1	Evolution of Power Markets and How They Work Marty Blake The Prime Group, LLC 502-425-7882
2	Power Markets 20 Years Ago Buyer initiated transactions Purchases to cover for outages Selling what you had Balanced book Low risk Typically transactions with neighbors
3	Power Markets 20 Years Ago
4	Power Markets 20 Years Ago Large surplus with 33% average reserve margin Utilities heavy on baseload and light on peaking
5	Power Markets 12 Years Ago Beginning of real power marketing Seller initiated transactions Blending of generation sources High margins Beginning of unbalanced books Greater risk
6	Power Markets 12 Years Ago
7	A Market Stimulus June 22-26, 1998 – a week that changed everything Prior to June, 1998 the highest price for electric energy was typically $100/MWh
8	1998 Daily Price Index of Spot Electricity ECAR On-Peak ($/MWh)
9	Power Markets 5 Years Ago Over 375 traders High volume/low margin business Unbalanced books Higher risk Natural gas generation takes off Risk management functions Reserve margins? Coordinated planning?
10	Market Meltdown The California experience Insufficient transmission Insufficient generation Market manipulation Seriously making money Impact on western markets Price caps
11	The Underlying Economics
12	Market Mechanisms Bilateral transactions Energy markets Day ahead market Real time market Locational marginal price (LMP) Financial transmission rights Capacity markets Ancillary services markets
13	Power Marketing Today Nine of the top ten players in the trading market for the third quarter of last year have now either totally withdrawn or pulled back substantially from the power trading market. (Power Markets Week, April 14, 2003, p. 26) Back to basics for vertically integrated utilities Hedge funds and financial institutions enter
14	Power Marketing Today Increased counterparty risk Increased transmission constraints Less liquidity in the bilateral forward power markets Increasing and volatile cash demands S&P said that it considers purchased power agreements to be fixed-debt obligations
15	Power Marketing Today Incentives to hold reserves have changed Capacity markets Price volatility in energy markets Reserve requirements Did large customers get what they wanted when they started this whole thing?
16	Purpose of RTO Energy Markets Provides a market solution for transmission congestion Provides a mechanism to deal with energy imbalance Provides a commercial market What is the future of bilateral trades? Role of power marketers?
17	Congestion Management Historically, transmission congestion was managed using TLRs MISO testimony indicated that based on 2003 data, underutilization of transmission capacity during level 3 and higher TLR events averaged: 16.4% in MAPP footprint 10.9% in WUMS sub-region 7.7% in remainder of MISO
18	Congestion Management TLRs are an inefficient way to manage transmission congestion Energy Markets manage congestion by redispatching generation based on energy prices at various points in the system (rather than physical curtailment through TLRs) LMP-based market provides a way to compensate generators for redispatch
19	Structure of the Midwest Market Real time LMP hourly market that allows self-scheduling Day ahead LMP hourly market that allows self-scheduling Financial Transmission Rights that hedge against day-ahead congestion Capacity assessment and generation commitment for supply adequacy
20	Locational Marginal Pricing An energy price that is calculated at each commercial node based on marginal generation bids for a time period, using a security constrained economic dispatch LMP is a marginal price NOT an average price All energy at a commercial node is priced at the LMP Congestion between two nodes are valued at the differences between the nodal LMP’s
21	Example LMP Profile
22	Financial Transmission Rights An FTR is the right to collect the difference in LMP between two commercial nodes Options Obligations Settlement of FTR’s is separate from settlement of energy or congestion charges No schedule is required to collect FTR revenue FTR’s can be traded bilaterally or in an auction
23	Options An option is a type of FTR in which the owner does not pay congestion costs when the Target Allocation is negative, but receives congestion costs when the Target Allocation is positive The Target Allocation is equal to the LMP at the Point of Delivery minus the LMP at the Point of Receipt
24	Obligations Obligations are a type of FTR for which the owner may either pay or receive congestion costs When the Target Allocation is negative, the owner must pay congestion costs When the Target Allocation is positive, the owner receives congestion costs
25	LMP Concepts
26	LMP and FTR Concepts
27	Settlements Paradigm Vertically Integrated Utility (pre Market)
28	Settlements Paradigm Vertically Integrated Utility (in Market)
29	Types of Risk Market price risk Fuel price risk Load risk Transmission congestion Cost of emissions mitigation Unit outages and other production management risks Counterparty credit risks
30	Where Do We Go From Here? Group discussion