ELECTRICITY RESTRUCTURING
TRENDS AND IMPACTS
presentation by
George Gross
University of Illinois At Urbana - Champaign
at the
NSF Sustainable Energy Systems Workshop
Georgia Tech Campus
Atlanta, Georgia
November 29 - December 1,2000© Copyright George Gross, 2000
OBJECTIVES
To provide an overview of the environment in which
the discussions on sustainability are undertaken
To review the key developments in electricity
restructuring
To assess the key trends in the new electricity
business and their impacts
To identify specific challenges and research needs
OUTLINE
Importance of electricity
Key federal legislative and regulatory developments
Direct access at the state level
Key trends and developments
Dispersed resources
Major challenges
Electricity will continue to substitute for less Electricity will continue to substitute for less efficient and less productive energy formsefficient and less productive energy forms
ENERGY CONSUMPTION AND ELECTRICITY USE
5050
7070
9090
110110
130130
150150
Energy/GNP Ratio (Index is 100 for the year 1900)Energy/GNP Ratio (Index is 100 for the year 1900)Electricity use as aElectricity use as a percentage of totalpercentage of total energy consumedenergy consumed
2000200018801880 19001900 19201920 19401940 19601960 19801980 20202020
5050
4040
3030
2020
1010
%%
00
1970 1980 1990 50%
100%
150%
200%
250%
1970 = 100% Electricity use
Total energy
use
CO2 Emissions
ELECTRICITY / ENERGY DEMAND
IMPACT OF ELECTRICITY
The National Academy of Engineering - the nation’s
most prestigious collection of outstanding engineers -
named electrification - the development of the vast
networks of electricity that power the world - as the
most important of the twenty engineering achievements
that have had the greatest impact on the quality of life
in the 20 th century
IMPACT OF ELECTRICITY
Electricity ranked ahead of the automobile, airplane,
safe and abundant water, electronics, computers and
space exploration
The widespread electrification implemented in the 20 th
century gave us power for our cities, factories, farms
and homes, forever changing the lives of people
COMPETITION IN THE GENERATION MARKET
The 1978 Public Utility Regulatory Policies Act
(PURPA) unleashes competition through the
introduction of qualifying facilities (QF’s)
PURPA mandates each investor-owned utility to
purchase power at avoided cost from QF’s located in
its service territory
Implementation of PURPA was left to individual states
resulting in nonuniform definitions of avoided cost
The once fledgling private power enterprises
constitute today a multi-billion dollar industry and play
a critically important role in the electricity business
ENERGY SOURCES OF NUG CAPACITY
WindWind 3.4%3.4%
Waste 7.0%Waste 7.0%
Geothermal 1.8%Geothermal 1.8%
Oil 2.6%Oil 2.6%
Hydro 5.3%Hydro 5.3%
Coal 15.2%Coal 15.2%
Biomass 16.5%Biomass 16.5%
Solar 0.7%Solar 0.7%
Natural Gas 47.2%Natural Gas 47.2%
Other 0.3%Other 0.3%
Source : 1993 Capacity and Generation of Non-Utility Sources of Energy, Source : 1993 Capacity and Generation of Non-Utility Sources of Energy, Edison Electric InstituteEdison Electric Institute
OWNERSHIP OF NEW GENERATING CAPACITY ADDITIONS
1985 1987 1991 1992
84 73 51 36 39 66
0%
100%
UTILITY OWNERSHIP NON-UTILITY OWNERSHIP
19951994
16 27 49 64 61 34
84 73 51 36 39 66
1992 NATIONAL ENERGY POLICY ACT
Addresses all major elements of national energy supply and use
Marks the end of a highly regulated and structured period for utilities
Pushes aggressively wholesale competition by changing federal policies governing electric power in the wholesale marketplace revision of PUHCA of 1935 establishment of the new class of exempt
wholesale generators (EWGs) reform of the FPA broadening the powers of FERC
to mandate wheeling
Customers
Self-generation
IPP
THE EXISTING ELECTRIC INDUSTRY STRUCTURE
Generation
Transmission
Distribution
Customer Service Customer Service
Distribution
Transmission
Generation
THE EXISTING ELECTRIC INDUSTRY STRUCTURE
Customers
Self-generationIPP
Generation
Transmission
Distribution
