Atlantic Energy Group Washington, D.C. 10 Jan 2008

Transcription

1 Richard O Neill Chief Economic Advisor Federal Energy Regulation Commission richard.oneill@ferc.gov Atlantic Energy Group Washington, D.C. 10 Jan 2008 Views expressed are not necessarily those of the Commission November 20,

2 Innovation in electric markets 1882 to 1900: Edison, Telsa and Westinghouse AC v DC; Light bulb Competition Financial scale economies? (Morgan, Insull) holding company cost-of-service regulation bigger is better Scale economies increase Lower heat rates and better equipment Nukes too cheap to meter Blackouts (1965, 1977) November 20,

3 for nuclear plants under cost-of-service regulation November 20,

4 Policy choices circa 1977 Cost of service regulation isn t working well Excess capacity and blackouts High costs Let s try market-based regulation Properly shifts risk Stronger incentives 1978 PURPA produces independent power Physically possible Non-Goldilocks prices: too high or too low November 20,

5 Technology eliminates some market failures Computing hardware and software Communication: fiber optics and the Internet vertical integration not required: ISOs allows the load to participate in the market Smart grid [Who could ask for more] Faster response Energy market Generator size small compared to market QFs and IPPs Market design: cost-based to market-based November 20,

6 Non-nukes sold at an average of twice book Nukes sold at less than 15% of book Was this a mistake? Would these units be achieving the current load factors and profits if not sold off? Do more efficient units lower the LMP? yes Should the buy back contracts been longer? What should be done now? Redo? November 20,

7 Empirical mud slinging Technical analysis can be fun Everyone has his/her counterfactual. Everyone has his/her factual!!!!! Is this displaced aggression? What if natural gas prices fell? What happens with a large carbon tax or a renewable mandate? would ISOs and LMPs cause the resulting prices? November 20,

8 Agreements with Price C and others Arms length transactions for power Mitigate exercise of market power (mitigation should fail safe) Don t undo divestiture (don t covet thy neighbors goods) Focus on price-responsive demand (potentially lowers capital costs 15%) November 20,

9 Myths and Shibboleths (truth) FERC has deregulated (FERC has not deregulated anything) Broad socialization does not work (beneficiaries pays does) FERC discourages long term contracts (FERC encourages long term contracts) Deregulation caused the 2003 blackout (a day-two ISO would have prevented the blackout) ISOs are expensive (ISOs are cheap) November 20,

10 Myths and Shibboleths Central planning works better than markets Price volatility can be suppressed (Price volatility can be hidden or hedged) Static market shares indicate market power (the market can change and ISOs mitigate hourly) Pay-as-bid will lower prices (it will raise risks then prices ) Risks should be borne by consumers (Can we avoid the next round of stranded costs?) November 20,

11 LMPs do not cause cancer increase sexual performance cause high prices (high fuel prices do) cause investment (expected future profits do) Prevent investment (environmental issues prevent transmission coal and nukes from being built) November 20,

12 10 electric end use prices (EIA) real (2000$) p rice Did LMPs cause the 1970 to 1982 price increase? year November 20,

13 UK November 20,

14 ISOs, LMPs, Efficiency and green power transparency Allow better integration of all resources solar and wind need real-time ISO markets to realize full value Wind needs a large real-time balancing market solar s highest output is during peak Send good short term price signals Improve short term efficiency November 20,

15 Analogies and their problems analogy owners Commodity /conduit Displace ment network other issues pricing highways public unbundled No congestion Gas tax and toll roads water public bundled yes other uses usage Natural gas private unbundled yes storage and valves Price caps and no withholding Air traffic public unbundled no No pricing Ticket tax parks public unbundled no congestion Income tax telecom private mixed No Busy signal Price caps railroads private bundled no congestion Loose price caps November 20,

16 Structure conduct performance Structure/ cost-ofservice rates Market-based regulation Number of competitors Entry competitors none one or more Access Entry/Access rules hard easier Conduct: Price caps Bid caps market power Market power Allocate mitigation fixed Mitigate bids in an mitigation costs auction Performance incentives incentives Efficiency Efficiency Weak strong innovation November Innovation 20, 2012 Weak!!!!!!!!!! strong 16 Structure conduct Performance

17 ISO Competition Issues Short-term Vertical market power: ISO control Horizontal market power: bid mitigation Long-term Entry barriers generation transmission Price-responsive demand Contracts differing expectations November 20,

18 The Coase paradox: Are efficient markets free? All exchanges regulate in great detail the activities of those who trade in these markets these exchanges often used by economists as examples of a perfect competition, for anything approaching perfect competition to exist, an intricate system of rules and regulations would be normally needed. explanation for these regulations: that they exist in order to reduce transaction costs Those operating in these markets have to depend, therefore, on the legal system of the State." Coase, R.H. (1988), The Firm, the Market and the Law, in The Firm, the Market and the Law, Chicago, U. of Chicago Press November 20,

19 What is needed for efficiency and innovation? good information and market design mitigation of market power recognition of how electricity works understand the choices free market market with market rules administrative rules Regulation should encourage innovation and efficiency November 20,

20 What are the results of ISOs and market-based rates in first ten years The ghosts of ISOs and market-based rates past November 20,

21 Failed market designs Zonal markets (Cal, PJM, NE, UK) Prohibit long-term contracts Sequential markets for energy and anc services One settlement systems Infeasible markets (Cal PX and UK) Ignore non-convexities (start-up and no-load) Ignore market power all ended in administrative intervention November 20,

