Sunset Point, LLC. Evolution of markets

Transcription

1 Sunset Point, LLC Evolution of markets

2 Evolution of markets Introduction Some examples Illustration of specific problems/issues Global Energy Markets Trade Programme - 2 -

3 Introduction No market design remains constant, they all evolve Reforms have evolved in stages over many years in other countries Extensive experience available BUT, what is relevant to South Asia? Some countries in South Asia are experiencing rates of growth which few countries (except China) have known, but other countries have had circumstances that are similar to South Asia: Canada and Australia, like India, had provincial/state, governmentowned, vertically integrated utilities Australia had a large hydro project (Snowy Mountain) to supply two independent provinces/states Argentina, England and Wales, Australia, and California had no experience in operating a pool settlement system before creation of their wholesale day-ahead markets Almost every system in the world that has unbundled and introduced reforms has had to make major changes in billing metering South Asia is unique, but there is global experience that is relevant Global Energy Markets Trade Programme - 3 -

4 Introduction (continued) Many issues have to be addressed in developing reforms and markets Only a very few examples can be provided within this short presentation to illustrate experiences elsewhere No market design is without problems, but some designs may create fewer problems than others Mature, sustainable markets evolve, just like people; Crawl Walk Run Problems created when we try to run before we learn to walk Global Energy Markets Trade Programme - 4 -

5 Introduction (continued) Some fundamental requirements for development of reforms and markets Costs must be known: capital and operating (fixed and variable) Costs must be fully recovered through tariffs to end use (retail) customers Practical experience: regulated US utilities had long experience, before introducing open access markets, in assigning costs according to a uniform system of accounts established by the federal regulator Generation is scheduled (unit on/unit off decision) and dispatched (level of load carried by a generating unit) on basis of costs as modified by transmission and distribution system limitations, fuel availability, environmental restrictions, etc. Wholesale markets cannot correct for retail tariffs that do not permit costs to be recovered Private ownership is not an absolute requirement for reform and market development Much of the industry in Norway, Canada, Australia and other countries is still government-owned Global Energy Markets Trade Programme - 5 -

6 Introduction (continued) A key problem has been inadequate competition and structural problems Market designs are frequently asked to correct for problem with industry structure, such as inadequate number of competing generators Tendency has been to focus on immediate problem and forget longer term problems (e.g., short-term shortages in South Asia); if on-grid prices too limited, could discourage potential investors in generation Inadequate consideration of options; tendency to give too much weight to theory and not enough to practical considerations California and Texas replacing markets based on physical bilateral contracts ( net market) with markets in which all generation is offered into the centrally administered market with financial and physical bilateral contracts for hedging ( gross market ); England replaced initial gross market with a net market What is a practical solution for EACH country in South Asia? May be practical to have different market designs because of different stage of evolution of countries, provinces/states and regions. Global Energy Markets Trade Programme - 6 -

7 Many problems, BUT markets can and do work (constant evolution) Pennsylvania New Jersey Maryland (PJM) Interconnection New York Independent System Operator (NYISO) New England Power Pool (NEPOOL), operated by ISO New England (ISO-NE) Electric Reliability Council of Texas (ERCOT) Midwest Independent System Operator (MISO) England & Wales (original pool/neta) Norway/Scandinavia New Zealand Electricity Market (NZEM) Alberta & Ontario, Canada National Electricity Market (NEM Australia) Argentina (CAMMESA) Bolivia Chile Global Energy Markets Trade Programme - 7 -

8 Tiers of Markets National/International Wholesale Market Regional Wholesale Market Provincial/State Retail Market This part of the presentation focuses on development of regional markets National/international wholesale markets may link regional markets or country markets of different designs Regional markets may evolve at different speeds, e.g., one province/state may be vertically integrated, a second province/state may have a single buyer market, a third province/state may have a cost-based central dispatch market: How to integrate these into a regional market? When and under what conditions should retail competition be introduced? Global Energy Markets Trade Programme - 8 -

9 Examples of evolution of markets and reforms South Asia may view global experiences to see how reforms and markets evolved and how long this has taken Some examples United States New York Florida California Pennsylvania-New Jersey- Maryland (PJM) Norway Australia Central Asia Republics Thailand Other speakers will describe the markets in India Global Energy Markets Trade Programme - 9 -

