Energy Risk & Market

SPECIAL SERIES Part 3

Energy Risk & Markets

Default Retail Supply:

New Jersey's recent basic generation service auction shows how ignoring the many sources of risk can be financially ruinous.

Bidding at last year's basic generation service (BGS) auction in New Jersey was generally found to be extremely aggressive as many merchant energy providers watched in amazement as the bid prices continued to fall during the course of the auction. Many speculated on the reasons for the low bid prices-was it a thirst for market share no matter what the cost? Was it a sophisticated application of bidder-specific risk profiles? Or was it simply poor modeling? This article describes the sources of risk inherent in load-following deals (such as temperature and price variations, etc.) and how these risks can impact resulting bids in such auctions, which are a relatively new phenomenon. In fact, several states around the country such as Illinois, Ohio, California and Maryland either experimented with such an auction structure or are proposing similar structures for the immediate future.

In the case of New Jersey, the state implemented retail choice in 1998, adopting a four-year transition period. During the first three years of the transition, New Jersey's electricity distribution companies (EDCs)¹ supplied those customers that did not switch to competitive providers using pre-established rates or rate-making processes. During the fourth year of the transition (2002-2003), the EDCs jointly proposed an auction where suppliers competed to supply BGS.