Using Markets to Drive Conservation. Presentation to ACEEE Sheldon Fulton, Director Market Structure April 1, 2008

Transcription

1 Using Markets to Drive Conservation Presentation to ACEEE Sheldon Fulton, Director Market Structure April 1, 2008

2 Presentation Outline 1. Policy Objectives & Options 2. The Market as a Policy Tool 3. Creating New Value Through Market Mechanisms 4. Conservation, Renewables, and Demand Response 5. Stimulating Investments through Market Interactions 6. Pricing Mechanisms 2

3 What are the Policy Objectives? Increasing Capacity? White Tag Transforming Market Perceptions? Aquiring Resources? Fostering Innovation? 3

4 4 Policy Options Regulation - Legal restrictions set by government authority - Used when there are: risks of monopoly, collective actions, Inadequate information, unseen externalities, and irreversibility (climate change) - Driver: COST Command & Control - Relies upon detailed regulation - Enforced by ongoing inspection programs - Continuous modifications of standards required - Potentially suppressing industry growth - Utilizes the stick rather than the carrot - Driver: Prescriptive RULES Market - Create economic / value incentives - Market interactions drive compliance - Rewards innovation - Utilizes the carrot ; perpetual - Driver: PRICE

5 The Market as a Policy Tool Markets can stimulate: An Increase in conservation resources through creation of economic incentives for additional conservation or future investments by establishing proper price signals and forward price curves Pricing efficiency by ensuring effective alignment and interaction between the demand side and the supply side Lower costs & innovation through market competition and risk/reward incentives 5

6 Markets Interactions between groups of buyers (the demand side) and sellers (the supply side) Cost Value S E L L E R Demand Price B U Y E R 0 Supply Quantity 6

7 Three Building Blocks for Markets 1. Contract Product to be transacted What is being traded? Who are the buyers and sellers? Buyer s & seller rights & obligations Terms & conditions 2. Pricing Mechanism How is price determined? How do buyers & sellers interact? What is the purpose of the price signal? How is pricing to be done? Interactive bid-offer, auctions, competitive RFOs What are the key pricing fundamentals? What is the life time of the product being traded? - economic - physical 7 3. Rules governing contracts & pricing What are the rights and obligations - of buyers - of sellers How is delivery achieved? What constitutes title transfer? What is the mechanism for measurement and verification? Performance assurance Transparency and disclosure of pricing

8 Markets: Feedback Loop Continuously reflects the market participants perceptions of the value of the traded commodity. This requires the active participation of both demand and supply! 1. Price Signal 2. Response by Buyers/Sellers 4. New Response 8 3. New Price

9 Markets are affected by uncertainty & unknown events! Who bears the RISKS? and Who is rewarded for taking on the risks? 9

10 Markets: Electricity Supply and Demand Electricity Buyer (DEMAND) Electricity Seller (SUPPLY) Large Industrial Gas Coal Commercial & Small Industrial MUSH Hourly Pricing Operating Nuclear Reserves Capacity Markets Long Term PPAs Residential Hydro 10

11 Market: Electricity Pricing Considerations Plain cost of electricity Q u a l i t y L o c a t i o n Base Distant Close Off-Peak T i m e Peak 11 Alternate

12 Example: Trading Coffee Plantation Coffee House Warehouse 12 Shipping

13 Coffee Supply and Demand Coffee Bean Buyers (DEMAND) Second Cup Coffee Bean Sellers (SUPPLY) Mexico Java Starbucks Brazil Tim Hortons Coffee Connoisseurs Columbia 13

14 Market: Coffee Pricing Considerations Plain cost of coffee bean Q u a l i t y L o c a t i o n Arabica Coffee House Plantation Time 2:00 AM (Time-of-day/week/year) 10:00 AM 14 Columbian

15 Commodity Attributes Positive Coffee Attributes can be positive or negative in value Negative 15

16 Creating New Value Positive Attributes in the Coffee Market: 16

17 Creating New Value blood diamond Pronunciation: \ bləd\ \ dī-(ə-)mənd\ Synonyms: conflict diamond; dirty diamond; war diamond noun 1: refers to a diamond mined in a war zone and sold in order to finance an insurgency, invading army's war efforts, or supporting a warlord's activity 17

18 Electricity Pricing Considerations Plain cost of electricity Q u a l i t y L o c a t i o n Base Distant Close Off-Peak T i m e Peak 18 Alternate

19 Creating New Value: Tags A Renewable Energy Certificate (REC, or green tag ) is a representation of a positive Environmental Attribute associated with every unit of green electricity generated Similarly, white tags can be applied to conservation programs to recognize value for every unit of electricity conserved 19