10 Evolution of New York markets New York utilities established an energy broker to trade energy with each other In 50s, three companies established an hourly energy broker New York Power Pool (NYPP) established with seven privately owned utilities in July 1966 In 1977, New York speeded up and automated the broker to centralize the dispatch of generation owned by member utilities Pool dispatched real-time energy Physical bilateral trading for longer term transactions, internal to the pool and between pool members and utilities in neighboring pools Settlements based on scheduled transactions In late 90s replaced cost-based energy market with pricebased day-ahead and real-time energy markets Global Energy Markets Trade Programme

11 Evolution of Florida market Before 1979, three private and ten municipal utilities in Florida operated independently and bought and sold energy among themselves based only on bilateral contacts At request of the state regulator, Florida utilities studied optional methods for increasing efficiency of wholesale market PJM and New England type pools were considered and rejected 1979: Florida used New York experience with its broker as a model to implement its hourly energy broker In 80s, pool dispatch of minute-by-minute energy (PJM & NEPOOL methods) studied and again rejected Florida study determined that increased coordination of scheduling of generation would result in greater economies than central dispatch Florida has continued to look at forming an ISO (Grid Florida), but never gotten beyond the talking stage Global Energy Markets Trade Programme

12 Example of an energy broker cost-based spot market Each province/state quotes system cost for incremental and decremental costs Regional control centre matches cost bids to produce economical trading schedule Settle on bilateral basis based on bids Will work with vertically integrated industry Not necessary to convert existing internal one-part generation contracts to two-part generation contracts (separate capacity and energy components) Central administration - one source of information for all possible trades Bulletin board design may be best for relatively few (4-5) trading partners or if prices are used No industry restructure required Simple rules and small administrative organization Global Energy Markets Trade Programme

13 Evolution of PJM Pennsylvania New Jersey Maryland (PJM) Pool formed among three utilities in 1927 Members determined which and when generating units would be started as needed for local voltage support or other reasons Central dispatch of members generation based on variable cost Pool could request additional generation units to be started for pool benefit Pool expanded to five members in 1956 and to eleven members by 70s One member had three operating companies Cost-based market replaced with price-based market in late 90s Currently using a Locational Marginal Price (LMP), multisettlement market design Global Energy Markets Trade Programme

14 Evolution of California market Before 1980, three private and many municipal utilities in California operated independently and bought and sold energy among themselves and with out-of-state utilities based only on bilateral contacts In 1980, three privately owned utilities increased coordination of generating unit start-stop decisions based on comparison of operating costs (California Power Pool) In 1998, price-based Power Exchange (CalPX) implemented for day-ahead market and submitted balanced schedules to Independent System Operator (CAISO) CAISO operated real-time balancing energy market In 2001, following major problems in 2000, the Power Exchange was shut down by federal regulator Initial day-ahead balanced schedule requirement combined with a real-time balancing energy market is in the process of being replaced with an LMP market design (MRTU) Global Energy Markets Trade Programme

15 Evolution of Norway/Scandinavian market Norway has close to 90% hydro Excellent example of price-based market with extensive number of competing generators Possibly, with England & Wales, most active retail competition In the 1980s Norway had a broker-based pool, SamjØringen Legislation passed in 1990 lead to the creation of Statnett in 1993 as a transmission company and operator of the market A futures market was added in 1995 Retail competition was phased-in from 1991 to 1997 Norway and Sweden created NordPool in 1996 Finland joined NordPool in 1998 The Jutland portion of Denmark joined NordPool in 1999, with the Zealand portion joining in 2000 Norway broker evolved, in stages, from monthly to weekly to daily to hourly Only truly international market Global Energy Markets Trade Programme

16 Evolution of Victoria and Australia market Initially provinces/states were not connected Snowy mountains hydro project resulted in interconnection between New South Wales and Victoria New South Wales sold excess hydro energy to Victoria Early 90s, State Electricity Commission of Victoria (SECV) Functional unbundling Established internal transfer pricing between business units Victoria government initiated reform of industry, corporate unbundling and privatization, and formation of wholesale market Electricity market based on offering all generation to market administrator and use of financial hedging contracts Late 90s, Victoria wholesale market combined with New South Wales market to form National Electricity Market (NEM) South Australia and Queensland now also part of NEM Global Energy Markets Trade Programme

