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DAM and Nodal Collateral Requirements

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Some are concerned that the significant collateral requirements on QSEs will ... 1 Review previous DAM collateral discussions. 2 Examine Nodal Protocols ... – PowerPoint PPT presentation

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Title: DAM and Nodal Collateral Requirements


1
DAM and Nodal Collateral Requirements
  • Concerns and Solutions
  • December 7, 2009

2
Market Concern
  • Some are concerned that the significant
    collateral requirements on QSEs will discourage
    market participants from participating in the
    DAM, which will create inefficiencies and
    additional volatility. Additionally, unhedged QSE
    load in the DAM will result in increased default
    risk in real time.

3
Agenda
  • 1 Review previous DAM collateral discussions
  • 2 Examine Nodal Protocols
  • 3 Determine a short-term solution for market
    open
  • 4 Identify a long-term collateralization
    solution

4
Previous Over Collateralization Examples
Highlighted
  • Netting Deficiency
  • 3-Part Offer Identification
  • A) LSE Example
  • Hedge Strategy (1) Bilateral Supply from Hub (2)
    CRR from Hub to Zone
  • Day Ahead Activity
  • DAM Offer Sell Hub Quantity
  • DAM Bid Buy Load Zone Quantity
  • DAM Collateral Bid Price x Q 95th (RT-DA)
    x Q
  • Default Risk ltgt Bid Price x Q 95th (RT-DA)
    x Q
  • B) Resource Example
  • Hedge Strategy (1) Sell Hub Bilaterally (2) Buy
    CRR from Node to Hub
  • Day Ahead Activity
  • DAM Offer Sell Node Quantity
  • DAM Bid Buy Hub Quantity
  • DAM Collateral Bid Price x Q 95th (RT-DA)
    x Q
  • Default Risk ltgt Bid Price x Q 95th (RT-DA)
    x Q
  • A) Out of the Money Units
  • Penalty for not offering units in the DAM
  • High heat rate units submit offers but are not
    lifted in the day ahead market
  • Collateral required regardless of probability of
    offer being lifted
  • B) In The Money Units
  • Collateral required without regard to available
    portfolio capacity Higher heat rate units within
    portfolio limit real time exposure
  • Unit performance and probability of outage is
    ignored within credit requirement

5
Previous Nodal Collateral Discussions
  • Market Participants and ERCOT staff have
    recognized that the credit requirements require
    overcollateralization of situational risk
  • Proposed solutions have included but are not
    limited to
  • Identify physical bids and offers in an effort to
    reduce DAM overcollateralization
  • Distinguish offers Three-Part Offers versus
    Virtual
  • Not require out of the money units to post for
    submitting offers day-ahead that are unlikely to
    be dispatched
  • Reduce credit requirements for in the money units
    to operational performance risk
  • Decrease posting requirement from the 95th
    percentile
  • Differentiate physical bids from virtual bids
  • Expand netting from the same Settlement Point to
    offsetting risk management strategies
  • Lower bid posting requirements to forecasted net
    settled risk or a percentile of day-ahead and
    real time settlement differences.

6
Identify Nodal Collateral Requirements
  • Section 4. Day Ahead Operations
  • Credit Requirements for DAM Bids and Offers
    (4.4.10.6)
  • DAM Energy Bid Quantity multiplied by bid price
  • DAM Energy Offer Quantity times 95th RT DA ?
  • Same Settlement Point Max of Bid/Offer credit
    requirement
  • Ancillary Services not self arranged Quantity
    95th MCPC
  • PTP Obligation Bids Quantity Bid Price 95th
    RT DA ?
  • Section 7. Congestion Revenue Rights
  • CRR Auction credit constraint (7.5.5.3)
  • Lesser of self-imposed credit limit or 90
    Available Credit Limit
  • Additional credit for PTP Obligations A per MW
    Bid x Absolute Quantity

7
Identify Nodal Collateral Requirements
  • Section 16. Registration and Qualification of
    Market Particpants
  • Total Potential Exposure (TPE) Max 0, (IEL for
    the first 60 days), EAL, AIL, (EALAIL) Max
    0, FCE (16.11.4.1)
  • Estimated Aggregate Liability (EAL) Max IEL
    during the first 60-day period, Max (ADTE during
    the previous 60-day period) OUT PUL DALE
    (16.11.4.3)
  • Aggregate Incremental Liability (RTL d) Max
    0, (ADTE / 40 N 0.9) (16.11.4.4)
  • Initial Estimated Liability (16.11.4.2)
  • For ONLY Load-Serving Entities (LSE) IEL DEL
    Max 0.2, RTEFL RTAEP 40
  • For ONLY Resources IEL DEG Max 0.2, RTEFG
    RTAEP 40
  • For BOTH LSE and Resources IEL DEL Max 0.1,
    RTEFL RTAEP 40 DEG Max 0.1, RTEFG
    RTAEP 40
  • Future Credit Exposure FCEOBL o FCEOPT o
    FCRFGR o (16.11.4.5)
  • Available Credit Limit Unsecured Collateral
    TPE (16.11.4.6)
  • Day-Ahead Participation Incremental Collateral
    Requirement 90 ACL CRR Credit Limit
    (16.11.4.6.2)

8
Solution For Overcollateralization
  • Requesting MCWG and WMS to endorse the formation
    of a sub committee to
  • Interpret, determine application and quantify
    collateral requirements within the nodal protocol
    language
  • Identify situational default risk
  • Isolate over and under collateralization issues
  • Ascertain what solutions can be implemented by
    nodal inception to right size default and working
    capital risk
  • Draft Nodal Protocol Revision Requests
  • Determine long-term solutions for optimizing
    collateral requirements
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