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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
Electricity Market Restructuring Overview
• 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.”
Electricity Market Restructuring Overview
• 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%
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0%
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Year (starting from first year of deregulation)
Perc
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hang
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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%
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0%
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Perc
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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 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)
1. Standard Supply Service
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
1. Standard Supply Service
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1. Standard Supply Service
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
1. Standard Supply Service
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
1. Standard Supply Service
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.
2. Competitive Retail Procurement
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
2. Competitive Retail Procurement
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)
3. Wholesale Customer of IMO
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
3. Wholesale Customer of IMO
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
4. Generator Bilateral Contracts
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
4. Generator Bilateral Contracts
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,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
National Gallery, 3 D
National Gallery, 3 D
National Gallery, 3 D (rotated)
All Buildings, Jan 99
All Buildings, Jan 99
All Buildings, Jan 99
All Buildings, Jan 99
All Buildings, Jan 99 - Dec 99
All Buildings, Jan 99 - Dec 99
All Buildings, Jan 99 - Dec 99
All Buildings, Jan 99 - Dec 99
Aviation Museum Demand Profile
Aviation Museum Demand Profile
Aviation Museum Demand Profile
Aviation Museum Demand Profile
Aviation Museum Demand Profile
Aviation Museum Demand Profile
Aviation Museum Demand Profile
Arts Centre, is Yashin still subsidizing?
580 Booth, Peak Load Day
Peak Day Load Shaping
Peak Day Load Shaping
Peak Day Load Shaping
Peak Day Load Shaping
Peak Day Load Shaping
Peak Day Load Shaping
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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1-May 8-May June Normal Solar Jan Normal Solar
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.
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