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Ron Coutu

Ron Coutu. Strategic Market Advisor (not an Engineer). From the Computer Scientist’s perspective of the Economist view of the Market. Wholesale Electricity Markets Made Easy. This slide is representative of this presentation. From. To.

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Ron Coutu

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  1. Ron Coutu Strategic Market Advisor (not an Engineer) From the Computer Scientist’s perspective of the Economist view of the Market Wholesale Electricity Markets Made Easy

  2. This slide is representative of this presentation From To Professor William Hogan is Research Director of the Harvard Electricity Policy Group (HEPG), who is one of the “fathers” of current Market design in the United States Me - Computer Scientist originally trained in COBOL (This is the original COBOL team, I am not there) You: Very smart engineers like Tesla

  3. Today’s Objective • To introduction and explain the ISO New England’s Energy Markets • In these auction-based markets, customers buy and sell$6 to $12 billion of electricity annually • Everyone who lives in New England is implicitly part of this market since almost every MW produced and consumed flows through the market

  4. Power System Components • Generators (Make power) • Transformers • Transmission lines • Distribution lines • Loads (Use Power) Many Different Perspectives .

  5. Perspectives can SHape your views

  6. How many of these are spinning?

  7. Which table is longer? Which is wider? A B

  8. Let’s Talk about Markets From an Economic Perspective (put your engineering thoughts on hold)

  9. Topics Covered Wholesale Energy Markets: • Market Auctions: How do they work? • Economic Incentives: Why do they work? • Do they work?: Competitive markets versus traditional utility regulation

  10. Is an Electricity Market like a Grocery Store?

  11. Dramatic Shift in Energy ProductionRegion has seen shift from oil to natural gas

  12. Natural Gas & Wholesale Electricity Prices LinkedBecause of New England’s heavy reliance on natural gas as a fuel source, natural gas typically sets the price for wholesale electricity Electric Energy $/MWh Fuel $/MMBtu

  13. Electricity Auctions: Background • Daily auctions for electric power • Determine wholesale electricity prices • Buyers and sellers are: • Large energy users (buyers) • Load Aggregators (buyers)(serving homes & businesses) • Power plant owners (sellers) • Financial traders (buy and sell)

  14. A Simple Example: Auction Bids and Offers Demand: Bids to Buy Supply: Offers to Sell What is the Market Clearing Price?

  15. Clearing the Market: Price and Quantity Supply Price = $52 Demand Quantity

  16. What Clears? What Offer Sets Price? Offers to Sell Bids to Buy Marginal Seller 150 Marginal Buyer Offer F Sets the Market Price = $52

  17. Market Settlement: Who Gets Paid What? Supply Side: Cleared Offers to Sell

  18. Market Settlement: Demand Side Demand: Cleared Bids to Buy

  19. About Clearing the Markets • Timing: • Every hour has a different market price, quantity (24×7) • Auction is held on a Day-Ahead basis • Today’s prices… • Published on http://isoexpress.iso-ne.com • ISO to Go - iPhone and Android APP • What happens the next day? • Sellers are assured payment at the market clearing price • Buyers are assured physical delivery by the market operator

  20. Assuring Delivery the Next Day • ISO New England operates: • Electricity auction markets for New England region; and • Electric power grid to assure deliveries in the region.

  21. Energy Markets Timelines Day-Ahead Forward Market Real-Time (Spot) Market DA Forward Market bids and offers due 10AM DA Forward Market results published by 13:30 RT (Spot) Market opens Continue to execute the Real-Time (Spot) Market during the delivery (operating) day ―10:00 ―13:30 ―00:00 DAY-AHEAD FORWARD MARKET CLEARS DELIVERY DAY – REAL TIME MARKET CLEARS 14:00― ―13:30 ―10:00 ―00:00 Re-Offer Period closes by 14:00 for the next day’s Real-Time (Spot) Market Next DAY-AHEAD FORWARD MARKET CLEARS Next DELIVERY DAY

  22. Forward Markets and Spot Markets • Time for a Reality Check: • Suppose buyers (retailers/utilities) purchased a certain amount of electricity in the Day-Ahead Market auction • What if actual demand turns out to be higher the next day? • Do we need: • Another auction? • New prices? • How and when do we deal with this?

