Regardless of how things play out in the coming year(s), the PJM GreenHat default and the changes it will trigger are certain to be top of mind for FTR traders. To help traders manage this issue, we've researched and summarized the events leading to the default, the fall out so far and how it will potentially impact traders.Overall Summary
On June 21st, 2018, PJM learned an important lesson about its credit policy and management when one of its largest FTR portfolio investors, GreenHat Energy LLC., defaulted on its long-term FTR obligations for the ongoing 2018/2019, 2019/2020, and 2020/2021 PJM planning periods.
GreenHat built up a 890 million MWh portfolio posting a mere $600,000 in collateral.
GreenHat’s portfolio began depreciating in 2017 and subsequently pledged $62 million in sales revenue to PJM; Revenue was reportedly derived from a bi-lateral sales agreement.
Pledged revenue was pocketed, GreenHat increased its position exposing the portfolio to further losses.
Bets on historically successful positions allowed GreenHat to have low collateral requirements, but unexpected transmission upgrades helped lead to the massive default.
FERC, PJM and Independent Committee of Consultants are researching, analyzing and making recommendations to prevent this type of default in the future.
Analysis Summary
PJM did not have access to verify the $62 million pledge that allowed GreenHat to continue with is positions
PJM lacks a comprehensive clearing mechanism to mitigate rising default, requiring marketing participants and, ultimately, rate payers to do the mitigation
PJM has used flawed credit methodology to determine credit risk
Independent Committee Consultants’ Recommendations Summary - PJM should:
Use mark-to-auction values from more frequent auctions as the base for “variation margin”
Retain the 10¢/MWh minimum charge and purchase price that form the “original margin”, terminate the FTR undiversified adder due to its lack of correlation to risk
Define a default as the inability to grant a monthly variation margin call within two business days.
Enact outsourced background checks, to execute due diligence by assuring applicants employ their represented methods of risk management
Apply explicit rejection of membership should a background and regulatory history check fail
Annually update the financial qualifications and to enable PJM’s right to proceed on a participant's failure to meet those qualifications.
Increase its Long-term auctions to monthly or bi-monthly
Report with the IMM market expectations from participant risk managers, to establish position limits for FTRs based on capitalization
Produce internal participant risk management reports based on the frequency of participants changing portfolio positions
Potential Impacts of Recommended PJM Changes:
FTR market participants will likely need to provide collateral associated to their portfolio’s risk before submitting their bids.
When the Mark-to-Market value surpasses the FTR account’s available credit for auction bidding, PJM will issue a Collateral Call. The Collateral Proposal has the potential to delay auction clears and results.
PJM’s analysis conveys that 75% of PJM FTR participants will experience a negligible increase in credit, 11% will see an increase less than $100,000, and another 11% will see an increase under $1 million, and 4% will experience an increase over $1 million.
More stringent credit requirements, price formations, and Collateral Calls will heighten the entry costs associated with the PJM market, especially for smaller firms.