Customer Service
Customer Service
Distribution
Transmission
Generation
RESTRUCTURING IN OTHER INDUSTRIES
The recent past has witnessed major changes in
virtually every other regulated industry:
airlines
telecommunications
railroads
trucking
natural gas
Electric utility industry was the last major regulated
monopoly to undergo this “been there, done that”
phenomenon
SOME LESSONS LEARNED FROM RESTRUCTURING IN OTHER DOMAINS
Basic driver was the market -- emergence of real
economic opportunities
Breakup of strong vertically integrated industries can
be done rapidly
Prices decrease rapidly as products become more like
commodities
Decreasing prices encourage product differentiation
and innovation
SOME LESSONS LEARNED FROM RESTRUCTURING IN OTHER DOMAINS
Far more customer segments emerged than anyone
ever imagined or believed possible
Pace of change has continuously accelerated
The winners are the innovators who understand
customer needs and effectively apply technology - -
they create new opportunities rather than just
compete more aggressively for the existing ones
ELECTRICITY VS. OTHER SERVICES
electricity
busy signal
airline reservations
bumpingnext available flight
obligation to serve
telephone
FERC ORDERS 888 AND 889
On April 24, 1996, FERC released
Order No. 888 - Open Access Transmission and
Stranded Cost Recovery
Order No. 889 - Open Access Same-Time Information
System (OASIS)
The orders constitute a generic remedy for the undue
discrimination in the industry’s past practices in providing
transmission services
KEY OBJECTIVES
To promote aggressively robust competition in
wholesale markets
To remedy undue discrimination in transmission
To establish standards for recovering stranded costs
MAJOR THRUSTS
Utilities must provide non-discriminatory open access
through tariffs of general applicability
Utilities must functionally unbundle transmission and
generation services
Transmission providers must set up electronic bulletin
boards
MAJOR THRUSTS
Utilities must abide by the standards of conduct
Standards and procedures provide the recovery of
stranded costs resulting from increased competition
under the new FERC rules
Limited reciprocity must be provided by nonjurisdictional
entities requesting transmission services
UNBUNDLING EXAMPLE
Baggage Service
Takeoffs
Landings
In-Air Pillow/Blanket Service
Oxygen
Bath rooms
Backup Service* Bundled service available upon customer request
FLY THE FRIENDLY SKIES WITH
UNBUNDLING ‘R’ US*}
SAME INFORMATION AVAILABILITY
TransmissionProvider
TransmissionProvider
TransmissionCustomer
TransmissionCustomer
Transmission Service:
Palo Verde to Midway
200 MW at $4/MWhCall SCE
For Sale
Transmission Service:Four Corners to Midway
200 MW at $3/MWhCall SMUD
WantedRINOASIS
For Sale Wanted
200 MW at $3/MWhFour Corners to Midway
Call SMUD
200 MW at $4/MWh
Palo Verde to Midway
Call SCE
Transmission Service:Transmission Service:
THE FERC ORDERS NO. 888 AND 889
Signal FERC’s intention to establish universal open access
Aim to aggressively promote the development of a competitive wholesale electricity market by mandating non-discriminatory open transmission access
Provide a generic definition of a utility’s comparable transmission service obligations
Address transition costs associated with industry restructuring
Use the OASIS to provide functional unbundling of transmission and generation services
“COMMON CARRIER” TRANSMISSION SERVICE
Broker /marketer
Broker /marketer
Broker /marketer
Transmissionsystem
Utilitygeneration
Oth
erut
ility
QF
IPP
EWG
Broker /marketer
Selfgeneration
SALIENT CHARACTERISTICS OF CALIFORNIA RESTRUCTURING
Basic principles embodied are
customer choice
competition in generation
open access transmission
Physical direct access: flow based bilateral transactions coexist with the PX spot market
Independence of the ISO and PX: separation of security and economics functions
ISO has primary responsibility to facilitate transactions while maintaining system reliability/security
THE CALIFORNIA SYSTEM
... ...
load aggregatorend userESP
ISO
SC
...