17 Evolution of a Central Asia Republics (CAR) market As yet, there is no CAR region-wide market, but there is list of principles for a common electricity trading space Kazakhstan is the only country that has a functioning electricity market with multiple players and it has four markets Market for bilateral purchase/sale contracts Market for short-term (next day) trading Market for ancillary services Real-time balancing market (scheduled for operation in early 2008) Scheduling is coordinated with the Coordinating Dispatch Centre (CDC) in Tashkent, Uzbekistan, now an international company CDC performs any real-time balancing that is not resolved by the countries themselves using contracts with 2 large hydro stations Kyrgyzstan has conducted auctions for its excess summer hydro generation and is testing participation in the Kazakhstan markets Tajikistan and Uzbekistan do little trading and Turkmenistan has only recently re-established a weak interconnection to the rest of CAR Access to transmission through Uzbekistan has been an issue Global Energy Markets Trade Programme

18 Evolution of Thailand market The National Energy Policy Office (NEPO) took the lead and set up an ESI Reform Project Management Office to co-ordinate the implementation of reform across the power sector This office acted as the secretariat to the Privatisation Subcommittee, which had overall responsibility for the Electricity Supply Industry (ESI) reform Various documents were prepared, including: Design of the legal and regulatory framework Market and technical rules and agreements (similar to northeast US markets) Design of the mechanism for recovery of stranded costs Grid code and distribution code This work was coordinated with NEPO and the Electricity Generating Authority of Thailand (EGAT), the Metropolitan Electricity Authority (MEA) and the Provincial Electricity Authority (PEA) At the end of the day, the reform process was abandoned due to opposition from EGAT Global Energy Markets Trade Programme

19 Workshop Participant Assignment Continuing to work in your multi-country groups: What do you think about the various approaches taken to market evolution in the countries described? Do you see other options/opportunities for market evolution? What market evolution process fits best in your countries or regions? Global Energy Markets Trade Programme

20 Sunset Point, LLC Illustration of specific problems/issues

21 Governance Governance is the structure for who makes decisions on rules for operating and administering the market Who should be on the board and what weight should their vote have? Market participant board or non-market participant board Original England and Wales pool - market participants on governing board: Generator representation was balanced against distribution company representation Unable to reach decisions: equal votes for a change as compared to votes against a change (so nothing changed) Original PJM required unanimous agreement for change to rules Very difficult to change any rules even when a majority of members agreed on need for change New England Power Pool Weighted voting allowed few large members to dominate decisions Independent (non-market participant) boards Problems in the US with lack of accountability to market participants Decisions to make large expansions in market operator staffs which imposed increases in costs to market participants Global Energy Markets Trade Programme

22 Incremental vs. average cost problem; visibility of bids Florida: Broker required quotes of system variable cost System variable cost was marginal cost/mwh to increase production from all generating units controlled by bidding utility Accountants for one utility had difficulty in understanding difference between average variable cost for all generating units and marginal cost for all generating units Essential that market participants understand unit-by-unit fixed and variable generating unit cost Buyers must know their avoided cost when buying energy Questions as to what information should be seen by broker participants Should each market participant see the schedules of other market participants? Visibility of information is also a major issue with latest open access market designs With introduction of market-based pricing, Florida stopped using cost-based broker Global Energy Markets Trade Programme

23 Generation contracts Extremely important to design contracts that reduce price volatility, ensure adequate compensation to investors and allow introduction of competition. Well designed contracts can protect customers with low priced generation from exposure to high regional market prices England: vesting contracts Contracts-for-Differences (CFD) hedged spot market CFDs were phased-out over five year period Replaced by other hedging contracts negotiated bilaterally Hungary: long-term Power Purchase Agreements (PPA) Generation was privatized by government through buy back of production via long-term PPAs Concentration of generation under long term PPAs is an obstacle to introduction of more competitive spot markets Victoria, Australia: trader to market generation under PPA Loy Yang B generating unit sold and bought back with long-term PPA Trader established to offer Loy Yang B into competitive spot market Victoria government subsidized the difference between amount received from sales in spot and amount due buyer under terms of long-term PPA Global Energy Markets Trade Programme

