PWGSC Electricity Procurement Presentation Outline: Overview of Electricity Market Restructuring...

PWGSC Electricity Procurement

Presentation Outline:

• Overview of Electricity Market Restructuring

• Ontario’s Electricity Restructuring

• Six Options for PWGSC Electricity Procurement

• The Role of Distributed Generation & Renewables

• Energy Procurement Goals and Strategies

• Summary and Conclusions

Electricity Market Restructuring Overview

• Old Market Principles (~100 years): Regulated Monopoly Environment with - Obligation to serve - Power at cost, or - Power at cost + ~10% - Fixed “tariff” pricing

• New Market Principles (started 1996): Competing Generators with - Open transmission system access - Auctions and Bidding for most power - Customer choice in purchase contracts


• Ontario Market Principles

“The price of energy at each time and place shouldreflect the marginal cost of producing or not consumingone more unit of energy at that time and place”

“Market Participants should be compensated for theeffects of constraints and actions that are under thecontrol of the grid owners and the IMO.”


• THEORY: Markets reward efficiency and electricity prices should drop

- Politicians and corporations typically predict 15-20% drop (California, Alberta, Ontario,

etc.)- Analogies with gas, airlines, phones

• REALITY: Electricity is uniquely unsuited to being a true market commodity.

• RESULT: Electricity price volatility & uncertainty

Deregulation Case Studies

• Many commodity prices initially fell - SWEDEN• Scrutinize reasons before jumping to electric conclusions

3 / 2 4 / 9 9 3

D e r e g u l a t i o n I m p a c t o n P r i c e sD e r e g u l a t i o n I m p a c t o n P r i c e s

-80%

-60%

-40%

-20%

0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Year (starting from first year of deregulation)

Perc

ent c

hang

e in p

rice Airlines (1977)

Railroads (1980)

Trucking (1977)

Natural Gas (1984)

Telecommunications (1984)

3 / 2 4 / 9 9 3

D e r e g u l a t i o n I m p a c t o n P r i c e sD e r e g u l a t i o n I m p a c t o n P r i c e s

-80%

-60%

-40%

-20%

0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Year (starting from first year of deregulation)

Perc

ent c

hang

e in p

rice Airlines (1977)

Railroads (1980)

Trucking (1977)

Natural Gas (1984)

Telecommunications (1984)

Electricity Market Restructuring

• The Guru: Professor William Hogan Research Director - Electricity Policy Group Harvard Business School

• The Mantra: Competitive markets extract price efficiencies that result in savings for consumers

• The Reality: Electricity has five unique characteristics that frustrate the market’s “unseen hand”

Electricity Market Restructuring

• Electricity can’t readily be stored: - second by second match of generation and use - electricity “spoils” in 16 msec!

• Electricity doesn’t travel well - “interstate” travel can double the price - high “shipping” losses (10% per 1000 km)

• Customer demand tends to be price inelastic

• Cost and complexity of gen facilities limits suppliers

• Severe price volatility raises supplier risk premiums - Markets Monetize Risk

PJM Spot Prices: June ‘99 to June ‘00

Price Volatility in Deregulated Electricity Markets

Electricity prices change monthly, daily, and hourly,often by orders of magnitude.

PJM Spot Prices: two days in May ‘00

Price Volatility in Deregulated Electricity Markets

• Daily price variations of 1,000%• Yearly price variations of 10,000%

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California Spotmarket 1998-1999

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apr jun aug oct dec feb apr jun aug oct dec

California Power Prices

In one year, sellers learned how to decouple the traditional market correlation between demand and price.

California Power Prices

• But despite all the horrors of California electricity restructuring, Ontario is not the same.

DIFFERENT RULES GREATER SUPPLY LITTLE DEPENDANCE ON GAS OR IMPORTS

Projected Ontario Power Prices

Correlations to the PJM electric demand and price are strong

Ontario Electricity Restructuring

• Breakup of Ontario Hydro (Apr ‘99): - five shareholder-based companies - separated generation, transmission, & control - incorporated under BCA, further sales planned

• Reduced Municipal Distribution Utilities (Nov ‘00) - 300+ “Munis” reduced to 98 “LDCs” - all incorporated as businesses under BCA

• “Corporatization” of Ontario’s power system has been complex and disruptive

• Ontario Government is the sole shareholder now, but will further divide and privatize (especially generation)

Ontario Electricity Restructuring

• Ontario’s physical delivery system does not change - generators connect to transmission lines - LDCs take power from transmission lines - customers receive electricity from LDC lines - some large industrials connect to transmission lines

• Pricing and payment systems are completely new - contracts between all parties for everything - IMO runs the “Dutch auction” spot market - IMO dispatches generation and runs transmission - IMO collects and distributes wholesale payments - LDC’s offer “standard supply” to all their customers - any user can have side-deals for electricity with a wide variety of market players.

