Observed nodal credit issues
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Observed Nodal Credit Issues. MCWG – 12/10/2010. Observations. Day-Ahead Market Expiring CRRs do not offset calculated DAM Exposure TPE Collateral requirements related to RT-DA Spreads are excessive E-Factors do not incorporate PTP transactions CRR Exposure Calculations (Auction & FCE)

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Observed Nodal Credit Issues

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Observed nodal credit issues

Observed Nodal Credit Issues

MCWG – 12/10/2010


Observations

Observations

  • Day-Ahead Market

    • Expiring CRRs do not offset calculated DAM Exposure

    • TPE Collateral requirements related to RT-DA Spreads are excessive

    • E-Factors do not incorporate PTP transactions

  • CRR Exposure Calculations (Auction & FCE)

    • Auction exposure calculations overlook maximum risk associated with bid curves

    • Auction & FCE exposure calculations do not recognize offsetting risk


Expiring crrs do not offset calculated dam exposure

Forward Hedge pre DAM:

Resource Position 10 MWh

Load Position 10 MWh

CRR Position (Bus-Zone) 10 MWh

DAM Transaction and Exposure:

Option #1 (E1=0, D=100, Y&Z= 50)

10MWh, $0 TPO @ Resource =$ -50

10MWh, $200 EOB @ Zone = $ 100

Option # 2 (Uth =5)

10MWh, $50 PTP Bid Bus-Zone = $55

1

Expiring CRRs do not offset calculated DAM Exposure

Ex: Posting Requirements related to a QSE representing load and generation

2

Net Position 0 MWh

  • Settlements & Invoices post DAM:

  • (Zone SPP = $100; GenBus SPP = $50)

  • @ Resource = $50 * 10MWh = $500

  • @ Zone = $100 * -10MWh = $-1000

  • @ CRR = [$100-$50] * 10MWh = $500

  • Possible Solutions:

  • Recognize Expiring CRRs in/pre DAM

  • Enable CRRs to flow through to RT

  • Permit E-Factors to recognize offsetting risk

  • other

3

Net Exposure $0.00


Virtual da rt spreads are over collateralized by tpe equations

1MW Buy DAM and Sell RT

1MW Sell DAM and Buy RT

Virtual DA-RT Spreads are Over Collateralized by TPE Equations

Assumption: E1 = 1; E2 = 0; PDAM =$40; PRT =$60

Assumption: E1=1; E2=0; PDAM=$60; PRT=$40; RT-DA=$10

Over Collateralization ≈ 64x

Over Collateralization≈ 160x

Under Collateralization≈ 7x

  • Reason for Collateralization Mismatch:

  • DAM & RT invoicing cycles are not aligned; thus, creating an unnecessary posting requirement for payment risk related to one leg of the financial time spread

  • Extrapolation equations overestimate potential exposure


E factors do not incorporate ptp transactions

E-Factors do not incorporate PTP transactions

Real Time Congestion Exposure can be managed by purchasing a PTP Day-Ahead, or by Transacting a Bid @ the Sink and Offer @ at the Source.

  • Ex. TPO & Bid @ Zone

Transactions with the same risk profile but different E-Factor Treatment

  • Ex. PTP (Gen– Zone)

  • Ex. E-Factor Alt for PTP

DAM Settlements

10MWh TPO = $50

10MWh EOB = $100

DAM Settlements

10MWh PTP Bid Bus-Zone = $50

DAM Settlements 10MWh, $50 PTP Bid Bus-Zone = $50

E-Ratio Calculations

E-Ratio Calculations

E-Ratio Calculations

E1 Ratio= Min[1, Max[0, ((Qcleared-Bids*PDAM + Qcleared-PTPs*PSinkDAM - Qcleared-TPO*PDAM - Qcleared-EOO*PDAM -Qcleared-PTPs*PSourceDAM) / (Qcleared-Bids*PDAM + Qcleared-PTPs*PSinkDAM)]]

