2015 U.S.-Japan Renewable Energy and Energy Efficiency Policy Business Roundtable U.S. Energy Market Deregulation Challenges Solutions & Market Impacts Peter Weigand Chairman & CEO www.skippingstone.com Boston Atlanta Houston Los Angeles Tokyo
U.S. Retail Markets Each State & Utility is a Unique and Different Market In the U.S. 13 out of 50 states have deregulated electricity markets Each individual state has a separate utility commission (government department) that makes the retail rules Utility commissions have authority over publically owned utilities, not municipal owned or cooperative utilities Result: Municipal and cooperative utilities are not open for competition only the public utilities (patchwork of utilities in each state Each state, and each utility in that state, has different rules, technology requirements, meter types, data exchange protocols, etc. Result: Each utility is considered a separate retail electric market (120 markets) All states with competition also have a wholesale market, or ISO, that is regulated by FERC Result: Each utility is considered a separate retail electric market (120 markets) 2
North American Wholesale Markets Each Market Operates Independently 3
Deregulation Challenges Skilled Workforce Renewable Generation Retail Competition Grid Management Transmission Stranded Costs Liquidity Balancing All Challenges Are Connected 4
Deregulation Solutions QSE Real Time Market Settlement Zones & Nodes Trading Hubs Transition Charges Balancing Standards All Solutions Are Connected 5
U.S. Solutions Development Method The Devil is in the Details North American Energy Standards Board (NAESB) Detailed Standards (over 1,000) 8. Improvement Assures Common Business Practices Enables Business Processes & Technology 7. Operational Utilized by All Market Participants 6. Implementation 1. Law is Passed 5. Standards Writing (NAESB) 4. Testing (Pilots & Scenarios) 3. Market Rules Development (Framework) 2. Market Design Research & Collaboration (Goal Setting) 6
Challenge & Solution Challenge Skilled Workforce New market participants (retailers, renewable generators, independent generators, demand response aggregators, etc.) Risk of new market participants making a mess due to lack of experience Scheduling & Dispatch Load Following & Balancing Settlement, etc. Electric grid does not respond well to messes (reliability, real time, etc.) Solution QSE Require all market participants to either become or contract with a QSE QSE = Qualified Scheduling Entity QSE requires Real time connectivity to wholesale market operator 24 hour scheduling desk Real time connectivity to generation Ability to load follow and balance All wholesale market settlements done with QSE Testing & Certification of people and systems 7
Challenge & Solution Challenge Retail Competition Renewable Generation Generation & Loads vary widely by the minute Demand Response Balancing The grid must balance both loads and generation by the minute The value (price) of balancing must be fair and open to utilities, loads and generation Load should be balanced by location with generation & transmission to match Solution Zones & Nodes Real Time Market Balancing is managed by the Wholesale Market Operator (ISO) not each utility Scheduling by QSE s on behalf of retailers, generators & demand response Balancing is based on Zones (utility) and Nodes (geographic substation clusters) Avoids abuse of T&D charges by market participants fair for all Pricing for balancing is Real Time in the Wholesale Market (not utility penalty) Ancillary Market (either generation or DR) Hourly and Sub Hourly Market (either generation or DR) Both are Clearing Markets based on bidding (not bilateral or exchange) QSE 8
Challenge & Solution Challenge Grid Management Liquidity Transmission Price discovery is needed for supply, demand and T&D to make competition work Price signals drive behaviors, which must match physical system constraints Liquidity is required for a robust wholesale and retail marketplace Solution Transmission Rights Trading Hubs Zones & Nodes Transmission becomes a tradable commodity using rights (tagging) Creates a price signal and value based on supply, demand and grid conditions Trading hubs enable liquidity at key points on the transmission system Buyers and sellers use the same hubs Enables both a bilateral and trading market with price discovery for both Creates both liquidity and a financial trading mechanism for risk management From Hubs, redelivery to Zones & Nodes matches loads, simplifies balancing This allows distribution grids to be managed by price signals instead of penalties 9
