---
# System prepended metadata

title: 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<br/>Spring] --> NODEA[Node A<br/>Local Node Price]
    NODEA --> PIPE[Transmission Line<br/>Congestion Risk]
    PIPE --> HUB[Hub Price<br/>Reservoir]
    HUB --> MCD[McDonald's Load]
    
    %% Bilateral Trader
    STRATA -.schedules / contract.-> TEN[Tenaska / Guzman<br/>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.