24 Load vs. contract (quota) & balancing energy dispatch 24 Balancing Energy Load Load (1000 MW) 12 Contract (Quota) Energy Dispatch Midnight 6:00am Noon 6:00pm Midnight. REGIONAL LOAD Global Energy Markets Trade Programme

25 Hedging Hedges to protect against spot market volatile prices may be through forward contracting for differing time periods. Contracts may be financial or physical delivery Self-generation capability may be a form of a hedge California: did not allow hedging contracts, only day-ahead, hour-ahead, and real-time markets San Diego customers were exposed to very high spot market prices in 2000 as a result of market failure Many traders in the US failed because they were not adequately hedged against high spot market prices for which they had taken on long-term obligations to deliver electric energy to customers at specific prices Original England and Wales market included financial hedging contracts which covered approximately 95% of energy costs Global Energy Markets Trade Programme

26 Market power Entities that have market power will figure out how to exercise that market power, no matter what the market design Therefore, every market requires an entity responsible for monitoring for the exercise of market power and mitigating it when it appears England: initial England and Wales market: Two largest generators dominated market and were able to control prices in early years Only remedy available to regulator was to threaten a referral to the competition regulator Regulator required additional sales of generating units in order to reduce market power US: Independent market surveillance established Market monitoring has been established to detect abuses by market participants and identify failures in administration of the market by the system/market operator Disclosure of bids and offers Panama: Independent market monitoring panel reported to the regulator Global Energy Markets Trade Programme

27 Shortages of production capability Markets can work during times of shortage provided that there is Price mitigation to protect against abuse Clearly defined rules by which the system/market operator may intervene in the market Ability of load to bid into the market California: mitigation instituted Federal regulator required mitigated pricing to be established for application when certain criteria were exceeded Generally, mitigation required generation to be offered at cost Northeast (PJM, New York, New England) markets have operated under a $1,000/MWh cap on clearing prices Generation investments are still being made Risk: Needed investment may stop if market prices are mitigated such that the value of generation (scarcity value) is not reflected in prices for generation Global Energy Markets Trade Programme

28 Market incentives for generation expansion Should there be any incentives to invest in generation? What form should these take? England the rush to gas A large amount of generation was added in England following implementation of the pool in 1990 All of the new generation was gas-fired During winter peak demand there were concerns as to sufficient gas to meet other critical demand for gas Government intervened by refusing to license additional gas generation US Capacity obligations and payments existed in the northeast Problems experienced with capacity markets Replacing with Forward Capacity Markets (FCM) Latin America Extensive use of obligation to contract for generation, usually for 85% of non-contested load Australia Energy prices permitted to go to A$10,000/MWh (proposals to go higher) Prices are high enough to attract generation investment without adding complexity of rules required for a capacity obligation and related market Global Energy Markets Trade Programme

29 Failure to pass full cost to customers or to collect costs Full recovery of all costs (distribution wires, transmission wires, generating capital plant and fuel costs) is required for a healthy electric industry Bankruptcy of largest US utility, Pacific Gas & Electric (PG&E) PG&E could not pass through high energy costs in the California market and was not allowed to forward contract as a hedge against high day-ahead prices Dominican Republic financial black outs Failure to collect costs resulted in generators and distributors abandoning investment India Some provincial/state utilities are in severe financial condition due to difficulty in charging adequate tariffs and collecting those tariffs Global Energy Markets Trade Programme

30 Politically determined timetables for implementation (1) Realistic time frames required to do the job right Three years from start of design for system with very strong centralized management with clear authority for making decisions Five years when decision-making is normal Examples of well managed implementation: England beginning in Oct. 89 after continuing debates from summer 88 summer 89; Victoria; Argentina US: bad example, divided and limited regulatory authority; too much investment in merchant generation; abuses of market rules Too little time spent in design and preparation (testing software & training operators and participants) results in poor markets, and loss of confidence by potential investors Australia NEM took time to test software and procedures New York rushed to implementation PJM has gradually introduced unbundled ancillary services Global Energy Markets Trade Programme

