ERCOT Market Summary & REC Implications

# ERCOT Market Summary & REC Implications **Prepared by:** Freddy Platinus **Date:** November 2025 # Power Markets Summary v1 **Prepared by:** Freddy Platinus **Date:** November 2025 --- ## 1. Two Types of Markets ### **Day-Ahead (DA)** * Think of this as the **"planning schedule"** for tomorrow. * The ISO forecasts supply and demand. * DA prices are more stable because they reflect planned conditions. ### **Real-Time (RT)** * Happens every 5 minutes. * Reflects **actual** supply, demand, outages, and congestion. * RT prices can be extremely volatile. **Why the gap matters:** The difference between DA and RT prices is called the **DA–RT basis**, used to understand forecast error and market risk. --- ## 2. Nodes, Hubs, and the Water Analogy Visualize the grid as a **water system:** * **Generators** = springs that add water. * **Nodes** = gates where water enters the system. * **Transmission lines** = pipes that move water. * **Hubs** = large reservoirs that average many nodes. * **Loads (customers)** = towns pulling water. ### Hierarchy ``` U.S. → ISO → Hub → Node → Substation → Generator ``` ### Why this matters * **Node prices** are very local and volatile. * **Hub prices** are more liquid and stable. * Contracts often settle at hubs, but physical power is delivered at nodes. --- ## 3. Basis Risk (Hub Price – Node Price) Because power is generated at a **node** but many contracts settle at a **hub**, a price gap appears. **Basis = Hub Price – Node Price** Example: * Hub price = $60/MWh * Node price = -$10/MWh * **Basis = +$70/MWh** This difference can make or break project economics. --- ## 4. Transmission Congestion & Curtailment Transmission = pipes moving water. ### Congestion When the pipe is too small: * Node prices collapse. * Hub prices may remain high. * Basis risk increases. ### Curtailment If the pipe is completely overloaded, the ISO "closes the valve." * The generator produces **0 MWh**. * Happens often in high renewable regions. --- ## 5. Transmission Rights (Why They Matter) If you have transmission rights, you can **move power through congested lines**. If not: * You pay congestion charges. * Node prices may collapse. * Basis risk becomes unpredictable. Traders like Tenaska and Guzman specialize in obtaining and scheduling these rights. --- ## 6. Bilateral Trading (Tenaska, Guzman, etc.) ### What is a bilateral trade? A direct deal between two parties, **outside the central ISO auction**. ### Important clarification **"Bilateral does NOT remove basis risk."** * Physical power still flows through nodes and congested transmission. * Settlement still references nodal or hub prices. ### Why Tenaska “becomes the market” They coordinate: * Transmission scheduling * Generation sources * Customer demand They act like a **mini-ISO**, but without owning the assets. --- ## 7. VPPA Settlement Explained Simply ### Physical flow Strata sells power at the **node**. * Settlement price = Node price. ### Financial VPPA flow McDonald’s settles at the **hub**. * Settlement = (Hub Price – PPA Price) × MWh ### Combined effect ``` VPPA = PPA + (Node Project Price – Hub Price) ``` ### If the sale is at the busbar (node) Node price = reference price → **basis cancels out** → no basis risk. --- ## 8. ERCOT: Energy, Capacity, and Ancillary Services Every market must solve three problems: ### **1. Energy** The actual electricity you consume. ### **2. Capacity** Paying generators to be available, even if they’re not running. * ERCOT does *not* have a formal capacity market. * This makes ERCOT more volatile. ### **3. Ancillary Services** Frequency control, voltage stability, and other support functions. * Think of these like pumps and filters that keep the water system stable. --- ## 9. Full ASCII Diagram ``` UNITED STATES GRID ------------------------------------------------------------------------------------------------ | ISO / RTO | ------------------------------------------------------------------------------------------------ DAY-AHEAD (DA) MARKET REAL-TIME (RT) MARKET ---------------------- ------------------------- - Forecast tomorrow's conditions - Actual grid operations - Stable prices - Highly volatile prices [Strata Solar] (Spring) | v ┌──────────┐ │ Node A │ ← Node price (local gate) └──────────┘ | [Transmission Pipe] | v ┌──────────┐ │ HUB │ ← Hub price (reservoir) └──────────┘ | [McDonald’s Load] Bilateral Trader (Tenaska/Guzman) → Schedules flows, manages rights, carries credit risk. Basis Risk = Hub Price – Node Price Curtailment = ISO closes the valve when lines are full. Transmission Rights = ability