The ironic thing is that roof top solar electricity can alleviate the congestion by providing power when and where it is needed. The local solar may not power all of a building's air conditioning on a hot day but it can power a significant amount which can alleviate spikes that push current generating capacity.
From The New York Times - (check original link at bottom for a good chart) -
Traders Profit as Power Grid Is Overworked
By JULIE CRESWELL and ROBERT GEBELOFF
PORT
JEFFERSON, N.Y. — By 10 a.m. the heat was closing in on the North Shore
of Long Island. But 300 miles down the seaboard, at an obscure
investment company near Washington, the forecast pointed to something
else: profit.
As
the temperatures climbed toward the 90s here and air-conditioners
turned on, the electric grid struggled to meet the demand. By
midafternoon, the wholesale price of electricity had jumped nearly 550
percent.
What
no one here knew that day, May 30, 2013, was that the investment
company, DC Energy, was reaping rewards from the swelter. Within 48
hours the firm, based in Vienna, Va., had made more than $1.5 million by
cashing in on so-called congestion contracts, complex financial
instruments that gain value when the grid becomes overburdened,
according to an analysis of trading data by The New York Times.
Those
profits are a small fraction of the fortune that traders at DC Energy
and elsewhere have pocketed because of maneuvers involving the nation’s
congested grid. Over the last decade, DC Energy has made about $180
million in New York State alone, The Times found.
Across
the nation, investment funds and major banks are wagering billions on
similar trades using computer algorithms and teams of Ph.D.s, as they
chase profits in an arcane arena that rarely attracts attention.
Congestion
occurs when demand for electricity outstrips the immediate supply,
sending prices higher as the grid strains to deliver power from distant
and often more expensive locations to meet the demand. To help power
companies and others offset the higher costs, regional grid operators,
which manage the nation’s transmission lines and wholesale power
markets, auction off congestion contracts, derivatives linked to
thousands of locations on the grid. When electricity prices spike,
contract holders collect the difference in prices between points from
the grid operators. If the congestion moves in the opposite direction,
holders pay the operators.
The
contracts were intended to protect the electricity producers, utilities
and industries that need to buy power. The thinking was that the
contracts would help them hedge against sharp price swings caused by
competition as well as the weather, plant failures or equipment
problems. Those lower costs could reduce consumers’ bills.
But
Wall Street banks and other investors have stepped in, siphoning off
much of the money. In New York, DC Energy accounted for more than a
quarter of the total $639 million in profits in the congestion markets
between 2003 and 2013, The Times found. Some of DC Energy’s biggest
paydays involved Port Jefferson, a village 60 miles east of Manhattan.
Because of the geography of the grid, moving power from one point to
another means demand often briefly outstrips supply here.
“Why
aren’t we getting that money?” said Margot Garant, mayor of Port
Jefferson. City officials, including the mayor, had not heard of DC
Energy before they were told about it by The Times.
DC
Energy — and its profits — are an unexpected result of the deregulation
of the nation’s electric grid. The idea behind deregulation was to
eliminate old monopolies and create robust, competitive markets that
would encourage investment and ultimately lower costs for consumers. But
in most places, electricity bills have been rising, not falling. While
fuel prices, taxes and fees have added directly to the costs, Wall
Street-style traders have contributed in subtle ways by turning new
markets, like the trading of congestion contracts, to their advantage,
The Times analysis found.
The
contracts have attracted big money: More than $2 billion has been
invested nationwide in the monthly auctions for contracts since 2011,
according to Platts, a trade publication.
The Times examined 150,000 congestion contracts that have been auctioned since 2003 by the New York Independent System Operator,
a nonprofit company that oversees the state’s transmission network.
Under deregulation, system operators manage the nation’s transmission
lines and run wholesale power markets where utilities like PSEG Long
Island acquire power to sell to their customers. Using data made public
by the company, The Times cataloged who bought the contracts and at what
prices, and how much money was subsequently won or lost.
The data show how congestion and these contracts led to big profits in Port Jefferson on May 30, 2013.
Capitalizing on Math
DC
Energy had bet there would be trouble. That spring, its traders bought a
number of congestion contracts at a monthly Nyiso (pronounced NIGH-so)
auction. Those derivatives entitled the firm to collect the difference
in power prices between multiple points on the Long Island grid,
including between Port Jefferson and Northport, 20 miles to the west.l
On
that May morning, transmission lines near a power plant in Northport
were down for maintenance just as the heat arrived. The Northport area
had plenty of electricity for itself but could not send more to
communities like Port Jefferson. So while prices in Northport climbed to
more than $129 a megawatt hour, prices in Port Jefferson jumped to $324
— a boon for DC Energy, which held congestion contracts tied to price
differences between the two points.