Ontario’s Physical Electrical System

Ontario’s Proposed Market Transactions

GeneratorsGenerators TransmittersTransmitters

DistributorsDistributors

Retail Customers

Retail CustomersRetailersRetailers

WholesaleBuyers & Sellers

WholesaleBuyers & Sellers

Legend

IMOIMO

Spot Transaction

IMO Procurement

Flow of Electricity

Physical Bilateral Transaction

Ontario Energy Board

• Energy Competition Act, 1998, significantly expands role of OEB

• OEB provided with rule-making authority

• OEB will license generators, transmitters, distributors, wholesalers, retailers, and the IMO

• No longer has to use public hearings to exercise authority over generation, because prices will be set in a competitive market

Ontario Energy Board (cont’d)

• OEB still required to set the rates charged by transmission and distribution utilities

• OEB monitors market for abuse of market power with IMO assistance

• Reviews sale or acquisition of generation, transmission and distribution facilities

• Generators are free to set their own prices

Independent Market Operator

• IMO registers all market participants and establishes Financial, Technical, and Legal requirements

• IMO operates real time spot market, settlement, billing and collection

• Generators offer into market

• Loads bid into market

• Physical bilateral contracts allowed between parties

• Transmitters provide access to all

• IMO controls the transmission system

Ontario Power Generation

• OPG currently generates 90% of Ontario’s consumption, but is expected to shrink to 35%

• Initial restrictions on OPG pricing (tricky)

• Price cap of 3.8 cents/kWh and rebate mechanism over first 4 years of open access

• Contract Required Quantity (CRQ) is annual quantity of electricity on which the rebate is determined and paid by OPG

• But CRQ decreases with OPG “decontrol” milestones

OPG Cap Diminishes

• CRQ was initially set to 90% of OPG's expected sales into the Ontario market

• Has already fallen to 70%

• Only if average price is greater than 3.8 cents/kWh is a rebate is paid from OPG to the IMO

• Other adjustments lower any rebate

• Rebates come roughly 14 months after consumption

• Bottom Line: average market price can go well above 3.8 cents/kWh

Price Projections

Analysts believe Ontario electricity prices will rise to those in neighbouring States soon after market opens

Current average electricity (energy component) price in Ontario: 4.35 ¢/kWh

Insiders speculate Ontario electric energy price will move to an average 5.3 ¢/kWh after market opening

Compare with Alberta where “pool price” went from 2 ¢/kWh before market opening to 9 ¢/kWh in 2000

It is certain that electricity prices will be much higher during weekday daytime “5 x 16” blocks than at night or weekends (see NYMEX or PJM prices as proxy for IMO.)

Studies but no action. Currently legislating A timetable but no current choice. Implementing a competitive electric utility market Functioning competitive electric utility markets

US Electricity Deregulation Status as of May 2001

PWGSC Electricity Procurement

The Six Options (and the main requirements)

1. Standard Supply (the IMO and LDC take care of everything)

2. Competitive Retail Procurement (contracts with retailers)

3. Buy from IMO spot as a Wholesale Consumer (registration)

4. Buy from a Generator thru bilateral contracts (market savvy)

5. Bilateral contracts with non-generators (market savvy 2)

6. Self generate (risk capital or contracts with operators)

1. Standard Supply Service

Available to all customers connected to distribution lines (i.e., connected to 44 kV line or below)

By Code, SSS is a spot-market pass-through of the hourly Ontario electricity price (HOEP)

Smallest customers will have the (old) indicating meters, monthly readings, and a “net system load shape” applied to their total energy use to yield a final bill

Intermediate customers might decide to pay for the installation of hourly-interval meters, especially if their load shape is “better” than the default “NSLS”

Large customers (>1000 kW initially, >500 kW after first 6 months) will be obligated to install hourly-interval meters ($1,000 to $2,000 each)


It Matters What Shape You’re In!

