DART optimization explained: Trading the Day-Ahead and Real-Time spread in ERCOT

There's a lot of talk about DART (Day-Ahead and Real-Time) optimization in ERCOT - but what does it actually mean?

‘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.

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.

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.

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

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

1) Hedging risk: by taking positions in the Day-Ahead market, you can avoid (typically) more volatile Real-Time market prices.

2) 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”.

For battery energy storage systems, value has shifted out of Ancillary Services and into Energy markets.

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

In an increasingly competitive landscape, battery operators will need to explore new strategies to maintain profitability in a competitive market.

DART optimization allows storage operators to manage risk, speculate on DART spreads, and reduce cycling costs.

#ERCOT #PowerMarkets #BatteryEnergyStorage