20 Renewable, Energy Efficiency, and DR Voluntary Regime Demand: 1. Buyers in State/Province Interested in greening up operations 2. Out-of-State/Province Buyers Require white tags to meet their own obligations Will drive up the State/ Province white tag price, effectively encouraging more sellers to participate in the market Compliance Regime Demand: Targets set by government/regulatory regime, such as a White Tag Standard 20

21 US Renewable Portfolio Standards 30 states in US utilize RPS *WA: 15% by 2020 OR: 25% by 2025 (large utilities) 5% - 10% by 2025 (smaller utilities) CA: 20% by 2010 *NV: 20% by 2015 AZ: 15% by 2025 MT: 15% by 2015 NM: 20% by 2020 (IOUs) 10% by 2020 (co-ops) ND: 10% by 2015 MN: 25% by 2025 (Xcel: 30% by 2020) IA: 105 MW CO: 20% by 2020 (IOUs) *10% by 2020 (co-ops & large munis) WI: requirement varies by utility; 10% by 2015 goal IL: 25% by 2025 MO: 11% by 2020 VT: RE meets load growth by 2012 NC: 12.5% by 2021 (IOUs) 10% by 2018 (co-ops & munis) ME: 30% by % by new RE NH: 23.8% in 2025 MA: 4% by % annual increase RI: 16% by 2020 CT: 23% by 2020 NY: 24% by 2013 NJ: 22.5% by 2021 PA: 18%¹ by 2020 MD: 9.5% in 2022 *DE: 20% by 2019 DC: 11% by 2022 *VA: 12% by 2022 HI: 20% by 2020 TX: 5,880 MW by 2015 Minimum solar or customer-sited RE requirement * Increased credit for solar or customer-sited RE ¹PA: 8% Tier I / 10% Tier II (includes non-renewables) State RPS State Goal Solar water heating eligible 21

22 Market Transformation Complementing Price Signal Substituting Complementing adds integrity & transparency to feedback loop Substituting absence of feedback loop. May be complementing when feedback loop is available 22

23 Conservation + Supply Timeframes DR Peak Shed Pricing Dynamic DR Load Shift On-peak Off-peak Conservation / Energy Efficiency Generation Investment Displacement Gx Dispatch Resource Management New Investment 1 day 1 month 1 year Time Frame 23

24 Demand Resources: Contestable Load In an evolved market, both supply and demand resources would compete to serve different segments of contestable load Peak Hours On-peak/ Offpeak Differential Demand Resources DR Peak Load Shedding DG Displacement Generation Supply Resources SCGT, Peaking Hydro Intermediate Peak Hours Price Elasticity Demand Resources Energy Efficiency DR Load Shifting Supply Resources Pumped Storage & CCGT Energy Efficiency Demand Resources Energy Efficiency Conservation Supply Resources Nuclear & Hydro Base Load Avoided Base-Load Investments ,000 4,000 6,000 8,000

25 Stimulating Investments through Markets Green Tag Market Renewable Energy Project Electricity Market +MWh White Tag Market EE -MWh DR, EE, Conservation Programs 25

26 White Tag EE What is it? White tags (or energy efficiency certificates) are tradable commodities that represent one MWh of electricity savings through energy efficiency. Who buys it? Organizations who wish (voluntary) to offset their carbon footprint or utility companies required (mandatory) to meet portfolio standards by legislation 26 How is it measured? Extent of energy saving is compared against a baseline estimate of energy use in the absence of any attempt at saving energy.

27 White Tag Methods of Generating White Tags from retrofits or replacement of existing equipments from cogeneration, or CHP projects from LEED green building standards from operational changes that increase EE Existing Implementations Connecticut implemented a white tag standard in Nevada and Pennsylvania have adopted legislation requiring white tags as part of a mandated state portfolio standard 27

28 Ontario Price vs Load Ontario Load 2007 Ontario Spot Price [M W ] % 90% 80% 70% 60% 50% 40% 30% 20% 10% [$/M W h] 28

29 Alberta Price vs Load Alberta Load 2007 Alberta Spot Price [M W] [$/M W h] % 90% 80% 70% 60% 50% 40% 30% 20% 10% 29

30 NYISO_J Price vs Load NYISO_J Load 2007 NYISO_J Spot Price [M W ] [$/M W h ] % 90% 80% 70% 60% 50% 40% 30% 20% 10% 30

31 NYISO_A Price vs Load NYISO_A Load 2007 NYISO_A Spot Price [M W ] [$/M W h ] % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 31

32 Summary Market as a policy tool: to stimulate demand (ie. risk transference, portfolio standards) to contract supply (ie. eligibility, verification, duration) to drive prices (ie. competition) 32 Questions to Consider: What is the evidence of the effects of conservation actions? Does trading substitute or complement incentive programs? Who has jurisdiction to create trading opportunities? What are pros and cons of voluntary versus mandatory regimes? What are the regime impacts on reaching energy reliability and climate change goals?