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FORECASTING THE FUTURE The Challenge of Estimating Basis Risk

An article written in collaboration with Rodica Donaldson, Senior Director, Transmission Strategy

Washington DC-based Rodica Donaldson has been with EDF Group since 2008 and with EDF Renewables since 2012. In her current role as Senior Director, Transmission Strategy, she heads a six- person group responsible for forecasting transmission congestion and curtailment risks for EDFR’s wind and solar facilities. These issues usually occur because development has outpaced investment in the , so Rodica and her team also engage in efforts to improve transmission and market policies.

A key task for the Transmission Strategy team is estimating something called “basis risk,” which in simple terms can be thought of as the transmission-related costs associated with providing a customer with at a location on the grid specified in a power purchase agreement (PPA). Wind and solar PPAs are typically structured to provide a customer with power at a fixed price per megawatt hour (MWh) for a duration of 15 years or longer.

PPAs traditionally used the location where the facility inter- connects to the electrical grid, called the , as the delivery point for the customer. Today, busbar PPAs are less common and have been replaced by PPAs in which the point of delivery is most often a trading hub. Rodica observes,

“This change has been driven in part by large commercial and industrial (C&I) customers like and Microsoft that have elected to power their operations with renewables as a way of reducing their .” EDFRenewables#IAM

Figuring out a PPA price—that is, the price (), fuel prices and Securing and settling contracts for CRRs/ per MWh that a project has to receive transmission outages.” FTRs is handled by EDFR’s Risk Manage- in order to be profitable—is a complex ment group, but its bidding strategy and The Transmission Strategy team forecasts calculation based on a wide range of many other important decisions through- basis and curtailment risk for all of EDFR’s inputs like the cost of development, out the company are based on the development and existing projects across equipment and many other variables. It modeling and forecasts produced by the US using a powerful computer program also includes basis risk, which accounts Rodica and her group. called PROMOD, an “electric market for losses of electricity that occur when simulation solution that incorporates a “As a team, we are extremely busy,” Rodica electricity is moved long distances over large amount of data regarding generating says with a laugh. “The Development and the grid, and congestion, which occurs at unit operating characteristics, transmission Origination teams have ongoing needs, but points where the grid doesn’t have grid topology and constraints.” PROMOD is we also get requests to analyze basis risk for enough capacity to transmit all the power used extensively by both transmission existing projects that may be experiencing trying to get through, just like a traffic jam in system planners and market participants, curtailment or greater congestion than was rush hour. although the ability to conduct this type of anticipated.” In a perfect world, a project would have zero forecasting is generally limited to larger One of the biggest challenges facing the basis risk—the generation asset would be companies like EDFR. renewable industry is the need for very close to the hub specified in the PPA, Rodica and her team also routinely look investment in transmission upgrades and unaffected by congestion. In the real at ways to mitigate congestion or curtail- across the country. Many of the nation’s world, “The facility could be far away from ment for existing assets. In some cases, it best wind resources are affected by the trading hub, and there may be several may be possible to mitigate a portion of transmission constraints because they’re other facilities competing to use the same a facility’s basis risk through the purchase located in areas where wind development transmission capacity,” Rodica explains. of market-based instruments called has boomed but access to transmission is “Both of these factors will reduce the market congestion revenue rights (CRR) or limited. price of the electricity generated by the financial transmission rights (FTR), facility relative to the price of electricity at To help address this, Rodica’s team is actively depending on the market. the hub. This price difference represents involved in transmission and interconnection basis risk, and it can have a big impact on CRRs and FTRs function similarly to policy and planning processes both at the the economics of individual facilities.” highway tolls—they assign a value to the national level as well as within many of North right to use the available capacity, and America’s independent system operators For example, EDFR might have a PPA for a entities pay to acquire that right. In the (ISOs). These efforts involve engaging with renewable energy facility that requires it to case of a highway toll, the process is stakeholders to examine transmission issues provide a customer with electricity at a hub straightforward—the tolls are fixed and facilitate the integration of large-scale where the price of electricity settles at $20 amounts, and they’re purchased one at a renewables. For example, EDFR is advocating per MWh. If there are no losses or conges- time, as needed. for transmission expansion in , tion between the facility and the hub, EDFR which in 2019 enacted commendable clean receives $20 per MWh generated by the However, when it comes to a wind or goals that can be met only if signif- facility and also provides the customer with farm, things get much more complicated. icant new investments in transmission occur. $20 per MWh power at the hub—meaning CRRs or FTRs are usually only available on a the numbers match up. However, if losses or year-ahead basis, or in a best-case “Renewables represent some portion of the congestion cause the price of electricity at scenario, for up to three years ahead, generation mix in all markets in North the facility’s location to fall to $15 per whereas a facility may have basis risk for America,” Rodica remarks. megawatt hour, EDFR still has to provide the the full term of the PPA. In addition, CRRs or customer with $20 per MWh power at the FTRs are settled day ahead and in fixed hub—meaning, the extra $5 per MWh is a quantities, but wind and solar production cost borne by the company. are variable. “Calculating the basis risk for the term of the PPA essentially involves placing a long-term bet on future market condi- tions based on extensive modeling and complex studies that are very time- Increasing the level of renewable penetration nation- consuming and resource-intensive,” “ wide in a reliable and cost-effective manner is going to Rodica notes. “Basis can fluctuate widely over the short-, medium- and long-term require a lot of work. Transmission is really critical to depending on multiple variables, such as transitioning to a lower carbon electricity supply, demand (electricity consumption), supply so it’s a challenge worth waking up to each morning! ”