Best Winter Power Trade
I have been asked many times what the best trade is for this winter based on our product Power Market Analysis Near-Term (PMA-NT). PMA-NT, unlike other consulting products, is designed to have a business partnership relationship vs. typical vendor product relationship. We work with our clients to design and build custom forecasts to the point they feel PMA-NT is an augmentation of their analytical department. The product is designed to be customized by allowing clients to feed in their own weather forecast to commodity prices. Essentially, any input into the power model can be overwritten in order for you to have a smooth transition from what you are doing now. In addition, the output can also be customized.
The initial setup for PMA-NT does hold significant value as a trading and hedging tool. It was designed based on the 12+ years of power modeling experiences from utility trading and planning perspective to hedge fund trading of power and gas perspective. However it takes a holistic approach in dealing with risk. For many, this will be fine. For those of you focused in a particular region, you will likely not want an extreme weather case for N. America, but an extreme case for your region of interest. Every region in the US holds unique characteristics. Power trading in the west will likely want to have hydro sensitivities as part of their high and low cases. Those in the East will want basis sensitivities. The initial setup does neither of these as it takes a generic view, but the capability is clearly possible. Our Outlook runs (50+) do incorporate these risk factors, but the day to day running of the initial setup of PMA-NT does not since the goal is to get an overall understanding on the markets with weather, gas prices, and outages being the prime drivers. Once again, PMA-NT is designed for you so you can have a day to day run with your focused area with your data feed. When you succeed, we succeed. That is the core of PMA-NT. We believe in our working relationship model so much we are willing to offer a no-cost solution to a few candidates as long as we get to share in the profitability of the trade book.
With that being said, the initial setup best trade for winter from my perspective is to buy the December On-Peak spread of AD-Hub minus NYJ (Buy AD-Hub and sell NY-J). I prefer spreads as spreads mitigate some risk and I am not as risk averse as perhaps others are. I prefer spreads as spreads mitigate some risk and I am not as risk averse as perhaps others are. My criteria for the best was the trade with the most to gain with limited risk.
Justification: Last winter’s extreme weather seems to be priced into December – NYJ power prices (Dec13= $73/MWh vs. Forwards Dec14(10/08/2014)Avg=$88/MWh vs 2010-2013 Dec Avg=$63/MWh). Whereas AEP-Hub prices seem to be less weather impacted from last year (Dec13 Avg= $41/MWh vs. Forwards Dec14(10/08/2014)Avg=$44/MWh vs 2010-2013 Avg=$40/MWh). The extreme cold from last winter was more apparent in month January-March, which is surprising to see so much strength in NY-J this December. From 2010 to 2013 December spread between AD-HUB minus NY-J went as wide as $-39/MWh in 2010. If December does get cold, there is much more run-up room for AD-Hub than NY-J. Therefore, the spread will improve from its current $-44/MWh. However, if the winter is more normal, or even mild, expect NY-J to collapse more than AD-Hub – once again the spread will gain. There are areas to investigate, such as the possibility of operations at power plants this winter being better than it was last winter – as discussed in my previous article. This would act against the spread play, given PJM has more diversity of plants to improve upon the cold weather operations compared to New York. Entergy’s Vermont Yankee nuclear plant will not be available this winter as it is being decommissioned. This is in our initial setup, but the retirement is not expected till after the end of this year. The model does not have a sell on NY-J going into Jan perhaps because of this issue. From the winter outlook (50+sensitivities) only the basis moving up another 50% would get near the forward markets spread. Before setting forth to buy the spread, I suggest running a few more sensitivities, such as an earlier retirement of Vermont Yankee, and having a dialogue about all the factors that could lead to further widening of the spread. This is the working relationship I am describing for clients of PMA-NT.
At All Energy Consulting we understand supplying you with forecasts is only one step of the process and may even be the smallest value of the process. The real value comes from the interaction with us and the willingness to explain the process and have frank discussions on the results. We believe no other consulting product will offer this unparalleled experience. You will work directly with me, an experienced analyst from one of the top energy consulting company (Purvin & Gertz / now IHS, Deloitte) and one of the largest utilities in the industry (American Electric Power (AEP)). PMA-NT is not just a product, but more of a service. We want to work with you in understanding the volatile power markets.
This also applies to our long-term service PMA-LT. We can work with you to understand the impacts of various policies and develop a cohesive resource plan.
Please contact us at your earliest convenience. We look forward to beginning the conversation.
Your Willing to Work with You Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