31 Politically determined timetables for implementation (2) In US, federal regulator imposed an unrealistic timetable for implementation of new markets and had to allow more time Original timetable for England & Wales pool implementation had to be increased by approximately five months Metering is never as ready as promised Several years after operation of England & Wales market before metering was commercially certified Extensive problems with metering systems in England & Wales when customers greater than 100 kw were permitted access to the market; even worse when all customers had access Global Energy Markets Trade Programme

32 Inadequate resources for implementation Industry and market reforms have frequently not been well funded or adequately staffed Examples of effective funding and staffing: Original England and Wales pool AFTER effective project management was introduced Australia National Electricity Market Adequate resources means: People, People, People need a lot of the best and smartest people available; large number needed for design and implementation Funds to procure consulting assistance, software, communications and metering Global Energy Markets Trade Programme

33 Difficult for government and regulators to make decisions Alliance Transco in US Federal regulator gave conditional approval to proposed market Members of proposed market spent large amount of money before conditions were met Transco development terminated US regulator tried to require Standard Market Design (SMD) to reduce problem of neighboring markets with different rules Unable to do so because of inadequate authority and strong political resistance Many regulated utilities uncertain as to whether to spend time and money on market design and implementation Large amount of uncertainty US federal regulator only has authority over transmission tariffs and wholesale market for privately-owned utilities Many government-owned utilities in the US Global Energy Markets Trade Programme

34 Difficult for governments to complete announced reforms Thailand Government adopted reform policy to implement industry restructure and competitive market Large amount of money spent to develop detailed rules and documents Strong resistance from government-owned generation and transmission company and from trade unions Government decided NOT to proceed with reforms US Government unable to require reforms Strong resistance from state regulators England, Argentina, Victoria (Australia) all successful implementations with strong government leadership Global Energy Markets Trade Programme

35 Introduction of retail competition How will retail competition be phased in? England: 1 MW, then 100 KW, then all customers Will there be an obligation to supply retail customers? Who is responsible to be supplier of last resort? If load leaves supplier, what happens to stranded costs/benefits that are created? Will captive domestic customers be asked to assume stranded costs? Many, many more issues related to introducing retail competition Can aggressive wholesale competition combined with performance-based retail rate regulation achieve most of the theoretical benefits of retail competition? Global Energy Markets Trade Programme

36 Additional issues based on global experience Failure to market the reform process to different constituencies (i.e., politicians, employees, financial community, customers, etc.) Failure to document everything in detail Purchase of software before the market design is finalized (can spend a lot of money on wrong software) Decision to implement market during times of system stress (instead of during times of minimal stress) Metering that is never as ready as promised Congestion is never as limited or consistent as advertised (exposes previously internalized congestion) Major challenge: Ability of the government to take the time to consider the issues and to take difficult decisions which may be against the interest of the existing market participants. Natural tendency of every organization to maintain its current position or to want to increase its scope of authority. Global Energy Markets Trade Programme

37 Sunset Point, LLC Pricing

38 Various kinds of pricing Pricing with respect to the wholesale market Pricing within bilateral contracts Pricing to retail customers Global Energy Markets Trade Programme

39 Wholesale market pricing Whatever the market design, any centralized market needs to set a clearing price for each settlement period (e.g., on an hourly or half-hourly basis: day-ahead, hour-ahead, and/or real-time) Clearing prices are usually based on the cost of supplying the last (or next) MWh of load These clearing prices can be system-wide or locational, as used in LMP markets Some of the issues to be addressed include: What resources are eligible to set the clearing price (usually those dispatchable resources not at minimum or maximum load or ramping a full ramp rate) Treatment of dispatchable loads and imports/exports in setting clearing prices If clearing prices are not determined locationally, how are congestion costs calculated and allocated Global Energy Markets Trade Programme

40 Example, day-ahead financial commitment Price Day-Ahead Clearing P Price in hour Demand Committed Day-Ahead Supply Committed Day-Ahead Q S = D = Financially binding Quantity in hour Supply offered in hour based on unit commitment to meet Demand bid over day subject to reliability constraints Demand bid in hour quantity Global Energy Markets Trade Programme

