fundamentals of the power grid and electricity pricing
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©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
David Ulmer
Project Manager
EnergyCAP, Inc.
Fundamentals of the Power Grid and Electricity Pricing
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
“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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Courtesy of US Dept. of Energy
Three Power Grids in the United States
The Eastern
Interconnection
is the largest
motor in the
world
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Courtesy of PJM
Getting Power from the Generator to Your Home
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Who regulates the grid?Federal Energy Regulatory Commission (FERC) interstate trade of energy
State public utilitycommissions rates for consumers
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
*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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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)
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Managing Frequency is a Constant Task
Source: PJM eData System
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Courtesy of PJM
Generators Are Used Based on Cost (Economic Dispatch)
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Source: MISO
LMP Example: Midcontinent ISO
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Source: PJM
LMP Example: PJM during Superstorm Sandy
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Typical SummerLoad Curve
Typical WinterLoad Curve
Biggest Influences on Electricity Prices:Weather and Human Behavior
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Courtesy of Center for Energy and Environment
Capacity Must Consider Peak Usage Regardless of Season
Capacity Requirement
Constant Year Round
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Additional Grid Services (Ancillary Services)
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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?
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
Thank you for your time and interest
Email: David.Ulmer@EnergyCAP.com
Web: www.EnergyCAP.com
©2014 EnergyCAP, Inc. ▪ @energycap ▪ #energyleader ▪ www.EnergyCAP.com
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