22 Market Design that works Locational (locational marginal prices) Bid-based dispatch Co-optimization Efficiency reliability Market power (bid) mitigation Freedom of bilateral contracts Long term contracting Short-term contracting November 20,

23 Generation Capacity (up to 4 years) ensure Adequate compensation generation adequacy for reliability Call option in spot market Transmission rights (up to 10 years) hedge transmission congestion costs Options and obligations based on difference in LMPs Day-ahead (24 hours): scheduling market efficiently and reliability (from bids) schedule generation, load and, transmission Real-time (5 Minutes): balancing market efficiently and reliability (from bids) dispatch generation, load and transmission ancillary services Freedom of bilateral contracting and opt out of above November 20,

24 Market Monitoring and Mitigation analyze market design and market power Correct market design Give must run contracts for reliability Ex ante mitigation in ISO is the generator bidding above marginal costs? If so mitigate to marginal costs plus error Investigate physical withholding physical withholding: not available at rated capacity. good reason: scheduled maintenance or forced outage Penalties for violations physical withholding November 20,

25 Some numbers Facts and Counter facts November 20,

26 November 20,

27 Capacity 35% factors at nuclear plants Capacity Factor Increment over % 25% All other units Divested units 20% 15% 10% 5% 0% % -10% November 20,

28 Recent studies are confirming the theory Bushnell and Wolfram, Ownership Change, Incentives and Plant Efficiency: The Divestiture of U.S. Electric Generation Plants, 2006 after divestiture ~2% lower heat rates. nationwide $4 billion per year. helps achieve environmental goals Mansur and White, Market Organization and Market Efficiency in Electricity Markets, 2007 Examine PJM market expansion. Dramatic increase in flows from inexpensive in the Midwest to classic PJM. savings of $180 million per year. November 20,

29 Nonfuel Expense Growth Relative to Figure 2: Nonfuel Expense Trends by Company Type and Restructuring Status MUNI Plants IOU: Non-restructured States IOU: Restructured States November 20,

30 Results of ISOs and marketbased rates in first ten years More competition Lower heat rates Higher capacity factors Lower labor costs Higher profits for efficient generators Higher trading efficiency Better dispatch software Better reliability software November 20,

31 What happens in next ten years? The ghosts of ISOs and market-based rates future November 20,

32 Improvements in MIP (same hardware) one day unit commitment problem year Cplex version Time in sec B&B nodes (unsolved) And though the holes were rather small they had to count them all one week unit commitment problem Year Cplex version Time in sec B&B nodes (unsolved) Eight days a week is not enough to show I care. November 20,

33 Real-time market Survey Results Let me tell you how it will be ISO Current or previous approach Date or planned date of MIP Estimated savings on an annual basis PJM MIP 2006 $100 million ISONE LR/LP 2008 No estimate SPP LP none N/A NYISO LR/LP none N/A MISO judgment with LR 2008 No estimate CAISO LR ~$1 million November 20,

34 End-use markets got to get you into my life Vertical demand curve in ISO markets Consumers receive very weak price signals See monthly average price No real time meter; No real time price On a hot summer day wholesale price = $1000/MWH Retail price = $100/MWH Solution: real time pricing and Demand-side non-convex (MIP) bidding Two-sided market using MIP!!!!!!!!! He's as blind as he can be just sees what he wants to see November 20,

35 day-ahead market Survey Results Let me tell you how it will be ISO Current or previous approach Date or planned date of MIPbased implementation Estimated savings on an annual basis PJM LR 2004 $60 Million ISONE LR/LP 2008 None SPP N/A N/A N/A NYISO LR/LP none N/A MISO LR 2008 None CAISO LP 2008 $23 million November 20,

36 Market Benefits of MIP Implementation PJM Day Ahead Market uplift Costs ($/MWh Load) 0.50 Lower cost to maintain operational reliability 0.25 Lower uplift payments - Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 November 20, $/MWh Load

37 Linear Residual Demand and Local Optimal Solutions Equilibrium Points - Local Optima Net Benefit $50,000 $40,000 $30,000 $20,000 $10,000 $0 -$10,000 Happy ever after in the market place Quantity eco min $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 -$10 -$20 Marginal Cost Total Benefits Local Optima Marginal Costs Derived Demand Equilibrium Points November 20,

38 ISO Current or previous approach Planned or actual MIP implementation date PJM MIP June 2004 NYISO LR with modeling evaluation 2008 ISONE LP none SPP none N/A MISO Bidder selection 2008 CAISO Aggregated 2008 November 20,

39 Open or close circuit breakers using DCOPF IEEE 118 bus provided 25% savings N-1 for IEEE 118 & RST 96 system showed savings from 1% to 16% ISONE networks ranged from 5% to 15% savings or $500 Million annual (all solutions have gaps so higher savings may be found) November 20,

40 Benefits of better market modeling Say the words you long to hear Benefit/cost can be over 100 Bid modeling: CCCT forbidden zones Topology estimators for reliability: priceless Better reactive power modeling and markets Transmission dispatch: 5 to 24% savings Better incentives for transmission Worldwide: $10 to $200 billion/year November 20,

41 A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it. Max Planck, Scientific Autobiography and Other Papers The magical mystery tour is waiting to take you away, Waiting to take you away.