Challenge & Solution Challenge Stranded Costs Liquidity Monopoly generation was built on long term rate base assurance Deregulation requires shorter term pricing, hence long term valuation doesn t work Balancing the grid with renewables and retail requires fast acting natural gas generation Natural gas supply contracts are long term take or pay, with no short term liquidity Solution Transition Charges Financial Markets Trading Hubs Calculate a value for changing from long term to short term gas or generation Add a transition charge to distribution fees for every customer (5-7 years) Those with stranded costs (generators, T&D) recover valuation differential from transition Bonds can be purchased to convert transition fees to immediate cash Immediate cash can be invested in Deregulation business opportunities Long term supply contracts (gas) can be converted from fixed to floating swaps (financial) Requires a real time wholesale clearing market for power & Trading Hubs Requires converting bundled infrastructure and supply to be unbundled Infrastructure (pipes, terminals, transmission) become capacity markets 10
Challenge & Solution Risk Challenge Management New markets present many risk management challenges Price, balancing, P&L, credit & other financial risks Selling generation at either unit of fleet basis Market design & market rule uncertainty risk Enterprise risk (utilities, retailers, generators, etc.) Solution Standards Trading Hubs Develop and adopt a comprehensive and detailed set of standards Standards apply to all market participants Examples include: Contracts Data Exchange Settlement Method Conduct & Compliance Utilize Trading Hubs Enables Sale of Power by Fleet (not unit specific) Enables a Basis Market Simplifies Price Points (not every generation unit is separate price) Simplifies Scheduling 11
Wholesale Market Results Each ISO Runs a Clearing Market & Manages Transmission, Balancing & Settlement Reliability of supply required to meet demand Transmission scheduling and planning Managing the auction to buy and sell electricity and transmission Setting a clearing price for electricity Determining which generators will run Settling purchases and sales of electricity and transmission Managing the wholesale demand response market Licensing and monitoring of market participants Wholesale market rules (with approval by regulatory agency) 12
How Clearing Works 1. ISO publishes demand forecast for next hour 2. Generators submit price & volume bid 3. ISO selects lowest price to highest price required to meet demand 4. Highest price in bid stack for last volume of demand sets settle price for that hour Generator A Bid Generator B Bid Generator C Bid Generator D Bid Generator E Bid Generator F Bid Generator G Bid 80 70 60 50 40 30 20 These two generators are not dispatched and do not run ISO demand requirement met clearing price is 60 - All generators paid 60 (C-H) - All buyers pay 60 Generator H Bid 10 Bid Stack Prices 13
Wholesale Clearing Market Transactions Ancillary Real Time Day Ahead Transmission Capacity Demand Response Ancillary: 1 minute to 1 hour bid by generators used to balance grid Real Time: Every hour bid by generators traded settle price Day Ahead: Next day bid by generators traded settle price hourly Transmission: Quarterly bid auction for transmission rights traded daily Capacity *: Semi annual bid auction traded required for generators and demand response Demand Response *: Enroll customers based on capacity bid blocks of MW and hours * Not every ISO has a capacity market or a demand response market 14
Two Buying & Selling Methods 1. Wholesale Market a) Sell generation by bidding into the wholesale market b) If bid is accepted, receive clearing price for dispatched power c) Buy power from wholesale market at clearing price d) Transactions for real time, same day and next day 2. Bilateral Purchases & Sales a) Sell power to PPS directly b) Buy power from generator directly c) Schedule power through wholesale market In the U.S. Generators and PPSs Use Both Ways 1. Wholesale market for balancing a) Manage hourly and daily generation and load variations b) Trading and risk management strategies 2. Bilateral market for deals beyond the next day 15
Retail Market Results Retail 1.0 1997-2006 - Utility Affiliate Dominance - Low Mass Market Adoption - Basic Market Design & Rules - High Customer Education Spend Retail 2.0 2007-2012 - Rise of Non Utility Affiliate Players - Emergence of MLMs - Generation Caps Lifted Mass Market Switching Spikes - Complex and Varied Pricing Plans Retail 3.0 2012 ------ - Unlikely New Markets - Defaults, M&A, Fewer PPSs - Non Commodity Products/Services - Increased Reliance on Sales Channels 16
