In order to determine if an electricity supply product based upon Locational Based Marginal Pricing (LBMP) in the Day-Ahead Market (DAM) was an effective power purchasing strategy, Luthin Associates was engaged by a preeminent Real Estate Investment Trust (REIT) to develop an analytical model which could value historical and current market data while having the flexibility to consider variations in ESCO supply products.
One of the products under consideration was a block price structure which hedges a portion of the customers load with the residual load charged at NYISO hourly market prices. The nature of this agreement is such that attractive pricing is obtained for the hedged portion of the load because it mirrors the way ESCOs purchase power on the wholesale market. Given the complexity of such a product, a cost model was developed to determine if there is sufficient value in such an offering to outweigh the associated risks.
The analysis revealed that the block supply product offered better value than current fixed price offers. We communicated the deal structure in a way that enabled the client to understand the amount of market risk they were incurring and the potential savings they could achieve.