Strategies of Reliable Transmissionof Energy In A Competitive Market

Kerry Ray

Shuang (Joyce) Zhao

March 31, 2008

AgendaAgenda

Introduction- Deregulation market- Brief overview of regulationsIssuesRecommendations

The Natural MonopolyThe Natural Monopoly

Little competition among transmission providers

Still a vertically integrated system

InvestmentInvestment

6% transmission versus 20% generation

Timeline of regulationsTimeline of regulations

1978 , Congress passed the Public Utility Regulatory policies Act .

Policy Act of 1992 1996, Order 888 and Order 889Order 2000

What happened to What happened to Deregulation?Deregulation?

What happened to What happened to Deregulation?Deregulation?

Deregulation encouraged wholesale trading– Caused more stress on transmission network

More plant generation into congested network

Reaching CapacityReaching Capacity

TLRs up drasticallySystem denies

transactions that would overload system

Merchant TransmissionMerchant Transmission

Divestiture of transmission and generation functions

Make rates profitable and attractive to private investors

Help eliminate loop flowRate freeze

Performance-Based Performance-Based RegulationRegulation

Compensation based on accomplishing a certain objective rather than the current cost based system

Decreased congestion and costs in the UK network

RecommendationsThe guidelines of market design

“Market mechanisms should be used where possible, but in circumstances where

conflicts between reliability and commercial objectives can not be

reconciled, they must be resolved in favor of high reliability”

Blackout Task Force Report, April 2004, p 139

RecommendationsThe guidelines of market design

- Successfully identify market failures and play the role where the market fails.

• Distinguish the “good high price” from “ bad high price”.

• Operation reserves, exercising market power.• Regulatory body should not over act in facilitating

market, which can lead to market intervention.

RecommendationsThe guidelines of market design - Consistent pricing mechanism.• Consistent between wholesale market and retail market.

• The consistency between areas pricing mechanism

- Seek workable market design in stead of perfect market design

Recommendations Network Pricing- Nodal Pricing

- Nodal Pricing is a method of determining prices in which market clearing prices are calculated for a number of locations on the transmission grid called nodes”. It is also called locational marginal Pricing (LMP) or Locational Based Marginal Pricing ( LBMP) . “Price at each node represents the locational value of energy, which includes the cost of the energy and the cost of delivering it”.

Network Pricing

Retail Market Pricing

Nodal Pricing and MW-mile Methods for Distribution: Have We Uncovered Mission Markets or Elements for Wholesale Power Markets or Elements for Wholesale Power

Markets? Presented at the Harvard Electricity Policy Group ,

Paul Sotkiewicz, Director Energy Studies , Public Utility Research Center, University of Florida.

Recommendations Benefit of Nodal Pricing- Reduce uncertainty and inefficiency from wholesale

market by appropriately aligning the transmission cost with generation cost.

- Nodal pricing integrates the high-voltage lines and low-voltage lines, thus encourages the investment on building network and encourage the new entrants to come into the market.

Recommendations Benefit of Nodal Pricing- The more efficient dispatch promoted by nodal pricing can

lead to overall lower energy price to consumers.• Reward the resources that reduce line losses and line

utilization.• Penalize the resources that increase line losses and

utilization - Both demand side and supply side get the same price

signal, thus it brings demand back to the equation of wholesale market.

Recommendations Cons• -      “ Seams” problems might happen given the

transmissions and distributions sometimes happen across different states. It might also bring about more jurisdictional fights between FERC and states.

• -      Since nodal price does not cover the fix cost, it might not provide long-term signal.

Recommendations Build up linkage between wholesale market

and retail market• Take off the cap on retail market gradually coupled with

energy subsidies to low-income families. • Free demand side facilitated by providing enough

information of wholesale market and transmission status to consumers.

• Put consumers back to fluctuate market by implementing nodal pricing mechanism, which can help make the information of price more transparent to consumers.

Questions&Comments?