to move power across congested pipes. ``` ```mermaid flowchart TB %% Top-level US grid and ISO US[United States Grid] --> ISO[ISO / RTO] %% Day-Ahead vs Real-Time Market Boxes subgraph DA[DAY-AHEAD DA MARKET] DA1[Forecast tomorrow's conditions] DA2[Stable prices] DA1 --> DA2 end subgraph RT[REAL-TIME RT MARKET] RT1[Actual grid operations] RT2[High volatility] RT1 --> RT2 end ISO --> DA ISO --> RT %% Physical Flow: Strata -> Node -> Transmission -> Hub -> McDonalds STRATA[Strata Solar Spring] --> NODEA[Node A Local Node Price] NODEA --> PIPE[Transmission Line Congestion Risk] PIPE --> HUB[Hub Price Reservoir] HUB --> MCD[McDonald's Load] %% Bilateral Trader STRATA -.schedules / contract.-> TEN[Tenaska / Guzman Bilateral Trader] TEN -.manages flows / credit risk.-> ISO %% Basis explanation NODEA ---|Basis = Hub - Node| HUB %% Curtailment annotation PIPE -.if congested, ISO closes valve curtailment.-> NODEA %% Transmission rights annotation TEN -.uses transmission rights to move power.-> PIPE ``` --- ## 10. RECs and Why Buyers Like McDonald's Can Be at a Disadvantage Large corporate buyers (like McDonald's) care about **environmental compliance**, reporting frameworks (GHG Protocol), and ESG commitments. This means they often want **renewable energy attributes**, not just electricity. These attributes come through **RECs (Renewable Energy Certificates)**. ### What a REC Actually Represents A REC = *proof that 1 MWh of renewable energy was generated*. * Physical electricity and RECs can be separated. * When separated, the energy becomes **null power**. * Corporate buyers need RECs to claim decarbonization. ### Why Buyers Like McDonald's Can Be at a Disadvantage #### 1. They want both **electricity + RECs**, not just electricity. Most generators (like Strata) can sell: * Energy at node/hub prices, **and** * RECs in a separate market. Corporates compete with utilities, banks, traders, and ESG procurement desks → driving REC prices up. This puts McDonald's at a disadvantage because **their demand for RECs is price-inelastic** (they *must* buy to meet ESG goals). #### 2. The VPPA math becomes more complex once RECs are included. Corporates often structure a VPPA to receive the **RECs + financial hedge**, but the **energy settlement** still follows hub and node dynamics. ### VPPA With RECs (Intuitive Math) Normal VPPA: ``` VPPA Cash Flow = (Hub Price – PPA Price) × MWh ``` If RECs are included: ``` VPPA + REC = (Hub Price – PPA Price) × MWh + REC Value ``` If the corporate also buys unbundled RECs separately: ``` Total Cost = (Hub – PPA) × MWh + REC Price ``` ### Where Disadvantages Appear #### **A. REC prices rise during high demand** Corporates (Google, Meta, Amazon, Walmart) all need massive RECs → prices in voluntary and compliance markets rise. McDonald's must pay these higher REC prices to meet sustainability goals. #### **B. REC markets don’t care about node/hub basis.** This means: * Energy settlement = volatile (hub vs node) * REC prices = separate market McDonald's ends up exposed to **two independent markets**: 1. Power markets (basis risk) 2. REC markets (supply/demand of green attributes) Generators like Strata can sell electricity + RECs separately to maximize revenue. Buyers like McDonald's must purchase RECs **no matter what the price is**. #### **C. Buying RECs can make the VPPA cashflow less favorable** If hub prices fall but REC prices rise in the same year: * VPPA cashflow may go negative * REC purchases increase total cost * Combined impact can create unexpected ESG compliance costs This is why corporates sometimes push for: * Fixed REC adders * Bundled REC delivery * Green tariffs with regulated REC prices ### Why McDonald's Still Does It This isn’t for profit—it’s for: * Sustainability targets * SEC climate reporting compliance * Scope 2 emissions reduction (market-based method) * ESG brand value Even if it costs more, RECs are the only way to credibly report renewable energy usage. --- ## 11. Final Summary * Power markets are easiest to understand as a **water system**. * **Nodes** are small gates with volatile prices. * **Hubs** are big reservoirs with stable prices. * **Basis risk** exists because physical delivery and financial settlements happen at different points. * **Transmission congestion** creates price separation. * **Curtailment** occurs when the grid is overloaded. * **Transmission rights** are valuable because they reduce congestion exposure. * **Bilateral trades** simplify relationships but do not eliminate basis. * **ERCOT energy, ancillary, and “no capacity market” structure** explains why ERCOT is so volatile.