In January 2016, Genscape introduced a blog demonstrating the value the Nodal Market Insights application brings towards understanding and executing around congestion risks. Specifically given the limited volatility, low demand and lack of key market price drivers, this blog focused on capitalizing on what we believe is consistent, on-going overvaluation in the CRR Market. While this is a common trend that has existed in ERCOT for years that many are aware of, most participants still do not trade short congestion as they may not always feel confident enough in understanding the risk around these transactions. This is where Genscape’s Nodal Market Insights application brings a new transparency to the market better enabling users to assess overall risk with a more aggressive short trading strategy.
Since January 2016, the team at Genscape has been monitoring the default portfolio as generated by the Nodal Market Insights platform to discern what kind of returns can be generated when placing short positions in the Day Ahead Market. The default portfolio is a portfolio of recommended trades generated by the Nodal Market Insights platform based on a set of standard assumptions (regarding demand, the supply stack composition, outages, etc..) made by Genscape. Users of the platform have the ability to customize these assumptions and generate recommended trades based on their own assumptions.
As seen in the figure below, the Default Portfolio for all positions with a Strength of 5 (recommended trades are rated on a scale of 1 to 10 with 1 being the most compelling trades) or better has generated a steady positive return. This comes from a mix of long and short positions, however in aggregate 64 of 65 days actually netted to a short day based on the cost of the sum of all trades.
Return Breakdown
- Average Daily % Return = 37% (Average of each individual day’s return. Not annualized)
- Average Daily $/MW = $0.19/MW
- Aggregate % Return = 40% (from January 1 – March 6 )
- Aggregate $/MW = $0.20/MW
- Max Daily Return = 517%
- Min Daily Return = -459%
- Daily Win % = 75%
Optimizing the Default
As noted in January's blog, De-risk Short Positions: Extracting Value from Over-Valued CRR Trades, the Nodal Market Insights application enables users to customize their own input assumption. One of Genscape’s market analysts has been developing his own assumptions each day which differ from the standard set of assumptions. The customized assumptions differed only in terms of the:
- Constraints being studied by the model
- Demand forecast
- Generation supply stack for a given day
All other model parameters have remained the same. Using the assumptions customized by a Genscape analyst resulted in higher returns overall than the already attractive returns generated by the default set of assumptions. Again, the returns were generated from a mix of long and short positions, however in aggregate 35 of 39 days netted to a short portfolio based on cost. As noted below, the win rate is nearly the same with a higher aggregate return and a 21% higher $/MW return on a daily basis demonstrating that with custom involvement users can further differentiate portfolios creating additional insights that drive value.
The customized assumptions resulted in the following outcomes from February 1 to March 9:
- Average Daily % Return = 23%
- Average Daily $/MW = $0.23/MW
- Aggregate % Return = 54%
- Aggregate $/MW = $0.26/MW
- Max Daily Return = 475%
- Min Daily Return = -1536%
- Daily Win % = 74%
Find new insights. Create new value.
Take a look at Genscape’s Nodal Market Insights Platform today to start applying new insights to your trading processes. Click here to learn more or request a free trial.