= Min[ 1, Max[ 0, ($100 - $50)/$100]] = 0.50

E1 Ratio = Min[1, Max[ 0, ($0 - $0)/$0]] = 0

E1 Ratio = Min[1, Max[ 0, ($100 - $50)/$100]] = 0.50

E2 Ratio = 1 - Max[0, ((Qcleared-EOO + Qcleared-TPO - Qcleared-Bids)/((Qcleared-EOO + Qcleared-TPO + Qcleared-PTP))] = 1 – Max[0, (10 -10)/10] = 1

E2 Ratio = 1 – Max[0, (0 -0)/0] = 1

E2 Ratio = 1 – Max[0, (10 -10)/10] = 1

Incorporating PTPs into the E-Factor Equations provides equality for counterparties managing congestion risk


Crr auction exposure calculations overlook maximum risk associated with bid curves

CRR Bid Example & Clearing Price

Max Price Exposure Example

CRR Auction exposure calculations overlook maximum risk associated with bid curves

10

  • 10MW 5x16 OBL (NHub,NZ) @ $10

  • 500MW5x16 OBL (NHub,NZ) @ $2

  • 600MW5x16 OBL (NHub,NZ) @ $1

  • PCleared = $1/MWh ; 1,110MW Awarded

Max Exp = $1/MWh

A

$100

2

23% Savings

Bid Price ($/MW)

B

$1020

1

  • CRR Auction Exposure(5x16 ≈ 336hrs)

C

$1110

Exp = [(M+1) * │PBid│ + A] * Q

10

510

1110

Quantity (MW)

  • [(0+1) * $10 + 0.75] * 10 * 336 = $36,120

  • [(0+1) * $2 + 0.75] * 500 * 336 = $462,000

  • [(0+1) * $1 + 0.75] * 600 * 336 = $352,800

  • Total Exposure = $850,920

Alt. Exp = [(M+1)*Max[0,Min[ PMaxExp,PBid]+ A ]] *Q

  • [(0+1) * $1 + 0.75] * 10 * 336 = $5,880

  • [(0+1) * $1 + 0.75] * 500 * 336 = $294,000

  • [(0+1) * $1 + 0.75] * 600 * 336 = $352,800

  • Total Exposure = $652,680


Auction fce exposure calculations do not recognize offsetting risk

CRR Auction Exposure

Auction & FCE exposure calculations do not recognize offsetting risk

A CRRAH managing Gen Bus to Load Zone congestion risk by legging into a GenBus to Zone CRR requires more collateral than purchasing a CRR from GenBus to Zone

  • Auction Submissions

  • Auction Cleared Values

10MW 5x16 OBL (NGen,NH) @ $10

10MW 5x16 OBL (NH,NZ) @ $10

10MW 5x16 OBL (NGen,NH) @ $0.75

10MW 5x16 OBL (NH,NZ) @ $0.75

Bid #1:

Bid #2:

10MW 5x16 OBL (NGen,NZ) @ $20

10MW 5x16 OBL (NGen,NZ) @ $1.5

Recognizing offsetting CRR Exposure (i.e. SinkCRR1 = SourceCRR2) reduces FCE posting requirements by 50%

  • Future Credit Exposure

= [ $10 + $0.75] * 3,360 = $36,120

= [ $10 + $0.75] * 3,360 = $36,120

Total = $72,240

ACPE = $3,360 ; FMM = $2,520

ACPE = $3,360 ; FMM = $2,520

Total = $6,720

Bid #1:

Current Calculations

Bid #2:

= [ $20 + $0.75] * 3,360 = $69,720

= Max [ $3,360 ; -$5,040] = $3,360

Exp = [(M+1) * │PBid│ + A] * Q

A = $0.75, M=0

FCE = Max[ ACPE , - FMM ]

W1=100%, X=1, Y=1.5

Where:


Other issues previously discussed

Other Issues Previously Discussed

  • Day-Ahead Market

    • Negative EO Bids do not require collateralization

    • Exposure calculations overlook maximum risk associated with Bid Curves

  • CRR Exposure Calculations (Auction & FCE)

    • Annual Auction Pre-Payment Requirements & Adequacy of FCE calculations

    • Collateral Requirements for Negative Bids

    • Adequacy of “A”, “X”, and “Y”


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