41 Contract pricing Contract prices can be cost-based or result from negotiation A typical cost-based Power Purchase Agreement (PPA) will establish: A capacity charge based on verifiable costs and include an availability incentive on profits An energy charge based on the actual fuel-related and incremental maintenance costs, sometimes indexed to various indices A typical negotiated Contract-for-Difference (CfD) will establish: An option fee, typically similar to a capacity charge A strike price, typically the energy prices at which the parties wish to trade Next slide shows how a CfD works Sometimes, as in England & Wales and Victoria, the government establishes some initial contracts to ease transition to the market and that phase-out over time Global Energy Markets Trade Programme

42 Financial hedging A market participant can manage risk via CfDs, hedges, options, etc. (could lead to a coordinated forwards market) Guarantees a price, independent of the spot price Characteristics only limited by imagination One-Way Hedge Pool Price Pool Price Difference Payments Negotiated Option Fee $ SALE Difference Payments = Pool Price - Negotiated Strike Price Global Energy Markets Trade Programme

43 Retail pricing For captive customers, the regulator approves the rates For contestable customers, they can negotiate their own rate or accept an offer from a retail supplier Contestable customers that don t select a supplier get assigned one or take standard offer service Most markets, at least initially, have the burden of historical crosssubsidies: Between customer classes (residential, commercial, industrial) Between geographical regions (urban versus rural) Very difficult to run a market with embedded cross-subsidies However, that does not mean that cross-subsidies cannot be implemented outside the market (i.e., a fee applied, after rates are calculated, to one category of customer and used to create a credit to another category of customer) It s a government policy question For a financially viable industry, the prudent costs incurred must be recovered from customers, with the generators and competitive suppliers taking business risks on operation of their businesses Global Energy Markets Trade Programme

44 Workshop Participant Assignment Continuing to work in your multi-country groups: Which of the problems/issues covered in the previous slides present the greatest risk in your countries or regions? What do you think about the political problems/issues that other countries have experienced (i.e., unrealistic timetables, slow decision making, revisiting previous decisions, undue influence, etc.)? Do you have suggestions on how to address the specific problems/issues covered? What is your view on the pricing issue and how market versus contract versus retail pricing should be coordinated? Global Energy Markets Trade Programme

45 Sunset Point, LLC Current events

46 Current events Impacts caused by changing oil/gas markets Effects of rising prices Impact mitigation Potential South Asia impacts Global Energy Markets Trade Programme

47 Impacts caused by changing oil/gas markets To the extent that a country uses imported fuels it is obviously somewhat at the mercy of world markets for those fuels In addition, to the extent that it has a clearing price electricity market, there is the risk that the clearing price will be driven by world fuel prices Private developers will want to either pass on the fuel risk, if their resources use imported fuels, or allow their prices to increase to track world prices, even if using domestic fuels The way to capture the value of domestic fuels is through longterm contracts But, these carry their own risks if those prices exceed world prices Global Energy Markets Trade Programme

48 Effects of rising prices Increasing prices cause the need to increase retail electricity prices to establish and maintain the financial stability of retail suppliers and their suppliers and, therefore, the ability to attract capital for expansion This causes problems for the economy This, in turn, causes political problems To maintain lower residential prices, cross- or government subsidies may be required, but these should not be allowed to distort the market To the extent that industry cross-subsidizes residential customers, that hurts their ability to compete in the global economy Inability of customers to pay higher prices impacts the financial viability of the industry and the overall economy Global Energy Markets Trade Programme

49 Impact mitigation Develop domestic resources fueled by internationally traded fuels (e.g., oil, natural gas & coal) under long-term contract to stabilize prices Develop domestic renewable resources (e.g., hydro, wind, solar) under long-term contracts NOT tied to world fuel prices Improve industry efficiency to reduce need to increase prices even as world fuel prices increase: Increase plant availability and thermal efficiency Reduce staffing (or, increase government subsidies if necessary to maintain social programs) Reduce technical losses Reduce non-technical losses Increase collections Increase trading with neighboring countries to take advantage of seasonal load and resource variations Increase trading with neighboring countries to share technical requirements such as reserves and regulation Global Energy Markets Trade Programme

