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 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 StatesHarvard Electricity Policy Group From To Me - Computer Scientist originally trained in COBOL (This is the original COBOL team, I am not there) You: Very smart engineers like Tesla

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 3

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

PERSPECTIVES CAN SHAPE YOUR VIEWS 5

How many of these are spinning?

Which table is longer? Which is wider?

LET’S TALK ABOUT MARKETS From an Economic Perspective (put your engineering thoughts on hold) 8

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 9

Is an Electricity Market like a Grocery Store? 10

Dramatic Shift in Energy Production Region has seen shift from oil to natural gas 11

12 Natural Gas & Wholesale Electricity Prices Linked Because 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

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) 13

A Simple Example: Auction Bids and Offers 14 Buyer ID Quantity (MWh) Price ($/MWh) K100$59 L100$58 M250$57 N200$55 O150$54 P200$53 Q150$51 R200$50 S200$49 T125$47 Seller ID Quantity (MWh) Price ($/MWh) A100$46 B190$47 C150$48 D210$49 E200$51 F250$52 G200$54 H275$55 I150$56 J100$57 What is the Market Clearing Price? Supply: Offers to Sell Demand: Bids to Buy

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

What Clears? What Offer Sets Price? 16 IDQuantityPrice K100$59 L100$58 M250$57 N200$55 O150$54 P200$53 Q150$51 R200$50 S200$49 T125$47 IDQuantityPrice A100$46 B190$47 C150$48 D210$49 E200$51 F250$52 G200$54 H275$55 I150$56 J100$57 Offer F Sets the Market Price = $52 Offers to Sell Bids to Buy Marginal Seller Marginal Buyer 150

Market Settlement: Who Gets Paid What? 17 Seller ID Offer Quantity Offer Price Cleared Quantity Market Price Seller Credit ($) A100$46100$52$5,200 B190$47190$52$9,880 C150$48150$52$7,800 D210$49210$52$10,920 E200$51200$52$10,400 F250$52150$52$7,800 G200$540$52$0 H275$550$52$0 I150$560$52$0 J100$570$52$0 Total Payments to Sellers$52,000 Supply Side: Cleared Offers to Sell

Market Settlement: Demand Side 18 ID Bid Quantity Bid Price Cleared Quantity Market Price Buyer Charge ($) K100$59100$52$5,200 L100$58100$52$5,200 M250$57250$52$13,000 N200$55200$52$10,400 O150$54150$52$7,800 P200$53200$52$10,400 Q150$510$52$0 R200$500$52$0 S200$490$52$0 T125$470$52$0 Total Payments by Buyers$52,000 Demand: Cleared Bids to Buy

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 ISO to Go - iPhone and Android APP What happens the next day? 1.Sellers are assured payment at the market clearing price 2.Buyers are assured physical delivery by the market operator 19

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.

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

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? 22

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: 1.A forward price set in the Day-Ahead Auction; and 2.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 23

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

Who Gets Paid What? 25 IDQuantityPrice A100$46 B190$47 C150$48 D210$49 E200$51 F250$52 G200$54 H275$55 I150$56 J100$57 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

Spot Market Settlement: At Real-Time Price Sellers F, G, H deliver 500 MW more than they sold in Day-Ahead auction 26 ID Offer Quantity Offer Price Delivered MWh Day -Ahead Sale MWh Spot Market Sale MWh Spot Market Price Spot Market Credit $ A100$ $55$0 B190$ $55$0 C150$ $55$0 D210$ $55$0 E200$ $55$0 F250$ $55$5,500 G200$ $55$11,000 H275$ $55$11,000 I150$56000$55$0 J100$57000$55$0 Total Payments for Spot Market Sales:$27,500

Real-Time Market Settlement: Demand Side Assume highlighted buyers demand more in RT than purchased DA 27 ID Real-Time Demand MWh Day –Ahead Purchase MWh Spot Market Purchase MWh Spot Market Price Spot Market Charge $ K $55$2,750 L $55$5,500 M250 0$55$0 N $55$5,500 O $55$2,750 P200 0$55$0 Q $55$11,000 R, S, T000$55$0 Total Payments for Spot Market Purchases:$27,500

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? 28

Example: Actual Demand is Lower in Real Time 29 Day-Ahead Quantity Spot Price = $49 Real-Time Demand Day-Ahead Price = $52 Seller E Offer: $51

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 30 Revenue$10,400From DA Market (above) Production cost($10,200)$51 x 200 MW delivered Profit$200

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? 31 Revenue$10,400From DA Market ‘Buy out’ cost($9,800)200 x $49 spot market price Profit$600

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 32

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

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? 34

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? 35

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 36

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 37

YOU MAY NOW RETURN TO VIEWING THE WORLD FROM AN ENGINEER’S POINT OF VIEW 38