Wholesale Electricity Costs
May 19, 2006
Massachusetts Electricity Restructuring Roundtable
Bob Ethier, Chief Economist and
Director, Resource Adequacy
1
Overview
• Power prices have increased
– Higher fuel prices
– Increased power use
• Average and on-peak
• Steps can be taken to reduce electricity costs
– New England must become more efficient (price
responsive)
• Time-differentiated retail rates can encourage consumers
to use power when its cheaper
– Market investment in lower cost base load resources
needed
MA Roundtable
© 2006 ISO New England Inc.
2
Dispatching Resources
• ISO uses least expensive mix of resources to meet minute-tominute power needs of the region
– Accounting for transmission constraints and potential outages
• Most expensive needed resource sets market clearing price for all
(Uniform Clearing Price Auction)
– Sends a clear signal to investors and the region on what resources
should be developed
– Responds immediately to changed market conditions
– Encourages marginal-cost based offers so that the most efficient
units are dispatched
• Region-wide economic dispatch in place for 35 years in New
England
MA Roundtable
© 2006 ISO New England Inc.
3
UCP
Demand
Forecast
Demand and generation (MW)
Dispatching Resources: All Resources
Needed to Meet Demand Paid Uniform
Clearing Price
Actual
Demand
$100
$65
$65
$45
$30
$10
$0
MA Roundtable
© 2006 ISO New England Inc.
4
Electricity Prices Increased in 2005
• Average system price of $79.96/MWh was 47% higher than 2004
• Increase is due to increased fuel costs and increased demand
– 44% increase in natural gas prices
– Increase in peak and average use over previous years
• Higher cost gas and oil units set price more than 80% of the time
– Changes in the prices of these fuels are quickly reflected in wholesale
electricity prices
• Retail price increases for the 05/06 winter were also significant
– In most states the timing of the increase lags behind wholesale market
conditions
– Reduces the ability of consumer behavior to lower wholesale prices
MA Roundtable
© 2006 ISO New England Inc.
5
New England’s Generation Mix:
More Than 60% Natural Gas and Oil
Summer 2000
Pumped
Storage
1,679 MW
7.0%
Other
Renewables
1,092 MW
4.6%
Hydro
1,626 MW
6.8%
Summer 2006
Natural Gas
4,255 MW
17.7%
Pumped
Storage
1,672 MW
5.4%
Hydro
1,691 MW
5.5%
Othe r
Renewables
922 MW
3.0%
Natural Gas
11,803 MW
38.1%
Coal
2,846 MW
9.2%
Coal
2,814 MW
11.7%
Nuclear
4,448 MW
14.4%
Nuclear
4,359 MW
18.2%
Total: 23,975 MW
Oil
8,150 MW
34.0%
Oil
7,549 MW
24.4%
Total: 30,931 MW
Note: Units in the “Other Renewables” category include those fueled by biomass, refuse, and wind.
MA Roundtable
© 2006 ISO New England Inc.
6
Electricity Prices Track Fuel Prices
Average Monthly Electricity, Natural Gas and Oil Prices
$140
$16
$120
$14
$/MWh
$10
$80
$8
$60
$6
$40
$4
$20
$0
Mar-03
$/MMBTu
$12
$100
$2
$0
Aug-03
Jan-04
Hub
Jun-04
Nov-04
Nat Gas
Apr-05
Sep-05
Feb-06
Oil
MA Roundtable
© 2006 ISO New England Inc.
7
Which Units Are Setting Prices in the
Energy Market?
Marginal Input Fuels in Real-Time, 2005
60%
40%
30%
20%
10%
yd
ro
:R
oR
W
oo
d/
R
ef
us
e
ue
l
H
Je
tF
C
oa
yd
l /O
ro
il
:R
es
er
vo
ir
H
oa
l
C
yd
ro
:P
S
il
H
O
il
as
/O
G
as
0%
G
% of Time
50%
MA Roundtable
© 2006 ISO New England Inc.
8
Electricity Use on the Rise
• New England set new
record for electricity use in
2005
– Peak growth
– Average consumption
• Projected annual growth in
New England peak demand
2006-2015: 1.9%
MA Roundtable
© 2006 ISO New England Inc.
9
Addressing Increased Prices
• Reduce demand
–
–
–
–
Energy efficiency
Demand Response
Peak shaving
Conservation
• Investment in lower cost resources
– Efficient units, and those with lower fuel costs
MA Roundtable
© 2006 ISO New England Inc.
10
Higher Prices Drive Investment
• Higher electricity prices provide increased incentives
for investing in resources that don’t use higher-priced
natural gas
– Large increase in interest in wind power
– Interest in developing coal gasification plants
• Siting of generating resources is difficult in New
England
MA Roundtable
© 2006 ISO New England Inc.
11
Analyzing Electricity Costs
• 2006 Regional System Plan (RSP06) will estimate how
certain actions can affect costs
• RSP06 will model a number of scenarios to determine
their effect on prices, including:
–
–
–
–
–
Addition of a 1,000 MW base load resource
Addition of a 1,000 MW clean-coal generator
5% load growth without generation addition
5% on-peak conservation
Addition of 500 MW of load response
MA Roundtable
© 2006 ISO New England Inc.
12
Controlling Electricity Costs: Results
% Change in
Wholesale
Electricity Price
1 Add baseload
2 Add coal
3 5% growth
4 5% reduction
5 Load response
-5.70%
-5.60%
5.80%
-4.70%
-0.02%
Change in Total
Consumer
Costs
Change in Total
Production Costs
Change in
Total Capacity
Costs
-$600 million
-$590 million
$600 million
-$490 million
-$2 million
-$470 million
-$300 million
$420 million
-$360 million
-$0.5 million
$90 million
-$90 million
-$30 million
Note: RSP06 will provide an indication of the relative market and reliability
benefits from different resources in each sub-area.
MA Roundtable
© 2006 ISO New England Inc.
13
Wholesale-Retail Linkages
• Retail and wholesale markets are disconnected
– Flat retail pricing provides no incentive to reduce use when
wholesale prices are highest
• States can encourage energy efficiency and conservation
by adopting time-differentiated retail rates
– Consumers shifting power use to cheaper hours of the day will
make better use of the existing power system
• Lowers energy market prices
• Reduces capacity payments by deferring need to build infrastructure
MA Roundtable
© 2006 ISO New England Inc.
14
Recommendations for Massachusetts
• Adopt time-differentiated retail pricing for large customers
– Encourage efficiency
– Offer opportunity to manage energy costs
– The more eligible consumers, the better
• Adopt policies that encourage a more diverse set of resources
(i.e. nuclear, clean coal, renewables)
– Including facility siting and air permits that provide flexibility needed
for reliability and economics
• Continue active involvement in the regional planning process for
the power system and wholesale markets
MA Roundtable
© 2006 ISO New England Inc.
15