At least 21 PWGSC buildings in Ottawa must be interval billed, 12 smaller ones have interval meters, SSS electricity prices rise and fall every day

If your load rises during the day, you’ll be using power at the most expensive hours During price spike events, you can save a significant fraction of your power bill by curtailing load Notice of hourly prices only comes on IMO web site Systems to “shape” load (operators and hardware) must be planned, installed, and maintained to be effective Metering services from your LDC or other official providers


X

Customer B

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ctri

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oad

Customer A

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Hourly Electricity Price

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Time of Day

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1 3 5 7 9 11 13 15 17 19 21 23

Time of Day

Pri

ce

= 750

= 600

= 450


Today, MEUs buy for ~6.2¢ and add ~1¢ for distribution

for a total of

~7.2¢/kWh.

1.8 ¢

5 ¢ ?

1 ¢

0.2 ¢

0.7 ¢ ________

8.7 ¢/kWh


Some aspects will hit large offices harder:

The former Ontario Hydro “Diversity Credit” for large customers imbedded within municipal utilities was usually passed along to large users in the form of better bulk rates - about 1 cent/kWh lower than everyone else

After market opening, everyone pays spot

Untreated office load shapes (especially summer air conditioning) peak during the high-priced spot times


Some good news for Ontario customers

The Ontario market design passes all generation through the IMO bidding and dispatch process, so the market never “thins” because of direct deals with generators

The IMO, as the biggest “buyer” in Ontario, should command relatively good prices

Ontario has sufficient generation capacity and good ties with adjacent jurisdictions

2. Competitive Retail Procurement

Customers within an LDC can contract with an independent competitive Retailer for all your electrical service

Your LDC will still meter and render an energy bill to your Retailer

Your Retailer, in turn, will invoice you based on the particular terms of your contract

Retailers will likely have their own long-term contracts with generators, and/or will trade in the market using various financial hedges, options, futures, etc.


Some Retailers may offer fixed prices, or fixed time-of-use block rates to customers

Forward fixed prices typically cost about 15% more than the expected spot price to cover the risk

Retailer offers must be carefully compared (price, penalties, obligations, exit terms, etc.)

If you’re large enough, you can write your own contract and tender it for competitive offers that meet your particular expected load profile

Matching Your Load to Blocks


3. Wholesale Customer of IMO

This option mainly for large industry connected directly to transmission lines and with multi-million dollar usage

Wholesale Consumers have special 5-minute interval metering and monitoring that communicates electronically with the IMO (equipment: $10k and up)

Aggregation across multiple sites requires metering and monitoring at each Wholesale Consumers require IMO authorization and registration, and are bound by contract to follow the “Market Rules” (currently ~700 pages and climbing)

Wholesale Consumers pay IMO for energy and must meet “prudential requirements” (financial guarantees)


To have any advantage over SSS, a Wholesale Consumer has to bid for electricity in quantities and prices that you specify

You receive load dispatch instructions over a specified communication terminal link with the IMO, and you will know almost immediately if price is exceeding your “ceiling”

You must respond to load shedding instructions from IMO

You save the money you would have spent on the electricity you avoid using

You don’t receive any “payment” for cutting load


To be of much advantage over simply watching spot prices and acting unilaterally to cut load, a Wholesale Consumer should also bid into the Real-Time Operating Reserve Market (10-minute and 30-minute response)

Operating Reserve bids that are accepted earn a small “standby” payment that accumulates for as long as you’re “on-call”

If called upon to interrupt, further payments (in accordance with your bid) are received from the IMO

The bidding and response process in the IMO market is non- trivial

4. Generator Bilateral Contracts

You can customize supply and pricing arrangements by contracting with individual generators

You can choose to support certain types of generation

Two kinds of contracts are possible: Physical Bilateral Contracts Financial Bilateral Contracts

Physical Bilaterals are submitted to the IMO by registered participants, and the actual quantities of power are deducted from the payment pool the IMO administers - you then pay the generator directly (and avoid the financial prudential requirements of the IMO)

Financial Bilaterals are private contracts directly with the generator - you continue to pay your LDC bills


Financial Bilateral Contracts can accomplish anything that a Physical Bilateral Contract can

Financial Bilateral Contracts seen as “futures” contracts under corporate policy rules, but not different than Physicals

Physical Bilaterals can shift prudential requirements away from the consumer and on to the generator

Physical Bilaterals require IMO authorization and registration (not insignificant)

A generator offering a financial bilateral contract to a non-registered consumer is really acting as a retailer


Financial Bilateral Contracts between Generator and User

User pays LDC for power and separatelysends or receives money from generator

LDC

5. Bilateral Contracts with Others

Financial Bilateral Contracts can be undertaken with any credible party.

