Outline What is a blackout? and how do we deal with them? What - - PDF document

Power Plant Investment and Electricity Restructuring

James Bushnell University of California Energy Institute www.ucei.berkeley.edu

7/31/2006 2

Outline

• What is a blackout?

– and how do we deal with them?

• What is Resource Adequacy?

– who’s supposed to build the generation? – how are they to be paid?

• Proposed solutions

– Commodity (‘energy-only’) models – Explicit capacity product models

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What is a Blackout?

1 in 10 years (goal) ?10 -20 years? 1.5-2 per year Frequency

California 2001 Yes Parts of Cities Supply Shortage US East Coast Blackout No Many States Cascading Transmission problems My House Not Very (probabilities

• nly)

Local Distribution problem Example Predictable? Area Effected Name

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How do we deal with shortages? (not very well)

• Different customers have very different costs of

interruption (value of service)

– but for the most part we ignore that

• random blackouts

– “essential facilities” – interruptible customers

• Individual customers also have very different

values for the electricity they consume

– the difference between interruption and real-time pricing

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Investment in Restructured Electricity Markets

• Old model: Utility builds capacity to meet a

forecast of load, gets a guarantee to recover the costs (plus ROR)

• Market model: Firms build capacity based on

expected market revenues – no guarantees if they make a mistake

– nobody explicitly responsible to ensure there is “enough” investment

Restructuring has Produced Investment in the US

217,000 total Capacity Added Year 20,00 2004 50,000 2003 55,000 2002 48,000 2001 23,500 2000 10,500 1999 6,500 1998 4,000 1997

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Alternative Paths to Resource Adequacy

• “Energy only” markets

– higher price caps – more and better defined ancillary services purchasing – May be combined with hedging requirements

• Backstop procurement

– Energy only market with resource “guidelines” – ISO or other agency makes a payment or long-term contract with specific resources it deems necessary for reliability – LSEs are billed for cost (probably controversial)

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Alternative Paths to Resource Adequacy

• Capacity Markets

– ISO or other agency makes a periodic payment to all certified “resources” (monthly, annual) – LSEs are billed pro-rata by demand – LSEs may sell into the market (take both sides) – Price may be influenced by a “demand curve” for capacity

• Resource Adequacy obligations

– all load serving entities must procure “resources” to cover their forecast demand – procurement left to LSEs – penalties for non-compliance

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International Overview

for most part capacity markets are a US “innovation”

• Energy-based

– UK, Australia, New Zealand, US MISO? – Implicit backstops (procured by Gridcos,etc.) – With mandatory options contracts? (Texas)

• Capacity markets

– ‘1st generation’ PJM, NEISO, NYISO – ‘2nd generation’ PJM, NEISO

• Longer-term, more targeted incentives
• Resource Obligations

– California

• Impeneterable - Spain

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Reasons Offered Why Capacity Markets Are Needed

• Factors present in other industries

– inelastic demand – lack of storage – capital intensive industry, long-lead times

• Inefficient rationing of shortages

– unwillingness to match demand and supply at retailer level – relatively low price caps in some markets (compared to airline bumping)

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Arguments for Capacity Markets

• random rationing creates a “free rider” problem –

capacity markets eliminate shirking

• No one likes price volatility, so it is costless to

establish standards that reduce volatility

• The costs of getting investment wrong are much

greater on the downside than the upside

• To what extent are these self-inflicted problems?

– Lack of RTP, critical-peak pricing, and the randomization

• f outages creates the disparity

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Concerns About Capacity Markets

• Implementation creates a bias towards higher reserve

levels

• Allocation of costs tend to be smoothed amongst many

hours

• Capacity markets in practice distort markets by artificially

smoothing price volatility

– means more consumption & capacity on peak – means higher average cost

• Buying capacity does not guarantee you get energy
• Could empower more subtle forms of supplier market power

7/31/2006 13 Capped and Uncapped Spot Prices

100 200 300 400 500 600 700 800 900 1000 1 12 23 34 45 56 67 78 89 100 111 122 133 144 155 166 177 188 199 210 221 232 243 254 265 276 287 Day Price + "Scarcity" spot_price

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Impact of annual capacity market

50 100 150 200 250 300 1 9 17 25 33 41 49 57 65 73 81 89 97 105 113 121 129 137 145 153 161 169 177 185 193 201 209 217 225 233 241 Day spot price annual capacity cost

7/31/2006 15 Monthly Capacity Markets

50 100 150 200 250 300 350 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211 221 231 241 Day spot_price monthly

7/31/2006 16 Daily Capacity Market

100 200 300 400 500 600 1 12 23 34 45 56 67 78 89 100 111 122 133 144 155 166 177 188 199 210 221 232 243 254 265 276 287 Day spot_price daily

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Summary: The Big Picture

• Goal is to provide reliable service at lowest

possible cost

– what is the “right” definition of reliability?

• Are “energy only” markets viable?

– what’s wrong with the high energy price approach? – can we mitigate those concerns?

• market power mitigation, forced financial hedging
• Are capacity markets the best form of regulation?

– do we want our capacity markets to replicate high energy prices as closely as possible?