1	Wholesale Pricing for Electricity Marty Blake The Prime Group, LLC 502-425-7882
2	Wholesale Market Mechanisms Two different wholesale mechanisms Bilateral trading RTO energy markets What role did wholesale power markets play? What role do they play now? What role will they play in the future?
3	Bilateral Trading A power marketer dealing directly with a customer Takes advantage of imperfect information in the market Does not capture advantages of central system dispatch
4	Market Participants Power Marketer - purchases power from one source and resells it to another. Blends power from several sources to meet customer needs Takes title to the power Retail power marketer - sells electric power to end use customer Wholesale power marketer - sells to entities that resell electric power to others
5	Market Participants Power Broker - brings a buyer and seller together. Arranges a transaction without taking title to the power. Aggregator - combines end-use customers into a block of sufficient size to be attractive to a power marketer. Performs administrative functions and reduces the transaction cost for power marketers.
6	Combining Functions Bundled - combining functions for sale as a single product. The bundled electric product currently sold by most utilities combines input procurement, generation, transmission and distribution Unbundled - the customer arranges for and purchases each function separately
7	Wholesale Power Products Firm Power - Electric power or power producing capacity intended to be available at all times during the period covered by the guaranteed commitment to deliver System firm Physical firm Financial firm
8	Wholesale Power Products Non-Firm Power - Electric power or power producing capacity supplied or available under a commitment having limited or no assured availability
9	Wholesale Power Products On-Peak Power 5 days per week (Monday through Friday), 16 hours per day (generally 7 A.M. to 11 P.M.) in the east and ERCOT > 5-by-16 6 days per week (Monday through Saturday), 16 hours per day in the western markets (COB, NOB, Mid-Columbia and Palo Verde) > 6-by-16 Off-Peak Power Weekend Power > 2-by-16 and 2-by-8
10	Wholesale Power Products Hourly Day ahead Week ahead Month ahead Year ahead
11	Wholesale Power Products Tolling arrangements Coal tolling - party delivers coal and receives MWh in return Gas tolling - party delivers natural gas and receives MWh in return Essentially renting the use of a power plant to turn your fuel into power
12	Wholesale Power Products Emission credits NO_x SO² Carbon emissions in the future? Green Power
13	Pricing Cost-Based Pricing - Prices based on the average embedded cost of providing service to an individual customer or a class of customers (FERC regulated for wholesale transactions) Market-Based Pricing - Price that reflects the demand for and supply of the product in the market place (non-regulated)
14	Types of Generation Base Load Intermediate Load Peak Load
15	Base Load Generation High fixed cost per MW Low variable cost (fuel and variable O&M) Meant to supply electric power around the clock Typically coal-fired or nuclear plants Maintenance increases substantially if cycled frequently
16	Peaking Generation Low fixed cost per MW High variable cost per MWH Provides electric power for those few hours of the days of the year when demand hits its peak Can stop or start quickly and frequently Typically oil or gas units
17	Intermediate Load Generation To serve portion of load that varies daily Starts up every morning and turned down every night Balanced profile of fixed and variable costs Typically older units that once functioned as base load plants but have been replaced by newer more efficient base load units
18	Total Cost of Power Production
19	Weighted Average Price
20	Storing Electric Power Batteries Pumped hydro Compressed air Thermal storage Flywheels Superconducting magnets
21	Wholesale Price Variability Daily price variations principally driven by Weather Generating unit outages Transmission constraints Fuel costs A wholesale price of $150/MWh was considered a high price prior to June 1998 Seasonal price patterns typically repeat from year to year
22	Seasonal Price Variability Highest prices in June, July and August Lowest prices in shoulder months Winter prices fall between summer and shoulder months
23	1998 Daily Price Index of Spot Electricity ECAR On-Peak ($/MWh)
24	1999 Daily Price Index of Spot Electricity Into ComEd On-Peak ($/MWh)
25	1999 Daily Price Index of Spot Electricity Into Cinergy On-Peak ($/MWh)
26	ECAR Off-Peak Prices ($/MWh)
27	2000 Daily Price Index of Spot Electricity Into ComEd On-Peak ($/MWh)
28	Handling Upside Price Variation
29	Risk Management Tools Price risk Futures contracts Options hedging Quantity risk Weather options and Futures Insurance against physical loss
30	Average Price Into ComEd (in $/kWh)
31	Elements of a Wholesale Sale Generation Transmission Firm point-to-point Non-firm point-to-point Network service Ancillary services
32	Ancillary Services Necessary to support the transmission of electric energy between purchasing and selling entities while maintaining reliable operation Provided using generation capacity Order No. 888 requires transmission providers to offer 6 ancillary services
33	Order No. 888 Ancillary Services Scheduling, system control and dispatch service - scheduling, confirming and implementing interchange schedule, ensuring operational security during the interchange transaction Reactive supply and voltage control service - Provide reactive power and maintain transmission line voltage
34	Order No. 888 Ancillary Services Regulation and frequency response service - following the moment to moment variations and maintaining scheduled frequency Energy imbalance service - provide energy correction for any hourly mismatch between a transmission customer’s energy supply and the demand served
35	Order No. 888 Ancillary Services Operating reserve, spinning reserve - generators that are on line, loaded to less than their maximum output, and available to serve customer demand immediately should a contingency occur Operating reserve, supplemental reserve - generators that can respond to a contingency within a short period (usually 10 minutes)
36	RTO Energy Markets Matching bids and offers Day ahead market Real time market Locational marginal price (LMP) Financial transmission rights Capacity markets Ancillary services markets
37	RTO Energy Market Issues Can a single market support the economics of both peaking plants and baseload plants? What role does market design play in pricing performance? How big of a problem is market power in RTO energy markets?
38	Issues Two different wholesale pricing mechanisms RTO energy markets Bilateral trading Market seams issues Market to market Market to non-market Wholesale price variability
39	Issues Pricing generation Cost based Market based Price caps Pricing ancillary services Market FERC regulated
40	Issues Pricing transmission Real time pricing at retail level Necessary for price responsiveness of demand at wholesale level Currently price signals are seldom reflected at retail level