These take the form of Contracts for Differences or any other financial position in the market between two parties

Consumers continue to settle their SSS bills with their LDC in the normal manner

Depending on market circumstances, you either owe or receive payments from the other party

Financial Bilaterals can act as a hedge against electricity price volatility

Futures A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange.

Contract A term of reference describing a unit of trading for a financial or commodity future. Also, the actual bilateral agreement between the buyer and seller of a transaction

as defined by an exchange.

Commodity A commodity is food, a metal or another physical substance that investors buy or sell, usually via futures contracts.

Definitions

5. Bilateral Contracts with Others

Are you ready for Financial Bilaterals on the Market?

Test: discuss the pros and cons of a Participating Collarstrategy (a variation on a “collar” simultaneous cap-buyingand floor-selling hedging strategy that allowsthe hedger to benefit to some degree in a pricedecline below the lower level of the collar’s specifiedband. This is unlike a standard collar in which thehedger foregoes any benefit of favourable prices onone side of the band.)

Efficiency & Cogeneration (Combined Heat and Power)

6. Self Generation

Health Canada Lab Scarborough, 75 kW CHP

6. Self Generation

Embedded generation in small sizes (under 1000 kW) is treated “lightly” under the new market regulations

If generation competition is needed to keep prices down, large numbers of distributed or embedded generation sites can accomplish this task

Traditional on-site generation is more expensive than central generation, but when useful heat is obtained too, efficiency rises, and costs and emissions fall

Operate self generation to eliminate peak or spike charges

6. Self Generation

Distributed Generation (DG) - small-scale, modular, power generation units located close to where the energy is used.Drivers: Electricity Price Volatility Environmental Concerns (Kyoto Protocol, Green Power Market)

New Power Market Entrants (e.g. ESCOs) Higher Efficiency with on-site Cogeneration Power Quality Reliability of Supply Premium Power Applications Technology Development New DG Equipment Communications and Control Equipment

The Role of Renewables

• Some renewable energy sources that deliver on-peak (like solar) will compete favourably with peak-time prices

• Ontario has mediocre wind resources, but good small hydro potential •Contracts with renewable energy generators can stabilize long-term energy costs

Procurement Goals & Strategies Understand your building load shapes and analyze their effect on potential bills

Rank your procurement goals: Lowest cost? Lowest risk? Reliability?

Determine your range of financial risk tolerance

Evaluate the trade-offs between different procurement choices:• Price vs Risk• Cost of altering load shapes• Reliability and Services

Procurement Strategy Process

A: Understand your load shapes and potential costs 1. Data Collection 2. Review historical consumption and rates 3. Obtain forecasts for your loads and potential rates 4. Compare historical and forecast data

B: Core Supply Strategies 5. Outline Energy Goals & Strategy 6. Evaluate your Risk Profile

C: Develop Portfolio 7. Review all Purchase Alternatives 8. Develop Preferred Supply Portfolio

Procurement Strategy Issues

1. Develop a strategy appropriate for your company’s goals

2. Set the benchmark for a “good deal” - what measure are you trying to beat?

3. Weigh contract length and exit clause because they can limit your future choices

4. Understand the financial implications for each party in each clause of the contract

5. Write your own contract (if you’re big enough)

Prepare to Shed

Even if you’re not big enough to be a direct IMO market participant, you must be prepared to shed load during high-price hours.

Install interval metering

Watch “theIMO.com”

Install Automatic Load Controls

Practice “Curtailment Management”

Don’t buy $1.00 kWhs!

Reduce Your Exposure

Cut down on electricity purchases to become a smaller “target”:

• Demand Management• Energy Efficiency• Load Displacement Generation

2 MW lead acid battery system provides seamless power for a polymer extrusion plant after 15 seconds a quick start genset takes over for a 1 year payback

20 MW / 14 MWhr Puerto Rico

1 MW / 1.4 MWh Metlakatla Island

6 MW / 8hrs Sodium-Sulfur

eLutions Home Page

PWGSC Data Tree

PWGSC Ontario Data

PWGSC NCA Data

NCA Recording, PWGSC Operated

580 Booth Street

580 Booth Street, Reporting Options

580 Booth Street,Consumption Report

580 Booth Street, Dates and Intervals

580 Booth Street, Bar Chart

580 Booth Street,Table View

580 Booth Street, Microsoft Output

NCA OGD Buildings, Recording

National Gallery

National Gallery, 3 D

National Gallery, 3 D (rotated)

All Buildings, Jan 99

All Buildings, Jan 99 - Dec 99

Aviation Museum Demand Profile

Arts Centre, is Yashin still subsidizing?

