Strategies of Reliable Transmission of Energy In A Competitive Market

1. Strategies of Reliable Transmissionof Energy In A Competitive Market Kerry Ray Shuang (Joyce) Zhao March 31, 2008

2. Agenda • Introduction • Deregulation market • Brief overview of regulations • Issues • Recommendations

3. The Natural Monopoly Little competition among transmission providers Still a vertically integrated system

4. Investment 6% transmission versus 20% generation

6. Timeline of regulations 1978 , Congress passed the Public Utility Regulatory policies Act . Policy Act of 1992 1996, Order 888 and Order 889 Order 2000

7. What happened to Deregulation?

8. What happened to Deregulation? • Deregulation encouraged wholesale trading • Caused more stress on transmission network • More plant generation into congested network

9. Reaching Capacity TLRs up drastically System denies transactions that would overload system

10. Merchant Transmission Divestiture of transmission and generation functions Make rates profitable and attractive to private investors Help eliminate loop flow Rate freeze

11. Performance-Based Regulation Compensation based on accomplishing a certain objective rather than the current cost based system Decreased congestion and costs in the UK network

12. Recommendations • The guidelines of market design “Market mechanisms should be used where possible, but in circumstances where conflicts between reliability and commercial objectives can not be reconciled, they must be resolved in favor of high reliability” Blackout Task Force Report, April 2004, p 139

13. Recommendations • The guidelines of market design • Successfully identify market failures and play the role where the market fails. • Distinguish the “good high price” from “ bad high price”. • Operation reserves, exercising market power. • Regulatory body should not over act in facilitating market, which can lead to market intervention.

14. Recommendations • The guidelines of market design • Consistent pricing mechanism. • Consistent between wholesale market and retail market. • The consistency between areas pricing mechanism • Seek workable market design in stead of perfect market design

15. Recommendations • Network Pricing- Nodal Pricing • Nodal Pricing is a method of determining prices in which market clearing prices are calculated for a number of locations on the transmission grid called nodes”. It is also called locational marginal Pricing (LMP) or Locational Based Marginal Pricing ( LBMP) . “Price at each node represents the locational value of energy, which includes the cost of the energy and the cost of delivering it”.

16. Network Pricing Retail Market Pricing

18. Nodal Pricing and MW-mile Methods for Distribution: Have We Uncovered Mission Markets or Elements for Wholesale Power Markets or Elements for Wholesale Power Markets? Presented at the Harvard Electricity Policy Group , Paul Sotkiewicz, Director Energy Studies , Public Utility Research Center, University of Florida.

19. Recommendations • Benefit of Nodal Pricing • Reduce uncertainty and inefficiency from wholesale market by appropriately aligning the transmission cost with generation cost. • Nodal pricing integrates the high-voltage lines and low-voltage lines, thus encourages the investment on building network and encourage the new entrants to come into the market.

20. Recommendations • Benefit of Nodal Pricing • The more efficient dispatch promoted by nodal pricing can lead to overall lower energy price to consumers. • Reward the resources that reduce line losses and line utilization. • Penalize the resources that increase line losses and utilization • Both demand side and supply side get the same price signal, thus it brings demand back to the equation of wholesale market.

21. Recommendations • Cons • -      “ Seams” problems might happen given the transmissions and distributions sometimes happen across different states. It might also bring about more jurisdictional fights between FERC and states. • -      Since nodal price does not cover the fix cost, it might not provide long-term signal.

22. Recommendations • Build up linkage between wholesale market and retail market • Take off the cap on retail market gradually coupled with energy subsidies to low-income families. • Free demand side facilitated by providing enough information of wholesale market and transmission status to consumers. • Put consumers back to fluctuate market by implementing nodal pricing mechanism, which can help make the information of price more transparent to consumers.

23. Questions&Comments?