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PWGSC Electricity Procurement Presentation Outline:

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

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PWGSC Electricity Procurement Presentation Outline:

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  1. 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

  2. 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

  3. Electricity Market Restructuring Overview • Ontario Market Principles “The price of energy at each time and place should reflect the marginal cost of producing or not consuming one more unit of energy at that time and place” “Market Participants should be compensated for the effects of constraints and actions that are under the control of the grid owners and the IMO.”

  4. 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

  5. Deregulation Case Studies • Many commodity prices initially fell - SWEDEN • Scrutinize reasons before jumping to electric conclusions

  6. 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”

  7. 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

  8. Price Volatility in Deregulated Electricity Markets PJM Spot Prices: June ‘99 to June ‘00 Electricity prices change monthly, daily, and hourly, often by orders of magnitude.

  9. Price Volatility in Deregulated Electricity Markets PJM Spot Prices: two days in May ‘00 • Daily price variations of 1,000% • Yearly price variations of 10,000%

  10. California Spotmarket 1998-1999 apr jun aug oct dec feb apr jun aug oct dec

  11. California Power Prices • In one year, sellers learned how to decouple the traditional market correlation between demand and price.

  12. 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

  13. Projected Ontario Power Prices Correlations to the PJM electric demand and price are strong

  14. 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)

  15. 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.

  16. Ontario’s Physical Electrical System

  17. Generators Transmitters IMO Wholesale Buyers & Sellers Distributors Legend Retail Customers Flow of Electricity Retailers Spot Transaction Physical Bilateral Transaction IMO Procurement Ontario’s Proposed Market Transactions

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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.)

  24. US Electricity Deregulation Status as of May 2001 Studies but no action. Currently legislating A timetable but no current choice. Implementing a competitive electric utility market Functioning competitive electric utility markets

  25. 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)

  26. 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)

  27. 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

  28. 1. Standard Supply Service = 750 X = 600 X = 450 X

  29. 1. Standard Supply Service 1.8 ¢ Today, MEUs buy for ~6.2¢ and add ~1¢ for distribution for a total of ~7.2¢/kWh. 5 ¢ ? 1 ¢ 0.2 ¢ 0.7 ¢ ________ 8.7 ¢/kWh

  30. 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

  31. 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

  32. 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.

  33. 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

  34. 2. Competitive Retail Procurement Matching Your Load to Blocks

  35. 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)

  36. 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

  37. 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

  38. 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

  39. 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

  40. 4. Generator Bilateral Contracts LDC Financial Bilateral Contracts between Generator and User User pays LDC for power and separately sends or receives money from generator

  41. 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

  42. Definitions 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.

  43. 5. Bilateral Contracts with Others Are you ready for Financial Bilaterals on the Market? Test: discuss the pros and cons of a Participating Collar strategy (a variation on a “collar” simultaneous cap-buying and floor-selling hedging strategy that allows the hedger to benefit to some degree in a price decline below the lower level of the collar’s specified band. This is unlike a standard collar in which the hedger foregoes any benefit of favourable prices on one side of the band.)

  44. 6. Self Generation Efficiency & Cogeneration (Combined Heat and Power)

  45. Health Canada Lab Scarborough, 75 kW CHP

  46. 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

  47. 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

  48. 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

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