Valuing Load Reduction in Restructured Markets

Supply Cost Curve RegressionsMarket Price vs. Value of Load ReductionPhotovoltaic Case Study

William B. MarcusJBS Energy, Inc.311 D Street - West Sacramento, CA 95605 - (916) 372-0534

JBS Energy, Inc.

Research on California and Mid-Atlantic States (PJM Market)

Results presented at three conferences– Pace University Law School energy conference

11/10/00– Natl. Assn. of State Utility Consumer Advocates

(NASUCA) 11/15/00– Natl. Assn. of Energy Service Companies (NAESCO)

11/16/00 Sponsorship

– NAESCO and Pace Energy Project sponsored PJM research

– The Utility Reform Network (TURN – a California consumer group) sponsored California research

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Competitive Market (In Theory)

In a Perfect Market: The commodity can be stored. There is perfect information on price. There are no transaction costs. There are competitive options.

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The Market Reality

Electricity storage is very limited. Small customers receive no real price

signals.– Load profiles– Do not know price until after electricity is used.

Significant transaction costs, particularly for small customers, in seeking out competitive options.

Developing oligopoly creates market power through strategic bidding.

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“Electricity is just another commodity,

like oxygen is just

another gas.”

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Reducing Demand Empowers Customers

Two different ways to reduce demand Real-time customer response, based on

prices– Ultimately computer automated

Investments in:– Efficiency– Load Shifting– Distributed Generation behind the meter.

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Load Reduction Reduces Prices for Everyone

When consumption is reduced the market price is reduced for everyone.

The Value of Load Reduction is greater than market price, once the price reduction is factored in.

It can be analyzed using a quantitative framework.

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Old World versus New World

Price for last unit only set by last bid.

Marginal Cost incurred for last most expensive unit only.

Value of Load Reduction equal to last unit’s marginal cost.

Price for all units set by last bid in “Poolco” structure.

Value of Load Reduction is equal to bid price for last unit plus increase in bid price for all other units (except last unit).

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Methodology

Create Cost Curves relating market price to load.

Calculate market price and value of load reduction as they vary by load level.

Further analysis based on time-of-use periods or time pattern of savings from specific conservation or distributed generation options– Photovoltaic case study analyzed here

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Methodology – Cost Curve

Collect hourly market price and load data Create supply (cost) curve using

regression analysis. Multiple equations may be needed to fit

different portions of the curve. May obtain “family” of curves that vary

by month, day of week, time of day. Ancillary services can be analyzed in

same way (but only 2-8% of energy cost).

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Mid-Atlantic States Supply Curves

0

50

100

150

200

250

300

350

15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

System Load (MW)

Co

st (

$/M

Wh

)

Comparison of Supply Curves

0

10

20

30

40

50

60

70

80

90

100

Weekday, w inter and summer ($2.50 Gas)

Weekend w inter and summer ($2.50 Gas)

Weekday, March

Weekday April-May

Weekday Oct-Nov

Detail less than 45,000 MW

See Detail

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California Supply Curve

Supply Curve PX Day Ahead + NP 15 Weekday Daytime Ancillary Services (Cost in cents/kWh of Total Load)

0

10

20

30

40

50

60

70

80

90

15000 20000 25000 30000 35000 40000 45000

ISO Day-Ahead Forecast Load (MW)

(cen

ts/k

Wh

)

Restructuring Base Case ($2.50 Gas)

High Base Case ($5 Gas)

2000 Summer Shift ($5 Gas)

2000 Summer Shift with Price Cap

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Methodology – Value of Load Reduction

Price Supply

Demand

Reduced Demand

load (MW)

Reduced Prices are Value to Non-Participant Ratepayers

Reduced usage is Value to Participants

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Methodology – Value of Load Reduction – In Words

Greater than Market Price– [(Market price at existing load X existing

load) – MINUS– (Market price at reduced load X reduced

load )]– DIVIDED BY– (existing load – reduced load)

Adjust for hedging

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The Impact of Hedging on the Value of Load Reduction

Physical versus Contractual Hedging– Each has different Impacts on the Value of

Load Reduction – Physical hedging is based on generation sold

on a cost basis– Contractual Hedging is based on an

expectation of future market prices

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The Impact of Hedging – continued

The difference between the Value of Load Reduction on Market Price is attenuated in the longer term.– Impacts the construction of new generation.– Impacts utility system operations through

unit commitments. Assume a portion of supply is not

exposed to pool price to consider these factors.

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California Supply Curves – Value of Load Reduction

0

20

40

60

80

100

120

15000 20000 25000 30000 35000 40000 45000ISO Day-Ahead Forecast Load (MW)

Va

lue

of

Re

duct

ion

(ce

nts/

kWh)Value of 5% Load

Reduction

Market Price

PX Day-Ahead + NP 15 Weekday Daytime Ancillary Services, Market Price vs. Value of Demand Reduction , 40% physical hedge, 2000 Summer Shift Case, Capped

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California Supply Curves – Value of Load Reduction as a Percent of Market Price

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

550%

600%

650%

15000 20000 25000 30000 35000 40000 45000

2000 Summer Shift ($5 Gas)

Restructuring Base Case ($2.50Gas)

