Electricity Markets Outlook

Transcription

1 QUANTITATIVE TRADING Electricity Markets Outlook November 30, 2006 QUANTITATIVE TRADING WASHINGTON, D.C. (703) NERGY 1

2 Key Questions Is the current market adequate? Adequate infrastructure investment Adequate demand response Promoting increased efficiency and alternative energy objectives If not, how can we get there? When is it needed? 001, ,DCENGY01A.ppt cgl, JrB4 2

3 Today, the markets are at a fork in the road Enables Market Top Down Mandates: Command and Control Regulation ISO/RTO Reliability Planning Dispatch State/ FERC Political Forces Percent DR Capacity payment Percent Revenues Cross subsidies Typically short-term term fixes Fair Competition Non-discriminatory, economic dispatch Transmission access Efficiency Demand response Access to full energy price Investment New generation Alternative/renewables Entrepreneurial development ICE/NYMEX ISO Markets Exchanges Energy RT/DA Hubs FTR Spread Capacity Options 1) Can Price we cap envision gaps (and a socialized dispatch) more robust market? 2) Time horizon gaps 3) Product gaps Is is feasible? 006b, ,DCENGY01A.ppt JTS, 3

4 If you build it they will come... Or will they? Trading Volume Comparison First Half of Bilateral = Exchange 8 Bilateral (EQR Sales Volume/ Actual Load) ISO-NE (6.8x) PJM (6.2x) MISO (3.8x) 5-10x Growth Natural Gas 2 (40x) 2 NYISO (2.5x) 1 0 Corn 1 (25x) Exchange Volume Trading Ratio (Financial Traded Volume/Actual Load) Note: Assumes 90% ICE and 10% NYMEX market share in financial trading 1 Only considers CBOT trading volume on Futures products; half of the corn crop is traded 50x before delivery 2 Volume from NYMEX and ICE Natural Gas Trading; broker OTC market estimated at 10% of total volume Source: Dean & Company analysis, ICE, PJM, NYISO, MISO, ISO-NE, FERC EQR 002, ,DCENGY01A.ppt ini, JrB4 4

5 In fact, they should run to expanded markets Annualized Volatility by Products Short Term Balance of Day Medium Term Monthly Long Term Calendar Year 450% 426% 450% 450% 400% 400% 400% 350% 350% 350% 300% 250% Annualized Volatility 1 200% 243% Annualized Volatility 2 300% 250% 200% 257% Annualized Volatility 2 300% 250% 200% 150% 150% 150% 100% 50% 0% Electricity 97% Natural Gas Congestion 100% 50% 0% 95% Electricity 59% Natural Gas Congestion 100% 50% 0% 17% Electricity 45% Natural Gas N/A Congestion Note: Power is based on the most liquid financial product: PJM Western Hub. Volatility represents buying and holding a PJM WH contract the day before, one month before or one year before settlement. Volatility is measured by the standard deviation in returns on the the hold period of 1 day (daily going to settlement) ent) and one month for the monthly and annual contracts 1 Annualized Volatility = Daily Volatility x n where n = trading g days in one year (255) 2 Annualized Volatility = Monthly Volatility x n where n = trading months in one year Source: ICE and DCE analysis 010, ,DCENGY01A.ppt kal, 5

6 Exchanges are developed around markets with a high number of suppliers, pliers, high price volatility, and low product differentiation Commodity Comparison U.S. View Category Corn Oil Natural Gas Electricity Coal Paper Shipping (Truck Freight) Physical Suppliers 41,000 7,730 7,730 1,997 1, ,642 Physical Wholesale Buyers 5,415 4, ,216 (non-bulk) 2, ,325 (non-bulk) ,395 16,504 Volume (Physical) 11.7B bushels ($22B) (2005) 7.6B barrels ($490B) (2005) 22B MMBtu ($150B) (2005) 3.8B MWh ($152B) (2005) 1.1B short tons ($22B) (2005) 42MM short tons ($32B) (2002) 1.5T ton-miles ($164B) (2002) Price Volatility (Monthly) 23% (2006) 11% (2005) 29% (2002) 66% (2006) 6% (2004) 3% (2006) 15% 35% (2003) Exchange? Yes Yes Yes, hub and basis Limited No No No Source: EIA, USDA, World Bank, US Census Bureau, Corn Refiners Association, on, Platts,, DOE, NGSA, BTS, DC Energy data, Pulp & Paper 009, ,DCENGY01A.ppt kal, JrB2 6

7 For example, PJM influenced the availability of monthly spread products p through expanding the monthly FTR auctions to include the balance of planning period New PJM Markets Expanding Options & Liquidity for Participants 50,000 45,000 Volume Traded PJM Monthly FTR Auction Quarterlies Monthlies Introduction of Balance of Planning Year strip FTR auction Total Volume Traded (GWh) 003, ,DCENGY01A.ppt tck, JTS3 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jun Jun Auction Auction Jul Jul Auction Auction Aug Aug Auction Auction Sep Sep Auction Auction Oct Oct Auction Auction Nov Nov Auction Auction Jun Jun Auction Auction Jul Jul Auction Auction Aug Aug Auction Auction Sep Sep Auction Auction Oct Oct Auction Auction Nov Nov Auction Auction Introduction of a cleared spread product through the PJM FTR Auction for future months has increased trading in bilateral/broker markets 7

8 The market has yet to converge on its most practical product Time RT/DA Potential Market Scope Multi-Year Product/Times Gaps Gap Spread Products Energy Exchange Requirements: Hub One-to-One Zone Core Market Need Generator Nodes Nodes (load & generator) Location Gap One Too Many Multi-Year Annual Bal Year 1 Month Bal Month RT/DA Time 008, ,DCENGY01A cgl, JrB3 8

9 However, the expanded markets are not typical exchanges which is the hedgehog and which is the fox? Different Exchange Types Clearing Clearing Classic Exchange LMP Exchange Buyer Seller Buyer Sellers Same product Same location(s) Same price Different products Different locations Different prices One-to-one One-to-many or, (many-to-many) 011, ,DCENGY01A.ppt kal, JrB1 9

10 What the market should provide to participants. Today is come close, c but more is possible. Market Objectives Buy & Sell Power at Node(s) Hedged Price LT Power Price at Node Ability to Hedge Uncapped Price at Node To stimulate Demand Response Hedged Price To limit Risk Muni IOU LSE Generator Merchant Regulated Consumers Large (with metering) And small eventually) 004, ,DCENGY01A.ppt JTS, JrB1 Smooth earnings, certainty Investment Efficiency Demand/response 10

11 How to Get There? PJM Reality 0. The Correct Exchange Design 1. Staffing & Budgets 2. Governance LMP, many-to to-many exchange competence Budgets don t devote sufficient resources to markets. Whose money should be risked in developing new markets? Governance focus on reliability 3. Incentives Does it have the right incentives? 4. Regulation 5. Innovation Will it be regulated adequately for market products? Quick roll-out, out, willingness to experiment. 005, ,DCENGY01A.ppt ini, JrB4 11

12 What is your wish list? Key Questions What market is: Adequate? When do we need this market? Who can/should provide it? Desired? Ideal? 007, ,DCENGY01A.ppt JTS, JrB1 12