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by Jake Landis
Participation in competitive power markets is not limited to those who generate or supply power across the grid. Anyone with the appropriate market credentials, registration, and sufficient credit posting with the Independent System Operators (ISOs) or Regional Transmission Operators (RTOs) who oversee US power markets can execute short-term financial trades.
We previously talked about real-time power trading and how it works, and today we’ll dive into what day-ahead power trading is and how traders do it.
What Is Day-Ahead Virtual Trading?
Virtual trades are a financial energy product (not a physical energy product) based on the price of power at specific locations across the grid known as price nodes. Typically, these nodes are associated with power plants or consumer electricity demand points, even though these trades are purely financial.
Because these trades are purely financial, participants in virtual trading don’t need to own or control physical megawatts across the grid.
Participants execute trades through a purchase or sale at the day-ahead locational marginal price (LMP), and the ISO or RTO automatically closes out the following day with an opposing transaction at the real-time LMP. Purchases are known as decremental (or DEC) bids, while sales are called incremental (or INC) offers.
Traders can place bids or offers for any of the 24 hours in an operating day.
Because these trades are purely financial, participants in virtual trading don’t need to own or control physical megawatts across the grid.
Additionally, there are nearly 10,000 locations across the country where people can execute virtual transactions (pictured below).
Source: Yes Energy’s Real-Time Price Map
How Power Trading Works
A virtual trade is a financial transaction at one nodal location. Since there are thousands of location options, let’s examine a specific example from the Southwest Power Pool (SPPISO).
Location example, KCPL.WAVERLYWND in the KCPL zone of SPPISO
Prior to the day-ahead market closing time (typically between 9 and 11 a.m. local time), traders must submit bids and offers to the ISO or RTO for the next operating day. The information required in the bid or offer includes the node’s location, buy/sell indication, megawatt volume, and bid/offer price per megawatt for each hour a participant wishes to trade. If the bid/offer price clears the day-ahead LMP, the ISO or RTO awards a participant that position.
Participants are said to have a long position when a bid to purchase clears. It’s called this because they will make more money the higher power prices go in real time. Conversely, a cleared offer to sell is known as a short position.
During the operating day, all positions for all locations will be liquidated at the real-time price for the hours and locations awarded in the day ahead.
Because financial traders can’t actually supply or receive physical power, they must close out every day-ahead transaction with an offsetting trade in real time. Essentially, traders must buy back any power that they sold in the day-ahead market and sell back any power that they bought in the day-ahead market. This makes the difference between day-ahead and real-time prices (known as a day-ahead, real-time [or DART] spread) the measure of a trade's profitability.
For the single location below, let’s replicate an offer to sell 20 megawatts (MWs) at $30 megawatt-hour (MWh) for hours 11-21. The day-ahead price at this location was greater than the offer price of $30 MWh for hours 13-20. This results in a short position at the day-ahead price for the hours awarded. This short position is at the day-ahead price, which was actually greater than our offer price. As the real-time hourly prices came in throughout the day, they remained lower than the day-ahead price, resulting in a profit for each hour of our position.
Basically, we sold high and bought low. This generated a profit of almost $3,800 for this single day using one single location.
Source: Daily Portfolio Analysis Module in Yes Energy’s PowerSignals®
How Do Power Traders Find Profitable Trades?
Traders use many different strategies in evaluating trades to find the greatest opportunities. These strategies include trading well-known and researched locations day over day, analyzing congestion patterns, looking at renewable generation impacts to the grid, and ingesting large amounts of data for algorithmic trade discovery and execution.
Pictured below, traders can also run look-back scenarios around forecasted conditions tomorrow. They can also use different variables such as weather forecasts, local Live Power generation data, and electricity demand forecasts to find trends in favorable spreads between day-ahead and real-time prices (DART spread).
Source: Daily Portfolio Analysis in Yes Energy’s PowerSignals
Congestion patterns and congestion impacts to the system are one way that prices can diverge between day-ahead and real-time prices.
Having accurate data around previous congestion and causes can help traders look forward to next-day conditions that may be similar. Other factors like forecasting errors can drastically change the underlying price of power from one day to another.
One important factor that differs from our simple, single-location example is the opportunity to trade multiple locations and markets each day. Traders can submit portfolios of tens to thousands of locations across multiple markets using multiple strategies in ISOs around the country each day.
What Defines a Good or Bad Day for Traders?
Just like they use different trading strategies, traders also have different levels of risk in trading activity. Traders can “swing for the fences” and play large amounts of volume on the best-looking days or utilize a lower-risk strategy for more constant returns.
Running a profit strategy of $3,000 per day will make you a millionaire in profit and loss (before fees). Traders can make or lose several hundred thousands of dollars per day based on their strategies and risk tolerance.
Is Power Trading a Good Career?
Whether power trading is a good career for you depends on your skill set, goals, and willingness to take calculated risks. We outlined the path to becoming a power trader, including the abilities and experience that can help you on that journey.
Yes Energy for Power Traders
Power traders across North America depend on Yes Energy for the latest, reliable, and accurate data to conduct their businesses. Explore our market-leading solutions for power traders, or request a free trial to experience first-hand how our services can help you Win the Day AheadTM.
About the author: Jake Landis has been involved in nodal power markets since 2007. He previously worked at a large utility company in real-time trading and asset optimization through term and financial power products. Additionally, he spent time trading financial products with a private trading firm before joining Yes Energy in 2019.