  23. Forward Markets and Spot Markets • There’s also a spot (“real-time”) electricity auction • Intersecting supply offers and actual demand  new price! • That means there are two prices: • A forward price set in the Day-Ahead Auction; and • A spot price set in real-time, based on actual supply and demand • Who gets paid what, then? • Principle: The price is established when the offer is accepted • Forward price applies to bids and offers cleared in the forward market; • Spot price applies bids and offers cleared in the spot market

  24. Example: What if Actual Demand is Higher? Spot Price = $55 Day-Ahead Price = $52 Real-TimeDemand Day-AheadQuantity

  25. Who Gets Paid What? Incremental offers are cleared to meet incremental demand in the spot (real-time) market Offers to Sell Previously Cleared at Forward Market Price = $52 Now Clear at Spot Market Price = $55 200

  26. Spot Market Settlement: At Real-Time PriceSellers F, G, H deliver 500 MW more than they sold in Day-Ahead auction

  27. Real-Time Market Settlement: Demand SideAssume highlighted buyers demand more in RT than purchased DA

  28. Test Your Auction Intuition What if demand turns out to be lower the next day? • Then: Spot price < forward price • In real-time: Market operator instructs sellers with offers above the spot price to not produce, even if they cleared in DA forward market • In spot market settlement: These sellers are charged the spot price • By not producing, these sellers incur no (variable) costs Question: Are they happy about this? Or: Would they rather be producing?

  29. Example: Actual Demand is Lower in Real Time Real-TimeDemand Day-AheadQuantity Seller E Offer: 200 @ $51 Day-Ahead Price = $52 Spot Price = $49

  30. Scenario 1: Seller E’s payoff if it produces to cover its Day-Ahead cleared position • Consider its Day-Ahead auction position: • Offered: 200 MW at offer price $51 each • Cleared: 200 MW at market price of $52 each • Revenue: $52 × 200 MW = $10,400 • Costs: No (variable) costs yet; production occurs tomorrow. • Real-time Scenario 1: Produce the 200 MW

  31. Scenario 2: Charging the seller to not produce • Real-time Scenario 2: Don’t produce the 200 MW • Seller E will be charged the spot price to ‘buy out’ of its delivery • Yes! Seller E is better off paying to not produce in real-time. • Same applies for Seller F. Why? • What about lower-cost sellers with offers below the spot price of $49, such as Sellers A, B, and C? What would they rather do? • What would happen if the buy-out cost (spot price) is less than $49?

  32. How does this influence consumer’s bills? • So in the previous examples the wholesale load server was getting charged as much as $55/MWh • How does this translate into retail bills? • Someone is buying the energy on your behalf, perhaps at the very volatile prices (prices can range from $0 overnight to $400/MWh on a single day at times) • This gets passed on through a charged which is usually reflective of the expected average prices over a longer period of time

  33. How Do These Markets Affect Homeowners’ Electric Bills? Wholesale market prices impact “Generation” component of an electric bill ($77.15 / MWh = $0.07715 /kWh)

  34. B. Auctions, Costs, and Incentives • In the Day Ahead market example, the clearing price = $52. • Cheap seller A: Offered $46 • Marginal seller F: Offered $52 • Expensive seller J: Offered $57 • Who made a profit? Why? • Implications. What incentives does this create for: • Short term: A seller’s operating costs and offer prices? • Long term: Incentives to minimize costs when building power plants?

  35. Competitive Markets and Traditional Regulation • In many other, non-ISO Market parts of the United States, there are traditional utilities that: • Own power plants, and build new ones, when power demand grows • Regulated power prices are set by PUC’s, passing costs onto consumers • Concerns motivating competitive markets: High costs, incentives to over-build, and operational inefficiencies • Why use a market-based system to price power competitively? • Economics says: To improve efficiency! Auction-based markets create strong incentives to reduce production costs and offer prices. • And: who bears the risk of if a new plant comes in with high costs?

  36. Wait! There are more ISO auction markets! • The energy market auction prices vary by location • Thus: Locational Marginal Prices (LMP) • How many different locational prices? Hundreds. In the spot market, they can vary every few minutes. • Why? Because at times the cheapest sets of offers cannot service all of the load in the system due to transmission system limitations • Other ISO Markets: • Capacity market: Long-term forward sales (covers some fixed costs) • Reserves and ancillary services: Special markets for real-time control • All the ISO’s markets employ auctions, and follow the similar principles to those we’ve explored in this introductory module • NYISO, PJM, MISO, ERCOT, SPP and California ISO

  37. Topic Review • ISO New England’s Energy Markets • How the auction markets work • Economic Incentives: Why they work • Big Picture: Competitive markets instead of traditional regulation

  38. You may now return to viewing the world from an engineer’s point of view

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