about 50%, irritating many participating organizations accustomed to earning more revenue for being available to curtail if needed.
Fixed vs Index Load Resource Offerings
The standard Load Resource offering is indexed based on dynamics in the market, grid conditions, and weather conditions.
These conditions vary in their extremism and therefore cause the price ERCOT pays for load resources to fluctuate.
Historically (at least before 2018) the Load Resource program has offered participants a potential windfall to be available when the grid was most in need.
Now, proration is threatening that windfall for a lot of LR participants.
That there are a lot of participants in the LR program is the reason why proration is rising and earnings in the program are diluted.
Enter fixed LR.
Fixed LR takes proration out of the picture for participants by locking in an average, weighted return for a specified period of time. Locking into a fixed LR contract can guarantee a more attractive rate of return than the historical indexed LR average.
The averaged indexed LR return was between $6 and $7 per MW/hour in 2017 and around $9.50 in 2018. Heading into the 2019 summer season, fixed LR offerings are being secured with a 20-30% return above the indexed average.
To Fix or not to Fix?
Fixed LR tends to appeal to the more risk-averse participant compared with standard indexed LR. The former is more stable, the latter essentially a bet that the summer will include a couple of days when LRs driving contributors present a blowout scenario.
As any wise investor will attest, a balanced portfolio has the best chance to succeed.
Consider breaking your load into increments and determine a strategy to hedge against those different scenarios with a combination of fixed and indexed LR.
Lock in certain rates above the historical averages with fixed LR and position yourself for a nice reward during the few scorching days during the summer and extremely cold days during the winter with indexed LR.
This post was excerpted from the 2019 State of Demand-Side Energy Management in North America, a market-by-market analysis of the issues and trends the experts at CPower feel organizations like yours need to know to make better decisions about your energy use and spend.
CPower has taken the pain out of painstaking detail, leaving a comprehensive but easy-to-understand bed of insights and ideas to help you make sense of demand-side energy’s quickly-evolving landscape.
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