Wednesday, November 11, 2009

Electricity in NH - Bulk Electricity Markets

It's 9:00 am, do you know what the bulk price is for electricity in New Hampshire?

A competitive electricity market depends on the the ability of producers and consumers of electricity to transact business in an environment that's organized, transparent, and free from manipulation.  The producers of bulk electricity are power plant owners while the consumers include regulated utilities, large businesses, and power marketers.  Power marketers are companies that resell energy to customers as their their "energy supplier."  Currently in New Hampshire, residential customers must purchase energy from their utility because no power marketers have chosen to serve residential customers.  Businesses in New Hampshire can choose from among a dozen or so energy suppliers.

In New England, the bulk electricity market is  operated by ISO-NE.  You can think of ISO-NE as running something like a stock exchange, where buyers place bids for the power they need and generators place offers for power they're willing to supply.   The photo above is a screenshot from ISO-NE's website that shows the real-time location-based marginal prices (LMP) for bulk electricity at 9am yesterday.   The differences in prices between the states are due to transmission line losses from power having to travel greater distances and from congestion surcharges resulting from power having to travel over congested transmission lines.  In reality, the bulk power market system is much more complex than this map shows.  It contains over 900 distinct pricing "nodes" (pg 12) that include every generation station and many aggregation points for bulk load.  In addition, there are several pricing nodes at key transmission system interconnects.  The graph only shows representative data from key nodes throughout the system.

The prices shown in the map above are for a megawatt hour (MWh) of electricity.  One MWh is 1000 kilowatt hours (kWh), so a price of $39.10 per MWh comes out to about 3.9 cents per kWh.  That's the bulk price at a relatively low-demand period.  For comparison, the retail energy charge for PSNH residential customers is around 9 cents per kWh.  PSNH's regulated 9 cent rate is much higher than the 3.9 cent rate because it's an average rate and it takes into account  peak demand periods where the bulk rate can jump to over $150 per MWh (15 cents/ kWh).  PSNH's retail rate also includes a wholesale to retail markup.  You can see why many are calling for time-of-day metering to more closely tie the price people pay for electricity to the actual cost of electricity.  If using electricity in the afternoon cost 3 times as much as using it overnight, would you change your behavior?

Bulk electricity prices on a hot summer day (source : ISO-NE)

ISO-NE's bulk power market is only virtually connected to physical electricity production and consumption.  This connection is accomplished through a web of regulations and contract settlement procedures.  A purchase on the bulk market doesn't suddenly start the flow of electricity to the buyer nor does a sale mean that a generator must start their turbines spinning.   These bulk markets are a parallel financial universe that mirrors the physical world and provides a means for market participants to "settle up" for the power they produce or consume.

Generally, power plant owners and bulk electricity "loads" have three options at their disposal for exchanging virtual "rights" to electricity.  The first two options are operated by ISO-NE and include the real-time market described above as well as a day-ahead market.  The day-ahead market can be used by utilities and other loads to cover part of their estimated demand for the next day with pre-purchased electricity.  This gives participants protection from minute-to-minute market volatility and  provides important price stability to both  generators and loads.

On-peak day-ahead price history (source: FERC)

The third way for generators and loads to pre-negotiate prices for electricity is through bilateral contracts.   A bilateral contract is a contract between a generator and a load to supply a specified amount of power at a pre-negotiated price during a pre-negotiated period.  These contracts can be for power supplied the next day, or they can be for power to be supplied over a period of years.  They're an important component of competitive electricity markets because they provide long-term stability and predictability in an otherwise highly volatile market.  Bi-lateral contracts are essential for plant owners to secure long-term financing and they also allow utilities and large businesses to control their exposure to unexpected spikes in the price of electricity.

Finally, in addition to managing the market for bulk electricity, ISO-NE also manages several other electricity related markets and auction processes.  The goal is to create what I'd call "virtual electricity products" which include things like financial transmission rights, forward capacity payments, ancillary services (eg providing spinning reserves), and renewable energy credits.  ISO-NE, under the guidance of the Federal Energy Regulatory Commission (FERC), attempts to harness market forces to manage both the supply and demand of things like transmission line capacity, generation capacity, backup reserve capability, and renewable electricity generation.   These artificial markets are very complex and regulators are continuously tweaking them to make them operate more effectively.  That's a good thing, because badly functioning electricity markets can really make a mess of a state's economy, as California found out a few years back.

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