Articles on various aspects of energy market structures.
The market restructuring programs currently underway at the California ISO and Texas ERCOT represent potential new opportunities for energy traders operating in these markets. The development of new centralized day-ahead markets, combined with a change from the current zonal pricing models to resource specific nodal models, open up what are potentially more liquid markets that provide significant opportunities for both generators and power traders that don't hold assets. However, with opportunities come challenges, not only in terms of business strategy, but with the processes, people, and systems which need to be in place prior to pursuing business in the newly restructured markets.
California ISO—“MRTU”
The California ISO's Market Redesign and Technology Upgrade (MRTU) program is currently forecasting a “go live” date of February 1st, 2008. As the CAISO describes it, the MRTU is “a comprehensive program that enhances grid reliability and fixes flaws in the ISO markets. It keeps California compatible with market designs that are working throughout North America and replaces aging technology with modern computer systems that keep pace with the dynamic needs of California's energy industry.”1 For market participants, it entails a multitude of changes to the market structure, the most interesting of which are the move from zonal pricing to nodal pricing and the development of new day-ahead markets for energy, ancillary services and transmission management, with co-optimization, that is offerings including both energy and ancillary services in that day-ahead market.
Additional changes of note include the development of a new congestion revenue rights (CRR) product, increased credit monitoring of market participants, and new penalties and enforcement procedures for deviations from the ISO dispatch instructions.
Texas ERCOT—“Texas Nodal Market”
ERCOT is projecting a “go live” in December 2008 for the extensive changes they are making to the Texas power market structure, most significantly (like California), the transition to a nodal structure, moving from the zonal model that has been in place, and the development of day ahead power and ancillary services markets. And again, like California, ERCOT will implement co-optimization for energy and ancillary services.
Other important changes in the ERCOT market include issuance of CRRs and the development of a secondary market for those CRRs, new collateral credit requirements for market participants, and separate settlement for the real-time and day-ahead markets.
Alike but Different
The market changes in California and Texas appear to be similar and to a large extent they are. In fact with the changes in these two states, they are becoming more aligned with the mainstream of the other ISO/RTOs in the United States (with the exception of the SPP, which has not yet implemented centralized day-ahead markets).
However, there are significant differences in the design and execution of many of these changes in the two states. These differences are in some ways reflective of philosophical differences brought about by California's energy crises of 2001 and in other ways they are an acknowledgment of the physical differences between the two markets. California's grid is somewhat dependant on imported energy, while ERCOT, a practical “energy island,” operates more or less in isolation from its surrounding states.
These differences show up in the initial allocation of CRRs (California awarding CRRs to load, ERCOT auctioning to market participants) and the execution of the energy markets as it concerns capacity (ERCOT will make payment to generators for energy only, where as CAISO will provide payment to generators not only for energy but also for maintaining capacity).
Challenges
With the move from zonal pricing to nodal, pricing granularity is greatly increased, with the number of prices in the two markets moving from less than 10 in each to more than 4,000 in Texas and more than 3,000 in California. Obviously this increase in data will significantly impact the processes and systems used for managing deal entry, price structuring and position management.
Data management will become more critical to the information discovery, capture, and decision making process. Systems that managed this data in the pre-Nodal or pre-MRTU markets will be insufficient to support activities. Forecasting and analysis will be heavily impacted, most likely requiring the development of new models and tools, in addition to the development of strategies to address the lack of historical pricing associated with the new nodes.
Scheduling systems and ISO interfaces will be impacted as well. Participants in these markets will be dependant upon their selected vendors to deliver the new functionality required for managing schedules and paths involving the new nodal points and for interfacing those schedules with the ISO's.
With the dissolution of zones down to resource specific nodes, the book structures used by most participants will change, with the resulting impact on ETRM system configurations, effecting not only deal capture, position management, forecasting and scheduling, but also reporting. Significant rewrites of existing reports and development of new reports will be required.
Addressing the Challenges
As energy traders contemplate participating in the new markets, they need to consider not only business strategy, that is “how can we make money in these markets?”, but also consider the costs associated with aligning their systems, processes and people to the new market rules.
Knowledgeable and skilled personnel are a perquisite for success. However, it is this element that may be the most difficult to address. With an aging workforce, a robust energy economy and increased competition for new graduates entering in job market, qualified resources are at a premium. Filling new roles necessitated by the market changes will require realignment of responsibilities across the organization, with particular movement toward the forecasting and analysis areas. New hires will require significant training and orientation, involving several months of less than optimal production as they become familiarized with their roles and responsibilities prior to the opening of the markets. The costs associated with these personnel additions, movements, and training will be significant.
Process changes will be far reaching, effecting trade strategies, limits, deal capture, position management, scheduling, and risk management. Each new aspect of these markets will need to be examined for compatibility with current processes and the necessary adjustments made and tested as the company moves toward actively trading. And as these new processes cannot exist in isolation from the systems used to analyze, support, and record market decisions, the implementation of new processes cannot occur in isolation, but must be “part and parcel” to the implementation of the new systems that will be required.
The systems implications may ultimately be the most “easily” solvable of all the challenges. Vendors of ETRM, scheduling, and settlement systems have been at the forefront of assessing the impacts of the market changes. The leading vendors, such as OATI and The Structure Group, have been directly involved in working with the ISOs to ensure that the required changes are fully and accurately reflected in their systems. They are currently working in the testing environments provided by the ISOs, testing not only their functionality, but also helping to harden the processes implied by the new market rules.
Given these vendors' past experience with the other ISO/RTOs that have in place similar market structures, and their intimate knowledge of the changes occurring in California and Texas, companies that wish to do business in the new markets should seek to leverage that experience and knowledge.
For more information on the upcoming market changes and their implications, UtiliPoint recommends taking advantage of one of the web-based or public seminars offered by the leading application vendors such as OATI or The Structure Group, or by consulting organizations such as SunGard Consulting.