PX AS market
D I S T R I B U T I O N (W I R E S)D I S T R I B U T I O N (W I R E S)
GG GG GG GG GG GG GG GGGGGGGGGG
bilateral contracts
THE POWER EXCHANGE
Seller 1
PX
Seller M Seller i
Buyer N Buyer j Buyer 1
MWh MWh MWh
MWhMWhMWh
.$
.
. . .. . .
. . .
$$$
$ $
.
RETAIL ENERGY COSTS 4/1/98 - 3/31/99
wholesaleenergy
21%
distribution30%
strandedcosts23%
ratereduc-
tionbonds13%ISO costs
5%
transmission4%
public purpose
5%
total costs = $ 28 billion CA ISO estimates
ELECTRICITY RESTRUCTURING IN ILLINOIS
The Electric Service Customer Choice and Rate Relief LawElectric Service Customer Choice and Rate Relief Law
was enacted and signed in 1997
The LawLaw is a 261 page document which
provides customer choice to all by 2002
lowers residential base rates
addresses utilities’ stranded cost recovery and
transition issues
reshapes the utility industry for the competitive
environment
refocuses the scope of regulation in Illinois to reflect
the future competition in electricity
ENERGY SOURCES FOR ELECTRICITY
66,418 78,481 267
45.7% 54.1% 0.2%
IL
Legend
coal/ oil/ diesel
nuclear
natural gas/ biomass/ renewable (hydro, wind, solar)
37,170 10,970 2,872
72.9% 21.5% 5.6%
27,933 13,243 1,327
65.7% 31.2% 3.1%
28,652 3,730 1,120
85.5% 11.1% 3.4%
WI
MI
IA
Source: DoE EIA
RENEWABLE ENERGY AND ENERGY EFFICIENCY
A Renewable Energy Resources Trust Fund (RERTF) is established with funding to equal $100 million over 10 years
All customers will be assessed charges starting 1/1/98:
$0.05 on each residential electric customer
$0.05 on each residential gas customer
$0.50 ($37.50) on each nonresidential electric customer with peak load below (above)10 MW
$0.50 ($37.50) on each nonresidential gas customer with annual load under (above) 4 million therms
RENEWABLE ENERGY AND ENERGY EFFICIENCY
These amounts will be shared equally by the RERTF and
the Coal Technology Development Assistance Fund
The Energy Efficiency Trust Fund is established through
the collection of $3 million annually over 10 years from
each electric utility and ARES
KEY TRENDS IN THE ELECTRICITY BUSINESS
State-by-state patchwork restructuring pattern
Breakup of the vertically integrated utility
Growing importance of energy trading
Underperformance of electric utility stocks
Horizontal aggregation
Generation divestiture
Normalcy of price volatility and price spikes
Grid regionalization
Increasing use of e-commerce in electricity
RETAIL ACCESS STATUS
25states withlegislation
1state withPSC order
19states with
studies
7states withno activity
VERTICALLY INTEGRATED UTILITY STRUCTURE IS DISINTEGRATING
Transmission ownership
Customer
Service
Marketing/trading
ISO
Ancillary servicesPower exchange
System
OperationsGeneration
Distributio
n wires
Generation
Transmission
CustomerService
Distribution
UNIT/PLANT SALES
CAPACITY ALLOCATION
reserved for real-timebalancing market
spinningreserve
hour-ahead market
day-ahead market
ENERGY PAYMENTS
balancing market energy( including AGC)
hour-ahead energy market
day-ahead energy market
AGC downward capability
WHOLESALE COMMODITY MARKETS
Petroleum
Aluminum
Gold
Electricity
Cattle/Calves
Grains
Natural Gas
Coal
Copper
Dairy
$ Billions Annually
91.5
53.8
39.6
33.6
31.7
22.4
18.1
34.6
26.6
21.0
UN
ITE
D S
TA
TE
SW
OR
LD
WID
E
THE POWER MARKETING AND ENERGY TRADING EXPLOSION
Utilities, financial houses, marketers, generating entities,
brokers, and speculators are buying, selling and swapping
power/energy on a huge scale with the total volume of trade
worth multiples of the value of the underlying commodity Electric power marketing is dominated by Houston
each of the top 20 power marketers trades gas 75% of all unregulated power marketing volume is
conducted from Houston with 25% of all the power
marketers headquartered there Multimillion dollar bets are placed on how weather can
affect demand for gas, heating, oil and electricity
0
100
200
300
400
500
600
700
800
900
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Source: Edison Electric Institute, Regulatory Research Services