The
derivatives were not primarily devised for Wall Street. But in New York
and elsewhere, many power companies are smaller players in the market
compared to Wall Street banks like Goldman Sachs, and trading firms like
DC Energy.
It
is unclear how much the activity in the markets, particularly by the
banks, is speculation versus hedging on behalf of clients. Still, many
of the most active participants are investment firms.
The
utilities and power companies suggest they cannot win against trading
outfits that employ math specialists, often called “quants,” to spot
lucrative opportunities. With transmission contracts, there are tens of
thousands of tradable combinations.
“The
financial players have the resources, the smart people that discovered
there is a great opportunity to make money here,” said Hany A. Shawky, a
professor of finance and economics at the University at Albany who has
studied the electricity markets. “The utilities are sometimes missing
opportunities to hedge because of the competition coming in from
financial players.”
Trading
firms like DC Energy say they ultimately benefit consumers by bearing
financial risks and fostering competition. They argue that power
companies can hedge only if someone else is willing to speculate. Market
forces, they say, can also help power companies determine where to
invest in the grid.
“We
believe this type of activity should cause prices to better reflect
true costs and thus create a more efficient electricity infrastructure
that should better serve the retail customer,” Andrew J. Stevens, a
co-founder of DC Energy, said in an email. DC Energy executives declined
to be interviewed for this article but answered questions by email.
For
DC Energy, the derivatives seem close to a sure thing. Former employees
said the executives had told staff members that the firm lost money for
two months in its decade-long history. DC Energy bought the same
Northport-Port Jefferson contracts on Long Island 47 times since 2005,
earning $2 million, The Times found.
Dr.
Stevens said via email that the firm was involved in markets across the
country. “We invest in hundreds of thousands of contracts across the
marketplace,” Dr. Stevens said. “Any subset of these contracts in some
subset of time will show gains, while another subset will show losses.”
Yet
in places like upstate New York or Long Island, the market is so small,
and the participants for certain contracts so few, that knowledgeable
traders can collect rich rewards. Frank A. Wolak, an economics professor
at Stanford who studies commodities, said the congestion markets
created perverse incentives because profits rise when grid congestion
becomes worse.
"If
traders are making money, then consumers are paying more,” Mr. Wolak
said. “The money that these guys are making has to come from somewhere.”
A Winning Record
Little
outside the offices of DC Energy hints at its rarefied position in the
American power industry. The offices, in an upscale area 17 miles from
downtown Washington, are sandwiched between outposts of Hermès and
Tiffany.
Like
top Wall Street banks, DC Energy stocks its trading desk with graduates
of elite universities. Most have backgrounds in science and engineering
— a doctorate in chemical physics from Harvard, for example, or a
master’s degree in artificial intelligence from Stanford — rather than
in finance. Their job is to develop computer-driven trading models to
predict what will happen to electricity prices in different parts of the
nation.
In
this murky corner of the markets, DC Energy is powerful. Dean Wilde II
helped found the firm in 2002; he is a business strategist and
consultant who also heads Dean & Company, a corporate advisory firm
housed in the same suburban offices. Mr. Wilde, who studied physics at
Iowa State University and attended the M.I.T. Sloan School of
Management, founded Dean & Company in the early 1990s after working
for a management consulting company.
Mr. Wilde has given few interviews over the years and declined many requests to be interviewed for this article.
When
it comes to trading in the electricity congestion market, few can touch
DC Energy. While Wall Street banks like Morgan Stanley have placed
bigger bets in New York, few have matched DC Energy’s consistent,
winning record. Just how DC Energy achieved it is a closely guarded
secret. The firm requires employees to sign nondisclosure agreements,
and former employees spoke on the condition that they not be named to
avoid exposing themselves to lawsuits. These people attributed DC
Energy’s success to its focus on the engineering aspects of electricity
trading — that is, on the physics behind how and where power flows on
the grid.
Inside
DC Energy, teams of six to eight analysts search through data for
trends or disruptions before bidding on contracts through auctions held
by the New York Independent System Operator and its counterparts
elsewhere in the country.