2000 Summer Shift w ith Price Cap

Value of 5% Load Reduction as % of Market Price, 40% physical hedges (PX Day-Ahead Energy + Weekday NP15 Ancillary Services)

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PJM Value of Load Reduction – Hedged versus Unhedged

0

1000

2000

3000

4000

5000

6000

15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

System Load (MW)

Co

st (

$/M

Wh

)

Value of Load Reduction: No Hedging versus 50% Hedged Weekday, Winter and Summer

0

50

100

150

200

250

300

350

400

450

500

No Hedge

50% Hedge

Market Price

Detail less than 45,000 MW

See Detail

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PJM Relative Value of Load Reduction

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

1800%

15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

System Load (MW)

No Hedge

50% Hedge

Value of Load Reduction as Percentage of Market Price

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Valuing Photovoltaics

Photovoltaic production data collected for two UPVG sites in Pennsylvania and California.

Hourly market price and value of load reduction applied to photovoltaic generation.

Weighted average of hourly generation calculated to value PV.

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PV Characteristics Sacramento Airport, California 134 kW

PV Generation On-Peak Mid-Peak Off-Peak TotalSummer 42% 26% 32% 100%Winter 70% 30% 100%Annual 29% 40% 31% 100%

PV HoursSummer 17% 20% 62% 100%Winter 0% 38% 62% 100%Annual 10% 28% 62% 100%

PV Load Factor On-Peak Mid-Peak Off-Peak TotalSummer 55% 30% 12% 23%Winter 27% 7% 15%Annual 55% 28% 10% 19%

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PV Characteristics – Plymouth Meeting, Pennsylvania Site

PV Generation On-Peak Mid-peak Off-Peak TotalSummer 35% 49% 16% 100%Winter 83% 17% 100%Annual 17% 67% 16% 100%

PV Load Factor On-Peak Mid-peak Off-Peak TotalSummer 38% 24% 7% 19%Winter 17% 4% 11%Annual 38% 19% 5% 14%

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Value of Photovoltaics Annual - Sacramento Airport, California

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

Average ofBaseload Market

Price ($/MWh)

Baseload ValueOf Load Reduction

Hedged ($/MWh)

PV MarketPrice

($/MWh)

PV Value of LoadReduction Hedged

($/MWh)

Off-Peak

Mid-peak

On-Peak

Grand Total

Market Price / Value of Load Reduction Comparison

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Value of Load Reduction vs. Market Price Sacramento Airport Project

PV Market Price is 8.7 cents/kWh PV Value of Load Reduction is 20.2 cents/kWh

Data Off-Peak Mid-Peak On-Peak Grand Total

Average of Calculated Market Price ($/MWh) 52.28$ 76.76$ 124.17$ 66.39$

Value of Load Reduction Hedged ($/MWh) 99.03$ 151.21$ 350.60$ 139.07$

PV Revenue Calculated MP ($/MWh) 65.42$ 76.28$ 124.88$ 86.75$

PV Value of Load Reduction Hedged ($/MWh) 127.86$ 152.75$ 355.96$ 202.91$

Off-Peak Mid-Peak On-Peak Grand Total

Value of Load Reduction / Market Price 189% 197% 282% 209%

PV Value of Load Reduction / PV Revenue CMP 195% 200% 285% 234%

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Value of Photovoltaics Annual – Plymouth Meeting, Pennsylvania

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

Baseload

MarketPrice ($/MWh)

Baseload Value

of Load ReductionHedged ($/MWh)

PV Market

Price($/MWh)

PV Value of LoadReduction Hedged

($/MWh)

Off-Peak

Mid-peak

On-Peak

Grand Total

Market Price / Value of Load Reduction Comparison

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Value of Load Reduction vs. Market Price Pennsylvania Project

Data Off-Peak Mid-peak On-Peak Grand Total

Average of Calculated Market Price ($/MWh) 15.93$ 28.22$ 52.76$ 24.28$

Value of Load Reduction Hedged ($/MWh) 36.81$ 68.15$ 245.12$ 65.11$

PV Revenue Calculated MP ($/MWh) 22.91$ 29.17$ 56.43$ 32.69$

PV Value of Load Reduction Hedged ($/MWh) 54.63$ 69.03$ 270.71$ 100.23$

Off-Peak Mid-peak On-Peak Grand Total

Value of Load Reduction / Market Price 231% 242% 465% 268%

PV Value of Load Reduction / PV Revenue CMP 238% 237% 480% 307%

• Market Price for PV Oct. ’99 to Sept ‘00 is 3.3 cents/kWh• PV Value of Load Reduction is 10 cents/kWh• Prices and Value of Load Reduction were much higher in 1999

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Findings

Load Reduction Has Greater Value than Market Price– Twice (off-peak) to Five Times (peak)– Evident in both California and PJM

California Price Cap reduces differential

– This result is structural because of the upwardly sloping supply curve.

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Conclusions

Don’t Be Afraid to Invest in Energy Efficiency, Load Shifting and Distributed Generation

Rate Increases from DSM Will Be Mitigated or Reversed by Reductions in Market Price

Peak Reduction Has Highest Value– Air conditioner programs and photovoltaics

High Fixed Charges in Rates Are Counter-Productive– Encourage Consumption and Raise Rates for Everyone

Net Metering for Photovoltaics Is Justified by Higher Value of Load Reduction