This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Topics In Corporate Finance: Energy Markets and Instruments
• B40.3160.10• Neal D. Horrell• Contact Information:
– KMC 9-197 – Hours: Monday 5:00 – 6:00 and by appointment– Phone: (914) 830-1003 (212) 998-0300– Email: [email protected]
• Text:– Crewlow, Les & Strickland, Chris. Energy Risk
Management: Pricing and Applications. Lacama. London, England, 2000.
• Characteristics of commodity vary widely with respect to physical state and storage
• Extends to variables that drive prices including weather and emissions.
ElectricityPJM Day Ahead Price
050100150200250300
6/1/
2000
8/1/
2000
10/1
/200
0
12/1
/200
0
2/1/
2001
4/1/
2001
6/1/
2001
8/1/
2001
Date
Pri
ce
Characteristics of Markets
Immature Mature
Bid/Ask Spread Wide Tight
Liquidity Limited Very liquid
Number Participants Few Many
Forward Curve N/A Trading
Clearing Bilateral Institutionalized
Energy is Mixed
• Developing markets are electricity, Weather, Coal, products, emissions.
• Mature Markets exist for Oil and Natural gas.
• Settlement / clearing is primarily bilateral (little institutionalized structure)
• Some contracts institutionalized (NYMEX, IPE).
Electricity: Definitions
• Generation: Supply and Production
• Demand (load requirements on the system) fluctuates continuously, based on time of day, season, and the characteristics of the territory served by the system.
Energy in Matrix
• Electricity (Natural Gas) is embedded in a generation-transmission-distribution (production-transmission-distribution) framework and cannot be separated from this structure.
• While financial instruments are also in a framework, their fungiblity, ease of transportation and ease of storage make for a very different market.
Electricity: A Changing Environment
• Public Utilities Act & EU Energy Directive 92/96
• Both of these initiatives are aimed at the disaggregating utilities functions from the production, transmission and distribution of energy (and other) products. This reflects the economic realities that while transmission and distribution are “natural monopolies”, the production and sale of energy products can be more efficiently handled by the marketplace.
Regulatory History
• Energy Policy Act 1992 (EPACT) removed ownership constraints on generation facilities.
• encouraged increased competition in the wholesale electric power business.
• any electric utility can apply to the FERC for an order requiring another electric utility to provide transmission services (wheeling).
• This change in the law permits owners of electric generating equipment to sell wholesale power (sales for resale) to noncontiguous utilities.
April 1996
• FERC Rule 888 provides for equal access to the transmission grid for all wholesale buyers and sellers, transmission pricing, and the recovery of stranded costs
• Rule 889 requires jurisdictional utilities that own or operate transmission facilities to establish electronic systems to post information about their available transmission capacities
Response to Rules
• Independent System Operators (ISOs) to operate the transmission grid, regional transmission groups, and open access same-time information systems (OASIS) to inform competitors of available capacity on their lines.
• Creation of new participants in the electric power industry, power marketers and power brokers.
• Power marketers are entities engaged in buying and selling wholesale electricity (FERC).
• Texas Interconnected System is an island – not interconnected with the other two networks
• The other two networks have limited interconnections to each other.
• Western and the Texas are linked with different parts of Mexico.
• The Eastern and Western are completely integrated or linked with most of Canada
• Almost all U.S. utilities are interconnected by these three major grids
FERC Strategic Plan 2001-2005
• Provide Regulatory Framework• Facilitate Development of the market• September 25, 2001 Revision B• Federal Energy Regulatory Commission• Objective 1.1: Remove roadblocks impeding
market investment• Objective 1.2: Provide clarity of cost recovery to
• Private organization• Members are 10 Regional Councils:
– East Central Area Reliability Coordination Agreement– Electric Reliability Council of Texas– Florida Reliability Coordinating Council– Mid-Atlantic Area Council– Mid-Continent Area Power Pool– Mid-America Interconnected Network– Northeast Power Coordinating Council– Southeastern Electric Reliability Council– Southwest Power Pool– Western Systems Coordinating Council
Staff
OperatingCommitteeOperatingCommittee
AdequacyCommittee
Board of Trustees• Board of Trustees– 2 members/Region
– All market segments
– 9 independent members
• Standing Committees– 1 member per Region
– 2 from each market segmentMarket Interface
Committee
NERC I
NERC II
• North American Energy Reliability Council• Overall reliability planning and coordination of
the interconnected power systems • voluntarily formed in 1968 by the electric
utility industry as a result of the 1965 power failure in the Northeast.
• NERC's nine regional councils cover the lower 48 contiguous States, part of Alaska, and portions of Canada and Mexico.
NERC III
• overall coordination of bulk power policies
• exchange operating and planning information among their member utilities
• The boundaries of the NERC regions follow the service areas of the electric utilities in the region.
Networks (Power Grids)
Dispatch Center
• dispatch center must coordinate its responsibilities so that the peak load highest level of demand placed on the system can be met at any given time.
• The center must also ensure that the flow of electricity does not surpass the carrying limits of transmission lines.
Transactions 1
• Purchase transactions involve buying electricity from electric utilities and nonutility power producers.
• Sales for resale transactions refer to electricity sold by one electric utility or power marketer to other electric utilities for distribution.
Transactions 2
• Exchange transactions involve the availability of excess generating capacity or diversity in load requirements. For instance, an electric utility with low winter load may offer excess capacity in exchange for additional capacity to meet its high summer load.
• Wheeling transactions are the movements of electricity from one utility to another over the transmission facilities of one or more intervening utilities
Generating Units
• A base load generating unit is normally used to satisfy all or part of the minimum or base load of the system and, as a consequence, produces electricity at an essentially constant rate and runs continuously.
• A peak load generating unit, (aka peaker) is used to meet requirements during the periods of greatest or peak load on the system.
Types of Units
• Steam-Turbine Generating Units
• Gas Turbine Generating Units
• Internal-Combustion Engines
• Hydroelectric Generating Units
• Other Generating :geothermal, solar,
wind, biomass
Electric Power v Energy
• Electric power is the rate at which electricity does work-measured at a point in time (no time dimension) unit of measure for electric power is a watt).
• Electric energy is the amount of work that can be done by electricity. The unit of measure for electric energy is a watthour. Electric energy is measured over a period of time and has a time dimension as well an an energy dimension.
Changing Energy Marketplace: Today
Sample Hourly Prices 7/5/99-7/11/99
$-
$200
$400
$600
$800
$1,000
Supply & Demand Creates Electric Price Volatility
Hours
Energy Markets - Capacity
Load Duration Curve
0%
20%
40%
60%
80%
100%
% o
f P
ea
k L
oa
d
Base LoadBase Load
IntermediateIntermediate
PeakingPeaking
Supply & Demand
• Generation and Load
• Supply Determinants– Installed capacity– Congestion (use of transmission and
distribution lines)
• Demand Determinants– weather
Short Term Supply
Short Term Demand
• Demand (Load or Consumption)• Inelastic
– Seasonal Effects– function of weather– electricity heating/cooling
• Daily and Hourly Effects– on peak 16 hours from 7AM to 10PM local time excluding
Sundays / Holidays– off peak
• 8 hours 10PM local to 7AM local Sundays / Holidays
– Flat weighted average of peak and off-peak full calendar month
Market Clearing
Resources
• General Information– Energy Information Agency
http://www.eia.doe.gov/– Report on Utility Industry