580 Booth, Peak Load Day

Peak Day Load Shaping

Peak Day Load Shifting

580 Booth, June 99

580 Booth, Rate Comparison

PV Power / Market Price Coincidence

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Photovoltaic Technology Description

• Free-standing arrays or

• Building-integrated

wall & roof cladding

• Crystalline silicon

(on glass panel) has

highest efficiency

• Thin-film or amorphous panels

laminated to architectural building components

• Simple modular grid-interactive inverters

• Easy, distributed connections to building wiring

• Usually installed with no battery back-up

Solar PV Applications Summary

SpecialityStand-alone

Grid-ConnectedArrays

Solar Roofing Building Façade

Size Range under 1 kW 1 – 100 kW 2 kW – 100 kW 2 kW – 200 kW

CollectorPrice ($US/kW)

Today’s $4000/kW price for solar panels is not likely to drop substantially.

Balance ofSystem Price

up to $4000/kW forbatteries, inverters, etc.

$1000/kW for grid-interactive inverter systems

Benefits Replaces costly gridconnection

Green Energy Icon Replaces some roofingcosts

Replaces cladding costs

Players Kyocera, BP Solarex, Astropower, Seimens,Photowatt (ATS-Canada)

Uni-Solar BP Solarex

Technology Material and energy content of panels tracks inflation, and no efficiency jumps appear imminent.

Biggest innovations in inverters.

Mini-Hydro Technology Description

• Simple induction Simple induction

generatorsgenerators

• Made-in-CanadaMade-in-Canada

low-head turbineslow-head turbines

• Automatic controlsAutomatic controls

• Run-of-river sites, and/orRun-of-river sites, and/or

• Existing control structuresExisting control structures

• Feed nearby buildingsFeed nearby buildings

directly, ordirectly, or

• Sell into distribution gridSell into distribution grid

• Lowest-cost renewable energy sourceLowest-cost renewable energy source available in Canada available in Canada

Conclusions (1)

Electricity Markets are volatile

Price Spikes will occur

Electricity price predictability is gone

Consumers must learn “price sensitivity”

Painful learning curve

Efficiency in supply and demand will eventually

lower prices

Conclusions (2)

•Consumers must prepare to diversify energy

sources and contracts

•Watch initial prices and compare market offerings

•Expect gas price increases

•Lower energy consumption means less financial

risk: invest in DM

Enron chief worried power plant may be in jeopardy

TORONTO - A planned $200-million power plant for Southwestern Ontario may be in jeopardy if the provincialgovernment continues to drag its feet on deregulating the province's electricity market, the head of EnronCorp.'s Canadian unit said yesterday.

Enron, the Texas-based energy firm, is slated to build the 400-megawatt Moore project near Sarnia, Ont.However, construction of the plant is contingent on the government's date for opening the market tocompetition and time may be running out, Rob Milnthorp, president of Enron Canada, said from Calgary.

"I think we are really looking for a fall date as an optimum time for us to align our interests with Ontario," Mr. Milnthorp said.

"If it's put off until spring, I do believe that the project is somewhat in jeopardy and would need to be assessed from an operational standpoint against all other opportunities that Enron has on its plate."

Ontario said in April that deregulation would be brought into effect by the late spring of 2002, but was accused of raising market uncertainty by not setting a specific target date.

The government may have a better idea of its timetable in September, after a key study by the IndependentElectricity Market Operator (IMO) and the Ontario Energy Board (OEB) is finalized. The two have set up a joint task force to prepare for an opening in the wholesale and retail electricity market.

Mr. Milnthorp said Enron still holds out hope the province will give a target date soon after the Septemberstudy is released. Although he said Enron is "still committed to Ontario," he said the company will not invest any further until there is greater certainty.

"We're on hold at this point," he said.

PWGSC Electricity Procurement Presentation Outline: Overview of Electricity Market Restructuring...

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