POWER MARKETERS’ SALES
19960.2 billion
19992.5 billion
1998
2.3 billion19971.2 billion
INDEX COMPARISON
Data sources for Jan 1, 1995 - Dec 31, 1999
50%
195% 215%
455%
0%
100%
200%
300%
400%
500%
S&P UtilityIndex/ Dow
Jones UtilityIndex
Dow JonesIndustrialAverage
S&P 500 NASDAQComposite
Index
KEY IMPACTS ON THE ELECTRICITY BUSINESS
Underperformance of electric utility stocks push
companies into adopting new strategies:
diversification, including many nontraditional
businesses;
mergers
separation of high and low growth assets
Divestiture of assets of electric utilities by
transfer from regulated to unregulated; or
outright sale
THE M&A SCENE
Acquisitions of regulated utilities by IPP’s
Acquisitions of U.S. entities by foreign companies
Mergers of vertically integrated utilities
Purchases of energy businesses by investor groups
Convergence mergers of electric and gas utilities
QUICKENING PACE OF M & A
12
0
3
1
54
67
12 12
8
26
5
0
5
10
15
20
25
30
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000Data source : EEI
Monday Tuesday Wednesday Thursday Friday
MAXIMUM AND AVERAGE HOURLY PRICES FOR JUNE 22 - 25, 1998
pu
rch
ase
pri
ce $
/MW
h
3000
1000
0
1 5 9 13 17 21 1 5 9 13 17 21 1 5 9 13 17 21 1 5 9 13 17 21 1 5 9 13 17 21
2000
4000
5000
6000
7000
8000
THE SUMMER 2000 MARKETSm
on
thly
to
tals
(B
illi
on
s) $
aver
age
pri
ce (
$/M
Wh
)
0.0
1.0
2.0
3.0
4.0
May June July August*(1-29 only)
0
50
100
150
200
cap price $750 $500 $250
average price $/MWh
DECLARATIONS OF EMERGENCY BY THE CA ISO
stage one appeals (operating reserves ≤ 7%)
stage two curtailment of interruptible (operating reserves ≤ 5%)
stage three load shedding (operating reserves ≤ 1.5%)
33
3
6
1998 1999 2000
3
38
24
14
summer
REGIONAL TRANSMISSION ORGANIZATION (RTO)
FERC’s functional unbundling has not resulted in the desired separation of transmission and market functions
Certain structural impediments to greater competition elimination of pancaked rates improved congestion management curbing of market power undertaking of improved regional planning procedures
are best addressed regionally RTO is a generic term for a new independent
transmission management structure that will control transmission operations and planning uniformly in large regions of the US
RTO’s may come in various flavors -- ISO, TRANSCO, grid or some combination
DISPERSED RESOURCES
Direct access coupled with advances in fuel cell and
microturbine development are leading some to
forecast that DR will replace the role played by today’s
power plants
The utilization of DR to date is, by and large, limited to
specific niche applications
Some DR companies have enjoyed dot - com success
in terms of stock appreciation
DISPERSED RESOURCES
Emergence of DR represents both opportunities and threats to the restructured business
new sources to help the supply - demand balance
disruptive technology to change the transmission system through generation solutions
The future penetration of DG is uncertain due to factors such as
technology advances
environmental aspects
economics
“integration” into the existing system
The future role of transmission is also uncertain
ELECTRICITY AND THE NEW ECONOMY
The electricity business is on the cutting edge of the
new economy
new economy runs on electricity
400 million plus web users internationally
62% growth in U.S. internet industry in 1999
over 80 million PC’s shipped annually
Reliable and competitively priced electricity is a key
requirement for the myriad applications and the
operations of web-based e - businesses
MAJOR CHALLENGES
Smoother operations of the balkanized electricity markets
Effective integration of new technology and application of
advances in information technology
Monitoring of market performance
Implementation of demand-side responsiveness
Green electricity
Efficient economic signals for robust and reliable
transmission system
Market-based congestion management schemes