“The
message that was portrayed was, by doing this trading, we are making
the markets more efficient,” said a former employee. “But there were
people who got disillusioned and left because many of them aren’t
finance people to begin with, and the focus is on making money and
boosting the company’s bottom line.”
DC
Energy goes to great lengths to protect its winning formula. After one
of its top traders, Jason Miller, left for Saracen Energy, another
trading firm, DC Energy sued. The reason was that Saracen, based in
Houston, had begun playing the New York congestion market, just like DC
Energy. DC Energy said Mr. Miller violated confidentiality and
noncompete agreements he had signed, and misappropriated trade secrets.
A
lawyer for Mr. Miller, who denied all of the allegations against him in
court documents, declined to make him available for comment.
Kevin
Kelley, the president of Saracen, said in an emailed statement that
Saracen’s increased activity in the New York market was because of the
hiring of three traders last year, including Mr. Miller. He added that
Mr. Miller had not used any proprietary information of DC Energy’s to
trade for Saracen’s benefit.
“Saracen
also entered the Long Island congestion contracts markets for the first
time as a result of Mr. Miller’s background and experience with these
markets while at DC Energy,” DC Energy said in its lawsuit, filed in
federal court in the Eastern District of Virginia in January. Saracen,
DC Energy claims, made $1 million last November and December on Long
Island — profits that came at DC Energy’s expense, the suit contends.
“DC Energy had emerged as the only consistently profitable trader in the
congestion markets on Long Island,” the suit says.
Risk of Manipulation
A
major concern for federal regulators is that congestion contracts are
one way to manipulate electricity prices. While trading by financial
players is legal and DC Energy has not been accused of any wrongdoing,
the Federal Energy Regulatory Commission has since 2012 proposed penalties or reached settlements with three large banks and several investment firms, accusing each of manipulation of some type.
In
one of the cases, Louis Dreyfus Energy Services, an energy trading
company, began buying contracts linked to the grid around Velva, N.D.,
where winds off the prairie spin the turbines of a wind farm, in spring
2009.
First,
Xu Cheng, an employee at Louis Dreyfus Energy, which at the time was
partly owned by a J. P. Morgan hedge fund, placed a bet that congestion
would drive up electricity prices. Then, FERC later charged, Louis
Dreyfus set out to make sure those bets would pay off. Trading in
another corner of the electricity market, a second trader created the
impression that congestion was hitting the Velva area, the commission
concluded. Mr. Cheng had examined just such a situation in his doctoral
dissertation at the University of Illinois at Urbana-Champaign, noting
that traders could “make extra profit by creating nonreal congestion.”
The payoff for Louis Dreyfus was a quick $3.3 million in profits.
The commission smelled trouble and began to investigate. In February, Louis Dreyfus agreed to pay $7.4 million
to settle allegations that it had manipulated prices. As is often the
case in such settlements, the firm neither admitted nor denied
wrongdoing.
The
commission has been trying to crack down in the electricity market
lately, but for years it has been outmaneuvered by the traders it is
supposed to police.
Shaun
D. Ledgerwood, a former economist for the commission’s Office of
Enforcement and specialist on market manipulation, said that when he
joined the commission in 2008, only a handful of people were analyzing
possible manipulation in electricity markets. Today, that group is part
of the Division of Analytics and Surveillance, which has more than 50
employees. The enforcement office has grown to about 200 people from 60
in the last 10 years or so, said Dr. Ledgerwood, who is now a
consultant.
“Today,
the FERC is getting access to important data on a more regular basis,”
Dr. Ledgerwood said. “The goal is to get the data in real time.”
A spokesman for the commission declined to comment for this article.
But
some observers fear the commission’s actions could discourage activity
by financial players who they say are critical to the markets.
“They
are making enforcement decisions that are striking at the basic core of
the market’s design,” said William W. Hogan, a professor at the John F.
Kennedy School of Government at Harvard and the intellectual father of
congestion contracts. Dr. Hogan has been an outspoken critic of the
commission’s recent manipulation investigations and has defended some of
the firms that have come under scrutiny.
Back
on Long Island, Mayor Garant of Port Jefferson has been urging the
owner of the Port Jefferson and Northport plants to modernize them to
reduce electricity costs. It has not done so.
“We, the ratepayers, should be getting the benefit of these congestion contracts, not some speculators,” Ms. Garant said.
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