Fundamentals of the Power Grid and Electricity Pricing

©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com

David Ulmer

Project Manager

EnergyCAP, Inc.

Fundamentals of the Power Grid and Electricity Pricing


“We believe that electricity exists, because the electric company keeps sending us bills for it, but we cannot

figure out how it travels inside wires.”

Dave Barry–author and columnist


Background in Energy IndustryIT & Project Management

Grid Operations, Markets, and Planning

Energy Management System (EMS)

Smart Grid: SynchroPhasor system deployment

International Relations Liaison

Manager, Member Support Services

Stakeholder process

Market design


Understanding the Power Grid and Electricity Markets can save you money

What is the grid and who keeps it running?

Why do we have wholesale electricity markets and how do they affect me?

Where does the money go when I pay my electricity bill?


What is a Power Grid?

Often called the high voltage transmission system

Transports large volumes of electricity from generators to users

All generators and utilities are fully connected and synchronized at all times


Courtesy of US Dept. of Energy

Three Power Grids in the United States

The Eastern

Interconnection

is the largest

motor in the

world


Courtesy of PJM

Getting Power from the Generator to Your Home


Who regulates the grid?Federal Energy Regulatory Commission (FERC) interstate trade of energy

State public utilitycommissions rates for consumers


*Peak Load in MW

50,270

112,197

50,270

33,939

158,450

28,127

45,248

Regional Transmission Organizations (RTOs) &Independent System Operators (ISOs) in North America


Constant balancing act– frequency measures success

Limited options for electricity storage, so the grid must be kept in balance constantly

Electricity generation increases frequency(speeds up grid)

Electricity usage decreases frequency (slows down grid)


Managing Frequency is a Constant Task

Source: PJM eData System


Calculating the Cost of ElectricityHistorically, prices set by utility companies (cost recovery)

FERC encouraged independent generation offers (risk transferred to investors)

Open transmission lines allow for competition between generators


Courtesy of PJM

Generators Are Used Based on Cost (Economic Dispatch)


Locational Marginal Price (LMP)

Generators should be compensated based on their location

Customers should pay based on their access to generation

Prices are dynamic–change every five minutes


Source: MISO

LMP Example: Midcontinent ISO


Source: PJM

LMP Example: PJM during Superstorm Sandy


Typical SummerLoad Curve

Typical WinterLoad Curve

Biggest Influences on Electricity Prices:Weather and Human Behavior


Art and Science of Electricity MarketsForecast electricity use

Schedule the cheapest generation possible

Ensure that transmission system is not overloaded or damaged

React to unexpected changes


Wholesale Electricity Prices are the Basis for Retail Rates

$0

$50

$100

$150

$200

$250

$300

$350

HR1HR2

HR3HR4

HR5HR6

HR7HR8

HR9HR10

HR11HR12

HR13HR14

HR15HR16

HR17HR18

HR19HR20

HR21HR22

HR23HR24

Wholesale Price (Hourly LMP)

Retail Rate:Average of hourly

LMP values


Other Grid ConsiderationsHow do we ensure that there is always enough generation to meet customer demand?

What happens when there are unexpected changes to weather or human behavior?

How does the grid react to equipment failure?

Additional Markets and Ancillary Services


New England Swings from Energy Capacity Surplus to Shortfall

February 6, 2014 by Linda Hardesty

New England’s auction to acquire the power system resources required to meet consumer demand in 2017-2018

concluded this week with a slight shortfall, resulting in rising prices that reflect the need for new resources, according

to ISO New England, the operator of the region’s bulk power system and wholesale electricity markets.

Preliminary results from this week show that the Forward Capacity Market (FCM) auction concluded with about

33,700 MW of the 33,855 MW of capacity required for the 2017-2018 capacity commitment period. A preliminary

estimate of the total cost of the capacity market in New England in 2017-2018 is about $3.05 billion; by comparison,

through the first seven auctions, the total cost to the region ranged from about $1.06 billion in 2013 to $1.77 billion

in 2009.

The first seven auctions concluded with a significant surplus of capacity (with the exception of the NEMA/Boston

zone, which had insufficient competition in the previous auction). However, for the first time in auction history, New

England’s capacity auction resulted in a small shortfall relative to the requirement. In advance of this auction, 3,135

MW of resources announced plans to retire, in addition to several major plants that had previously announced their

plans to retire starting this year.

While the auction closed with slightly less capacity than will be needed in 2017-2018, the FCM design provides

mechanisms for such gaps to be closed through periodic reconfiguration auctions held over the next three years.Source: Energy Manager Today

What happens if electricity usage grows faster than our ability to supply?


New England Swings from Energy Capacity Surplus to Shortfall

February 6, 2014 by Linda Hardesty

New England’s auction to acquire the power system resources required to meet consumer demand in 2017-2018

concluded this week with a slight shortfall, resulting in rising prices that reflect the need for new resources, according

to ISO New England, the operator of the region’s bulk power system and wholesale electricity markets.

Preliminary results from this week show that the Forward Capacity Market (FCM) auction concluded with about

33,700 MW of the 33,855 MW of capacity required for the 2017-2018 capacity commitment period. A preliminary

estimate of the total cost of the capacity market in New England in 2017-2018 is about $3.05 billion; by comparison,

through the first seven auctions, the total cost to the region ranged from about $1.06 billion in 2013 to $1.77 billion

in 2009.

The first seven auctions concluded with a significant surplus of capacity (with the exception of the NEMA/Boston

zone, which had insufficient competition in the previous auction). However, for the first time in auction history, New

England’s capacity auction resulted in a small shortfall relative to the requirement. In advance of this auction, 3,135

MW of resources announced plans to retire, in addition to several major plants that had previously announced their

plans to retire starting this year.

While the auction closed with slightly less capacity than will be needed in 2017-2018, the FCM design provides

mechanisms for such gaps to be closed through periodic reconfiguration auctions held over the next three years.Source: Energy Manager Today

What happens if electricity usage grows faster than our ability to supply?

New England’s auction to acquire the power system resources required to meet consumer demand in 2017-2018 concluded this week with a slight shortfall,

resulting in rising prices that reflect the need for new resources

…the total cost of the capacity market in New England in 2017-2018 is about $3.05 billion; by comparison, through the first seven auctions, the total cost to the region ranged from about $1.06 billion in 2013 to $1.77 billion in 2009.

In advance of this auction, 3,135 MW of resources announced plans to retire$1.5 Billon impact in a single year


What is Capacity?Ability to serve all customers at all times

Plan for only one controlled blackout every 10 years

Use forecasting and statistical analysis to determine future electricity use and generator availability

Provides a daily revenue stream for suppliers

Capacity=Demand Charges


Courtesy of Center for Energy and Environment

Capacity Must Consider Peak Usage Regardless of Season

Capacity Requirement

Constant Year Round


Additional Grid Services (Ancillary Services)


PJM©201319

PJM Wholesale Cost

www.pjm.com

Energy, 36.24

Reliability(Capacity), 4.77

Transmission,4.51

Regulation, 0.28

OperatingReserve, 1.54

PJM Cost, 0.34

Reactive, 0.34

TransmissionOwners Control,0.08

SynchronizedReserve, 0.03Black Start, 0.14

TOTAL: $48.26/MWh

YTD February 2013($/MWh)

Add it all up…

Source: PJM


Thank you for your time and interest

Email: [email protected]

Web: www.EnergyCAP.com


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Fundamentals of the Power Grid and Electricity Pricing

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