27 Jun 2024
Alex Done

Day-Ahead & Real-Time optimization: How DART trading works in ERCOT

‘DART optimization’ is the umbrella term for any strategy that leverages both the Day-Ahead and Real-Time Energy markets to generate revenue.

Like all Energy arbitrage strategies, the idea is to buy low and sell high. The only twist is that market participants must consider the dynamics of both these ERCOT wholesale markets.

In some cases, that can be as simple as examining potential spreads in both markets - and picking the largest one.

But DART optimization can get a lot more complicated than that.

Watch the video below to understand how DART optimization can work.

Brandt explains Day-Ahead and Real-Time (DART) optimization.

In this explainer, you’ll learn:

  • How Day-Ahead and Real-Time settlement work in ERCOT.
  • How to utilize DART optimization to manage risk and generate revenue.
  • And how battery energy storage systems can take advantage of DART trading.

DART optimization: How are Day-Ahead and Real-Time prices settled in ERCOT?

When a bid to sell Energy is accepted in the Day-Ahead market, you effectively enter into a contract with ERCOT.

This contract is “financially, but not physically, binding”. Put simply, a Day-Ahead position doesn’t necessarily require the delivery of energy. But, in the event of non-delivery, the market participant pays for their undelivered volume.

So, which price do you pay and/or get paid for your delivered and undelivered volume?

  • You settle positions secured in the Day-Ahead Market at the Day-Ahead Settlement Point Price - even if you don’t deliver.
  • You settle undelivered Day-Ahead positions (i.e. the difference between what you agreed to deliver in the Day-Ahead and what you actually deliver in Real-Time) at the Real-Time Settlement Point Price.
  • And you settle Real-Time positions (when you’ve taken no Day-Ahead position) at the Real-Time Settlement Point Price.

The table below illustrates how this plays out in some simple examples.

Modo Energy ERCOT DART optimization explainer Day-Ahead Real-Time settlement volume (MW) table 1

By precisely securing positions in the Day-Ahead and Real-Time markets, participants can deliberately expose themselves to different prices.

This is the crux of DART optimization - you can decide exactly which price you are exposed to.

How to “trade the DART spread”

There are two main reasons for trading the Day-Ahead and Real-Time markets simultaneously:

  • Hedging risk: by taking positions in the Day-Ahead market, you can avoid (typically) more volatile Real-Time market prices.
  • Speculation: by taking positions in the Day-Ahead market and not delivering, you can bet on how the Real-Time price will turn out - relative to the Day-Ahead price. This is called “trading the DART spread”.

The table below shows the same Day-Ahead and Real-Time positions as the previous table.

Based on a Day-Ahead position secured at a price of $100/MWh, let’s look at the net revenues you would earn, depending on the Real-Time price.

  • The first row shows how you can hedge risk across both markets - the simplest form of DART optimization.
  • The second and third rows show how you can speculate across both markets - i.e. “trading the DART spread”.

By “non-delivery” (when selling energy), we simply mean that the energy isn’t actually generated. For thermal units (that consume gas), non-delivery represents a cost-saving reflective of fuel costs. For battery energy storage systems, non-delivery represents lower throughput and, therefore, cost-savings on degradation.

One unique advantage battery energy storage systems have is that they can trade the DART spread both ways - either when buying or selling energy. When buying energy, this process works much in the same way as outlined above - only in reverse.

How can battery energy storage systems in ERCOT leverage DART optimization?

Historically, battery energy storage systems in ERCOT have earned a large majority of revenues from Ancillary Services.

In 2023, 85% of all storage revenues came from Ancillary Services. However, by mid-April 2024, this number had dropped to 76%.

Value has shifted out of Ancillary Services and into Energy markets - with Energy arbitrage making up an ever-increasing portion of battery energy storage revenues.

This is driven by the rapid deployment of storage, and the subsequent saturation of Ancillary Services - a trend which is set to continue.

In an increasingly competitive landscape, battery operators will need to explore new strategies to maintain profitability in a competitive market. DART optimization will allow storage operators to manage risk, speculate on DART spreads, and reduce cycling costs.

To learn more about how ERCOT’s power markets work, make sure to check out The Energy Academy.

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