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).\u00a0 PMA-NT, unlike other consulting products, is designed to have a business partnership relationship vs. typical vendor product relationship.\u00a0 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.\u00a0\u00a0 The product is designed to be customized by allowing clients to feed in their own weather forecast to commodity prices.\u00a0\u00a0 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.\u00a0 In addition, the output can also be customized.<\/p>\n
The initial setup for PMA-NT does hold significant value as a trading and hedging tool.\u00a0 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.\u00a0 \u00a0However it takes a holistic approach in dealing with risk.\u00a0 For many, this will be fine. \u00a0For 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.\u00a0\u00a0 Every region in the US holds unique characteristics.\u00a0\u00a0 Power trading in the west will likely want to have hydro sensitivities as part of their high and low cases.\u00a0\u00a0 Those in the East will want basis sensitivities.\u00a0\u00a0 The initial setup does neither of these as it takes a generic view, but the capability is clearly possible.\u00a0\u00a0 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.\u00a0\u00a0 When you succeed, we succeed.\u00a0 That is the core of PMA-NT.\u00a0 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.<\/p>\n
With that being said, the initial setup best trade for winter from my perspective is to buy the December On-Peak spread of\u00a0AD-Hub minus NYJ<\/strong>\u00a0 (Buy AD-Hub and sell NY-J). \u00a0 I prefer spreads as spreads mitigate some risk and I am not as risk averse as perhaps others are. \u00a0\u00a0 I prefer spreads as spreads mitigate some risk and I am not as risk averse as perhaps others are. \u00a0My criteria for the best was the trade with the most to gain with limited risk.<\/p>\n Justification:<\/strong> Last winter\u2019s 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).\u00a0\u00a0 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).\u00a0 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.\u00a0\u00a0 From 2010 to 2013 December spread between AD-HUB minus NY-J went as wide as $-39\/MWh in 2010.\u00a0 If December does get cold, there is much more run-up room for AD-Hub than NY-J.\u00a0 Therefore, the spread will improve from its current $-44\/MWh.\u00a0\u00a0 However, if the winter is more normal, or even mild, expect NY-J to collapse more than AD-Hub \u2013 once again the spread will gain.\u00a0\u00a0\u00a0 There are areas to investigate, such as the possibility of operations at power plants this winter being better than it was last winter \u2013 as discussed in my previous article<\/a>.\u00a0 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. \u00a0\u00a0Entergy\u2019s Vermont Yankee nuclear plant will not be available this winter as it is being decommissioned.\u00a0 This is in our initial setup, but the retirement is not expected till after the end of this year.\u00a0 The model does not have a sell on NY-J going into Jan perhaps because of this issue.\u00a0 From the winter outlook (50+sensitivities) only the basis moving up another 50% would get near the forward markets spread.\u00a0 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.\u00a0\u00a0 This is the working relationship I am describing for clients of PMA-NT.<\/p>\n 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.\u00a0\u00a0 The real value comes from the interaction with us and the willingness to explain the process and have frank discussions on the results.\u00a0 We believe no other consulting product will offer this unparalleled experience.\u00a0\u00a0 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)). \u00a0PMA-NT is not just a product, but more of a service. \u00a0\u00a0We want to work with you in understanding the volatile power markets.<\/p>\n This also applies to our long-term service PMA-LT.\u00a0 We can work with you to understand the impacts of various policies and develop a cohesive resource plan.<\/p>\n Please contact us at your earliest convenience.\u00a0 We look forward to beginning the conversation.<\/p>\n Your Willing to Work with You Energy Consultant,<\/p>\n David<\/p>\n David K. Bellman
\nAll Energy Consulting LLC- “Independent analysis and opinions without a bias.”
\n614-356-0484
\ndkb@allenergyconsulting.com
\n<\/a>@AECDKB
\nblog:\u00a0\u00a0https:\/\/allenergyconsulting.com\/blog\/category\/market-insights\/<\/a><\/p>\n