Financial Power Markets & Trade Types Power Markets 101

Financial Power Markets & Trade Types Power Markets 101

If you need to catch up, find the entire power markets 101 blog series HERE

In our final post in this series, we will be discussing some of the power market trade types and vocabulary terms that might have you scratching your head.  There is an endless amount of information to learn about energy and power markets, however, after reading these blog posts we hope you’ll have a basic understanding of how power markets function.

Learn About:

  • Bilateral Trading

  • Virtual Trading - inc’s and dec’s

  • Spread Trading (up to congestion and point to point)

  • Financial Transmission Rights (FTRs, TCRs, CRRs and TCCs)

  • Bal-day Trading

  • Next-day/ Day-ahead trading

  • Bal-week Trading

  • Bal-month Trading

Bilateral & Virtual Trades

Bilateral trading is trading that happens between two parties.  Bilateral trading primarily takes place in structured markets.  For example, if a vertically integrated utility realizes that their demand is higher than their supply they may see if they can procure power from another utility or producer.  Bilateral trades can take place in deregulated markets, however, they do not occur as regularly as in structured markets. 

Virtual trading - Virtual trades are financial trades. Virtual traders bid into the day-ahead market, without the intention or ability to provide supply or consume load.  They are essentially bidding on if the real-time price will be higher or lower than the predicted day-ahead price at a specific location on the grid.  As discussed in the previous post, virtual traders help add liquidity to the market and lead the markets closer to price convergence.  DART (Day-ahead real-time) is another name for virtual trades.

  • Inc’s - Inc’s, or increment offers, are virtual trades selling power into the day-ahead market for a given price at a certain pricing node. 

  • Dec’s - Dec’s, or decrement offers, are virtual trades bidding to buy power at or below a certain price point at a specific pricing node. 

Congestion, a review

Locational Marginal Price Infographic

In order to define the next few trade types, it’s useful to review what congestion is. You may recall that LMP stands for Locational Marginal Price. There are three components to the LMP: a marginal energy component, a marginal loss component, and a marginal congestion component. The marginal cost of energy is the cost of the economic dispatch established by the ISO. While transmission lines are good energy conductors, some electricity is lost on the line, this is the loss component. In addition, transmission lines only have a certain amount of capacity, and they can get too crowded, like a traffic jam. When there is too much electricity traveling across a line it is called congestion. Congestion can also be caused when another line goes down creating a binding constraint on a piece of transmission equipment that is still in service, but is now serving too much power flow. The cost of congestion is the most variable component of the LMP. Congestion often causes locational price volatility, and this is the component financial traders are most interested in.

Spread trading - Spreads are transactions between two points on the grid; the source, which is where the power comes from, and the sink, where the power is going.  Spreads are bid into the day-ahead market and settled in the real-time market, they are essentially bids on if the congestion cost will be higher or lower in the day-ahead market than the real-time market.  Spreads are only an option in the ERCOT and PJM markets.  

  • Up to Congestion (UTC): The name for spreads in PJM. 

  • Point to Point (PTP): The name for spreads in ERCOT. 

Financial transmission rights (FTR’s) -  FTR’s are financial contracts, where there is no obligation to actually deliver electricity.  They are similar to spread transactions in some ways.  FTR’s are also transmission paths from a source to a sink, and they are a way to hedge against the volatility of the variable congestion price.  However, FTR’s are much longer-term contracts than spreads.  FTR’s are sold as monthly, annual, quarterly, and even 3-year contracts. 

FTR’s are purchased by generators or physical participants to hedge against volatility.  Financial traders also purchase FTR’s.  The owner of the FTR makes money when the DA LMP spread is higher than the FTR auction spread price.  The owner of the FTR loses money when the DA LMP spread is lower than the FTR auction spread price.  FTR’s have different names in different ISO’s, these are listed below. 

  • Transmission congestion right (TCR) - SPP

  • Congestion revenue right (CRR) - CAISO & ERCOT 

  • Transmission congestion contract (TCC) - NYISO

Intercontinental exchange (ICE)

The above trades and transactions occur within the individual ISO/RTO markets.  However, there is another market where power can be traded financially, this market is called the Intercontinental Exchange, or ICE. Trades on ICE are bilateral or over-the-counter (OTC) trades, meaning if you’re selling a contract on ICE there needs to be another individual or entity willing to buy the contract.  On ICE, until an agreement is reached, neither party knows who the other party is. While transactions traded on ICE are tied to ISO pricing signals, they are transacted completely on ICE.  Trading on ICE is purely speculative.  Below are some of the contracts traded on ICE.

Bal-day, Next-day, Bal-week and Bal-month trades image.

Bal-day - Balance of the day is a contract that settles at the average on-peak real-time price at a particular hub for the remainder or balance of the day.  For example, if one buys a contract for the remainder of the day for $20/MWH and the RT hub price settles at $25/MWH that trader will have made $5/MWH. 

Next Day/ Day-Ahead - Next day contracts are still speculating on RT prices, just for the next day, not the remainder of the day.  The next day contract settles on the average on-peak real-time price the next day. 

Bal-week - Balance of the week is a contract settling on the average on-peak real-time price for the week.

Bal- month - Balance of the month is a contract settling on the average on peak real-time price for the month.

These are the main financial trading types in North American Power Markets. We hope that you’ve enjoyed this series and found it useful. Thanks for reading along!

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Next Steps:

For more information on the terms in this blog post, check out the Yes Energy Glossary.

Resources we found helpful when putting together Power Markets 101 are available here.

Yes Energy’s Tools help financial and physical power market participants alike!

 

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