Energy Trading and Risk Management: What Every Plant Manager Should Know

Peter Kelly-Detwiler

Plant managers must take several factors into account in order to achieve optimal economic outcomes for energy trading and risk management.

Power plant operation is a highly complex undertaking, and plant managers must deal with a variety of issues every day. In competitive wholesale power markets, energy trading and risk management are critical issues that must be taken into account, as they affect both the physical and economic life of the power plant.

In regulated vertically integrated utilities, plant operators and companies are tasked with keeping the flow of electrons going and ensuring plant reliability. Risk management in this context is focused somewhat more on the physical operation of the plant than the fine-tuned economics of responding to power markets.

By contrast, in competitive markets, risk management involves a much stronger financial component. While some trading occurs on a day-ahead basis, much of it takes place in near real-time, for multiple products including energy (megawatt-hours), ancillary services and spinning reserves (typically 10-minute lead-time capability to response to changes in supply and demand), and frequency regulation (instantaneous response to ensure grid stability). In this context, risk is both physical and financial. The plant operator is affected not only by the immediate plant operating environment (at the operational technology — OT level) but by the larger market context as well. It is, therefore, vital that operators know exactly what the plant is capable of in order to make good on commitments.

Risk Management

In some cases, this energy trading and risk management component can become quite significant. For example, in the Texas (ERCOT) market, price caps have been raised to $9,000 per megawatt-hour (other competitive markets on the East Coast typically have caps in the $1,000 range, since they also pay for capacity). Average annual 2015 prices in Texas (the most recent year with a full data set) were $26.77. However, for 88 hours that year, prices exceeded $100. For 40 hours they soared above $200, and for 21 hours they exceeded $300. Indeed, prices briefly exceeded $4,500 per megawatt-hour, as Potomac Economics explains. It is absolutely critical to be operating during those periods of high prices at the highest possible (and safe) output. Availability can signify the difference between an annual profit or loss.

Market awareness of prices (both real-time and day-ahead) is, therefore, critical at the supervisory trading floor level. Developing the strategies and bidding into the market is the trader's job, not the plant operator's. Yet, at the same time, the operator must have an acute understanding of what the plant may be called upon to do and respond at a moment's notice. The plant operator must therefore intimately know the plant's limitations and capabilities. These must be communicated to the trading floor, so traders have full transparency and know how the plant will perform. Indeed, the ability to offer an extra five or 10 megawatt-hours at the right time for the desired duration can make an enormous financial difference.

Data and Communication

In today's world, communication translates to a daily morning conversation between operators and traders. The critical elements affecting that conversation include market opportunities, as well as a variety of other factors, such as plant history and any operating limitations, maintenance schedules, heat rates, ambient temperatures that affect operational efficiencies, and potential emissions and noise limitations.

Traditionally, this conversation has included some level of guesswork, "institutional knowledge," and conservative assumptions. Sometimes, this conservative approach may be unnecessary and result in lost profits. However, today instrumentation and Big Data can be infused into the conversation—the emerging Industrial Internet of Things—to improve the accuracy and efficiency of this conversation. The addition of plant sensors that can capture and store relevant critical data, including operating characteristics, maintenance records, and heat rates, holds the potential to reduce uncertainty and yield significant immediate economic benefits.

For example, in many cases, operators of large gas combined-cycle plants currently estimate fuel burn. These estimates can sometimes be inaccurate and, of course, heat rates also change over time. Gas Turbine World estimates that over 15 years, heat rates may increase by approximately 1.5 percent. The addition of accurate instrumentation to the power plant can improve knowledge of heat rates, which translates into more accurate estimates of fuel consumption. Improved estimates can help plants avoid thousands of dollars in unnecessary imbalance charges.

Likewise, better data allows operators to know when and for how long they can push their plants for maximum economic benefit during infrequent but critical market price spikes. When prices are 100 times the average, coaxing the plant beyond nameplate capacity is worth considering, but only if there is a high degree of confidence in the capability of the facility to safely do so.

At the end of the day, plant operators must take many factors into account in safely operating a generating facility, including the operational and market elements described above. Better instrumentation and new IT platforms can facilitate the combination of energy trading and risk management strategies. This allows both the physical and financial risks to be properly integrated, which results in improved plant longevity and optimized economic outcomes.


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