U.S. Retail Marketers are Shrinking # PPS 250 Primarily Consolidation (M&A) Both Gas & Electric # 234 2009 200 Natural Gas Only 150 #196 Q1 2013 100 50 1985 1990 1995 2000 2005 2010 2015 Many Retailers Sell Under Multiple Brands They are Counted as One for Chart 17
Current Business Models Trading Only Trading & Retail Support No Trading Hybrid Generation Focus if physical trading Financial Focus no physical flow Key to Risk Mgmt. for other 3 types Provides Liquidity Physical & Financial No Retail Customers Provide Supply, Risk Management & Credit to PPS Margins on Trading And Retail Support Majority of PPSs Give % of Margin For Retail Support PPS Money & Assets Controlled by Trader Just Mass Market Very Large PPS Only Serve Large End Users Serve Mass Market Physical & Financial Diversifying to Services 18
Typical Electricity Only Retail Price Plans Full Requirements Fixed Price Full Requirements Fixed Price W/10% Band Trigger Pricing (Customer Chooses When To Price) Block & Index Base Volume Fixed Swing Volume Index Variable Price Monthly Fixed Price & Free Saturday Fixed Monthly Budget & Annual True Up Variable Price W/Cap & Floor Any Price Plan + DR Discount 19
Retail Product & Service Diversification Value Added Products & Services Bundled with Power Electric Commodity Supply Chain Behind the Meter Value Added Products On Site Generation Wholesale Market - ISO Generation & Transmission Utility Distribution Utility Owned Smart Meter Consumers - C&I - Residential Thermostats / Controls Solar Batteries Demand Response Premise Services - Repairs - Warranty - Efficiency Projects - Security A Single Retailer May Have over 100 Power Price & Bundle Plans 20
Retail Customer Acquisition Models Indirect Sales Methods Direct Sales Methods Market Opens Today Direct Sales Methods: Sales Reps, Direct Mail, Advertising, Call Center, Door to Door - Cost of acquisition very high Indirect Sales Methods: Outsource Call Centers, Brokers, Multi Level Marketing - Cost of acquisition paid on success commission method 21
More Challenges Ahead Gas & Electric Market Synchronization Gas rules are different than electric rules and have gaps between them Example: Gas is scheduled before power is bid into wholesale market Result: Gas generators don t know if they will run before scheduling gas Environmental Impacts EPA rules will result in coal plant retirements EPA rules minimize use of end user oil fired back up generation Fortune 1,000 want more renewables for public reporting purposes Reluctant to sign term lengths needed to finance new projects Aging Workforce 70% of utility work force eligible to retire within 6 years Utility jobs not sexy for college graduates Infrastructure Issues Years of minimal or no rate increases result in minimal investment in the grid No meaningful way to recover investments in transmission Smart meter investments have yet to provide ROI (in many cases) 22
About Skipping Stone Skipping Stone is a global energy professional services company with of over 340 energy veterans. Market Segment Focuses Retail Gas & Electric Wholesale Gas & Electric Demand Response Renewables Energy Technologies Energy Management Professional Services Strategy Development Market Research Standards Development Solutions Design Risk Management Technology Services Implementation Mergers & Acquisitions Outsourced Services Training & Recruiting Boston Atlanta Houston Los Angeles Tokyo 23
Thank You for the Opportunity to Share Our Knowledge with You. Peter Weigand Chairman & CEO peterw@skippingstone.com www.skippingstone.com 24
Peter Weigand Bio Peter Weigand is Chairman & CEO of Skipping Stone, a global energy professional services company. Peter has over 30 years experience in global energy markets with career highlights including: CEO of Commerce Energy, the largest non-utility owned retail energy company in the U.S. COO of TransEnergy, of one of the leading trading and risk software vendors Peter has purchased or sold over 16 energy related companies He formed the first power trading company while Chief Strategy Officer at Statoil North America His companies have been named to many Fastest Growing Lists, including the Inc. 500, 3times Ernst & Young selected Peter as an Entrepreneur of the Year PennWell named Peter one of the Top 50 Most Influential People in U.S Energy Markets 25