Power Market Trading and Trade Types

Bilateral and 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 its demand is higher than its supply, it may see if it 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 is financial trading. Virtual traders bid into the day-ahead market, without the intention or ability to provide supply or consume load.  They are essentially bidding on whether 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 on financial power markets, 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.

• INCs, or increment offers, are virtual trades where people sell power into the day-ahead market for a given price at a certain pricing node.

• DECs, 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

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.

The LMP has three components: 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 the ISO established.

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 occur 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 that most interests financial traders.

Spread trading – Spreads are transactions between two points on the grid –the source, 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 whether 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 Electric Reliability Council of Texas (ERCOT) and Pennsylvania-New Jersey-Maryland Interconnection (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 (FTRs) are financial contracts where there is no obligation to actually deliver electricity. They are similar to spread transactions in some ways. FTRs 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, FTRs are much longer-term contracts than spreads. FTRs are sold as monthly, annual, quarterly, and even three-year contracts.

Generators or physical power market participants purchase FTRs to hedge against volatility. Financial traders also purchase FTRs. The owner of the FTR makes money when the day-ahead (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.

FTRs have different names in different ISOs; these are listed below.

• Transmission congestion right (TCR) – Southwest Power Pool (SPP)

• Congestion revenue right (CRR) – California ISO (CAISO) and ERCOT

• Transmission congestion contract (TCC) – New York ISO (NYISO)
  
  

Intercontinental Exchange (ICE)

The above trades and transactions occur within the individual ISO and RTO markets. However, there is another market where people can trade power 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 conducted completely on ICE.

Trading on ICE is purely speculative. Below are some of the contracts traded on ICE.

Balance of the day (bal-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 someone buys a contract for the remainder of the day for $20/MWH and the real-time (RT) hub price settles at $25/MWH, that trader will have made $5/MWH.

Next-day/day-ahead 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.

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

Balance of the month (bal-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!

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.