Hedging Part 2: ERCOT Summer Volatility

Updated: Jun 14, 2019

Picking up on our last TRUELight Talk post, 'To Hedge or Not To Hedge,' we take a deeper dive into ERCOT summer volatility this year and how to fine-tune your hedging strategy to mitigate risk.

We are freshly returning from our trip down to Houston for the Energy Marketing Conference. For those of you that also attended, it was great to connect. We had all kinds of great conversations this year, and are very excited by the innovation taking place in our industry. As promised, we have released a 'Part 2' to our previous TRUELight Talk post, this time addressing a topic on all our minds: summertime volatility in ERCOT.

As discussed in our 'To Hedge or Not To Hedge' conversation from the other week, we came to the conclusion that the most successful hedging strategy is one that encompasses a combination of clean historical data, forward curve data, and intelligence on current energy market fundamentals. One of these elements alone may not be enough to manage volatility, however when placed in context with the rest of them, creates a comprehensive risk management strategy.

For example, it is not enough to simply rely on historical data alone. Keeping up with dynamic changes in regional power grids is a crucial element in your hedge strategy. This insight helps bring color to historical data and produces a more holistic view of both current and future market conditions. To highlight the importance of keeping a pulse on energy market shifts, we can look to yet another case where ERCOT historical data does not tell the whole story.

Summer generation reserve margins in ERCOT have continued to tighten the past few summers, a structural change which is expected to drive extreme volatility again this summer, potentially pushing forward prices to levels unseen in the historical dataset. In this case, looking at a shorter time period can help a risk manager to determine viable short-term value, while also keeping in mind the potential for the summer forward prices to move up prior to the summer delivery period.

If you look at the Houston Zone data below, we can see that, while the current valuation lies in the middle of the 52-week range, current prices are in the bottom of the 13-week range. This, coupled with tightening reserve margins year-over-year, could be an indication that now is a good time to hedge an additional portion of your summer exposure in ERCOT (if you still have summer exposure).

As we get closer to the summer demand season, there is the potential for strong price volatility in the ERCOT market. It’s important to first take a step back and note some lessons learned from the previous demand season, where we did experience a strong run up in forward prices that did not materialize in weather and real-time prices. The key to avoiding a potentially similar pitfall is to adjust one’s strategy to better capture the whole picture. This includes both longer term forward curve value price ranges and current market shifts.

In short, to effectively prepare for another summer of volatility in ERCOT, our energy experts recommend utilizing historical data and forward curve data as well as intelligence on the latest energy market shifts.

The peace of mind provided by clean data and market awareness is invaluable in building a sound hedging strategy. If you need support with your hedging strategy and access to clean, third-party data, get in touch with our portfolio management team today. We are proud to be a trusted source of energy market intelligence and expert strategic execution support. Email us at sales@truelightenergy.com or give us a call at 617-209-2420!

© 2019 by TRUELight Energy LLC

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