50 Potential South Asia impacts Increasing prices as world fuel prices increase More financial stress on utilities if tariff prices and collections are not allowed to recover costs More reliability problems if resources and wires infrastructure are not expanded to handle increased demand Increased cost of doing business as domestic industries shutdown (or install more on-site generation to ensure reliability) More political stress as customers demand more energy at lower prices It appears that some of the following may be happening in South Asia: Difficulty trading energy products across borders (e.g., oil, electricity) Load shedding Installation of costly rental units by utilities Installation of costly stand-by units by industry Price hikes, leading to protests How is your country addressing these actual or potential impacts? Global Energy Markets Trade Programme

51 Is it all bad? Hopefully my elaboration on the experiences, and mistakes, of other countries is not discouraging Markets can and do work, but time and care must be taken in their design and implementation South Asia can learn from the successes and failures of other markets to design markets that will work in the South Asia context By doing so they can grow their electric industries to supply more customers with more affordable electricity in an efficient and reliable manner This will lead to improved economic opportunities for all the people of South Asia Global Energy Markets Trade Programme

52 Workshop Participant Assignment Continuing to work in your multi-country groups: Discuss the current impacts of rising fuel prices on your countries or regions With respect to electricity With respect to other sectors of your economy What do you think about the mitigation approaches discussed in the presentation? Other suggestions? What mitigation policies have been implemented in your countries or regions? After this presentation and all these discussions, what do you see as the way forward with respect to electricity markets for your countries or regions? Can your group reach a consensus on the basic characteristics of a market design that will work in your countries or regions? Global Energy Markets Trade Programme

53 Sunset Point, LLC Additional questions, answers and discussion

54 Sunset Point, LLC Appendix

55 What went wrong in California #1 Lack of construction of generation in California due to environmental objections Demand growth in Las Vegas and Phoenix absorbed southwest surplus that would have been available for export to California Drought conditions in Pacific northwest reduced surplus hydro available for export to California Spike in natural gas prices (possible manipulation) Strict limitations on air emissions (internal resources ran more due to lack of imports) Increased forced outages as maintenance deferred Some degree of electricity market manipulation Global Energy Markets Trade Programme

56 What went wrong in California #2 Ideology driven, non-transparent market design (rejection of central markets), resulting in no one knowing what the real market price of power was (it was hidden behind the bilateral contracts) Prohibition on forward contracting (hedging) by Investor Owned Utilities (IOUs) to cover demand of customers that do not choose to change suppliers Zonal congestion management with politically designed zones, resulting in significant intra-zonal congestion (the cost of which had to be administratively allocated) Un-enforced Balanced Schedule requirement Global Energy Markets Trade Programme

57 What went wrong in California #3 Complications and inefficiencies caused by separation of the Independent System Operator (real-time market) and the Power Exchange (day-ahead market): Need for closer coordination between day-ahead scheduling and real-time scheduling and dispatch Price caps created incentive to under-schedule demand (by bidding low buy prices) in the un-capped Power Exchange in order to move energy to the CAISO s price capped real-time market Market operation not aligned with physical operation (e.g., dayahead scheduling could cause phantom congestion that did not appear in real-time) Inefficient congestion management, as adjustments had to be made within a Scheduling Coordinator s portfolio and not between Scheduling Coordinators Global Energy Markets Trade Programme

58 What went wrong in Ontario #1 Restructuring driven by industry insiders, IPPs and large customers (99% of customers not represented) Failure to aggressively address the market power of Ontario Power Generation (OPG) Decision to preserve the value of OPG discouraged new entrants Uncertainty over return of mothballed nuclear capacity Seams between Ontario and the markets in the US Increased cost of importing Lack of day-ahead market led to over-reliance on real-time (balancing) market and price volatility Global Energy Markets Trade Programme

59 What went wrong in Ontario #2 Confusing customer bills Different terminology among 90 distribution companies (down from over 300) created distrust in market Retailers signed-up customers before default arrangements announced (led to sense of betrayal) Privatization of Hydro One set to coincide with market opening, creating more confusion Change in political leadership and expectation of Spring (March/April) 2003 elections Lack of political will, scared by volatile prices Government imposes price freeze Retail market evaporates (everyone gets fixed price) Regulatory Board emasculated Global Energy Markets Trade Programme

60 Sunset Point, LLC William H. Dunn, Jr. President & Executive Consultant Sunset Point, LLC 10 Sunset Point Yarmouth, Maine USA +1 (207) Phone +1 (207) Fax +1 (207) Cell