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Based on
-
-
-
Liberalisation, Deregulation and Regulation. Chapter 4 of Electricity Markets. C. Harris, 2006.
Fundamentals of Power System Economics. D. Kirschen and G. Strbac, 2010.
Reevaluation of Vertical Integration and Unbundling in Restructured Electricity Markets. Chapter 1 in
Competitive Electricity Markets, ed., F.P. Sioshansi, 2008.
Wall Street Bank Involvement with Physical Commodities. This senate report released by Permanent
Subcommittee on Investigations chaired by Carl Levin and John McCain on Nov 20-21, 2014.
A Handbook of Energy Market Basics by staff at the Division of Energy Oversight at FERC, July 2012.
1
Outline
 Liberalization
 Wholesale Market
 Retail Market
 Time-of-use Prices
Page
Markets
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2
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In Support of Liberalized Markets
Liberalization (deregulation) in Electricity Sector.
 Regions: US is large with different time zones, climates and legal systems. It is impossible
for a single entity to manage the entire grid (which is not synchronously connected anyway).
 Long-Distances: Distances are long so transmission losses are high. This leads to
consumption of what is locally produced. New trend is to locally produce and consume:
Micro grids.
 Inefficiencies are revealed by markets: In a vertically integrated sector, it is hard to find out
losses at a power plant or a sales division. When markets are employed, transactions
(transfer prices) between a buyer and seller allow us to easily assess the profitability of a
buyer/seller.
 Innovation can be fueled by market competition. Competition is stronger among independent
parties while it is nonexistent in a vertically integrated sector.
 Customer choice: Utility profits cannot be guaranteed at the expense of customers. Efficient
markets should drive costs down, should not they?

What & how to deregulate?
 Deregulate the Wholesale market between generators and retailers
 Deregulate the Retail market between retailers and
 Residential, Commercial, Industrial
 Establish a strong system operator and efficient markets
 Price resources well, especially scarce ones
 Be aware of gaming the system: Creating scarcity in real time to be paid more


Transmission scarcity: CA did not price congestion among some zones in real-time
Generation scarcity, coming up.
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3

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Liberalizing the Market
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Liberalize in a single step (England-Wales) or multiple steps (NordPool see nordpoolspot.com)
Which configuration is preferred eventually?
3
Genco
Genco
IPP

IPP
IPP
Wholesaler
Transmitter
Distribution
Distribution
2
Customers
IPP
Genco
Genco
Wholesale Market
Transmission Lines
Disco
Disco
Disco
Customers
Customers
Customers
Customers
Customers
In 3, distribution company (Disco) remains as the only connection between generators and customers.
Variations:



IPP
Wholesaler
Transmitter
Customers
1

Generator
Genco
In a slightly more extensive model, IPPs can sign large contracts with industrial customers; common in
Germany circa 2010.
In PJM (Pennsylvania-NJ-Maryland), the wholesale market settlement process includes solving the unit
commitment problem (when a plant/generator should be on and off).
Most importantly, the responsibility, authority and independence of system operator (SO).


More responsibility and authority drive towards integrated system.
Less responsibility and authority drive towards gaming and system reliability issues.
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
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Liberalization Steps for the Electricity System
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Often liberalization starts in the upstream to protect downstream consumers from its pitfalls.
Corporatization
Functional
Unbundling Accounting
Legal
Ownership
Integration with
other industries
Integrate
Unbundle
Ring fencing
Arrival of banks
Consolidate
Fragment
Privatization
Retail deregulation
Deregulate
Forced divestment
fragmentation



Emphasis on own cost and revenue; Deemphasize subsidies and tax income.
A system of transfer prices and service level agreements for the services within enterprise.
Public service as a constraint rather than objective.
Ring fencing: Isolating some portions of the industry or companies to maintain their stability while the other parts of the
industry goes through liberalization. E.g., Oncor (distribution company) is ring-fenced from Energy Future Holdings.
Forced divestment and fragmentation often includes privatization:



Revise
Corporatization: From state owned enterprise to profit-seeking company or non-profit organization.




Reregulate
Price
Grid stability
Interruptions
Economic sustainability
Environmental aspects
Electrification
Universal service
Disruption recovery
Public offering: Individuals, investors, institutions can buy a share of a corporatized piece.
Private (trade) sale: Government sells a corporatized piece directly to a single company or a conglomerate.
Integration with other industries such as Natural Gas, Oil, Coal, Construction, Banks, Investors.
Retail (including metering, billing) deregulation.


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Adam Smith: Individuals pursuing their own objectives can benefit their society. He did not say that individualism
always benefits the society.
Electricity markets need to be watched out for inadequate production in real time

Electricity is critical for life

Electricity cannot be stored
Markets can offer side-payments to generators to motivate them to bid more and/or at lower price

CAISO (California Independent System Operator) and MISO (Midcontinent Independent System Operator)

JP Morgan Ventures Energy Cooperation (JPMVEC) engaged in 12 types of improper bidding strategies.

“JPMVEC will pay a civil penalty of $285 million to the U.S. Treasury and disgorge $125 million in unjust
profits. The first $124 million of the disgorged profits will go to ratepayers in … California .... The other $1
million will go to ratepayers in the Midcontinent ...”
• July 30, 2013 FERC news release, “FERC, JPMorgan Unit Agree to $410 Million in Penalties, Disgorgement to
Ratepayers,” http://www.ferc.gov/media/news-releases/2013/2013-3/07-30-13.asp#.VC8CUKPD9aQ

5

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Economic Support for a Regulator
Regulators are to detect market manipulation and avoid it:

Federal regulator in USA: FERC (http://www.ferc.gov). State regulator in TX: ERCOT (http://www.ercot.com).

Fully independent (in design) regulators: Includes civil servant regulators not affiliated with a ministry.
CREG (http://www.creg.be/fr/index.html), EMRA (http://www.emra.org.tr), HEO (http://www.mekh.hu/en/), OFGEM
(https://www.ofgem.gov.uk).


Ministerial adviser regulators: Regulator is affiliated with a ministry (such as Department of Energy) and
only suggests a policy, but cannot formulate or enforce one. CRE (http://www.cre.fr in France), EC
(http://www.st.gov.my in Malaysia), ERU (http://www.eru.cz/en/o-uradu in Czech Republic).
Self regulation: Industry regulates itself. BNetzA (http://www.bundesnetzagentur.de).
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Heating and cooling consume more electrical energy than others.
Since demand is seasonal, so are trading contracts: August daytime
delivery to ERCOT interconnection
16 daytime hours 7:00-23:00 are peak hours; 8 night hours: 23:00-7:00
are off-peak hours.
Power products are defined by shorthand that refer to time blocks:

7x24 refers to 24 hours during a week;
5x16 and 7x16 refer to peak hours during workdays and a week;
5x8 and 7x8 refer to off peak hours during workdays and a week.
Same season
different days
Different
seasons
Hours of
a week
Find a difference
between figures
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
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Demand depends on the season, day of the week, time of day

During winters, two load peaks: about 7:00 and 19:00. During
summers, single peak: about 16:00. Fall/Spring demands are low and
they are called shoulder seasons.
/~metin
Demand Depends on Season and Day
but in a Certain Way
.edu
IPP
IPP
IPP
Bids
to sell
IPP
TN-En
Supply
Wholesaler
Transmitter
Distribution
Customers
Bids to sell in the wholesale market come from
multiple independent power producers.
Amount
MWh
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Price
$/MWh
100
60
Luminant
50
70
Luminant
50
80
100
90
Dynamo
80
100
Dynamo
80
110
Luminant
40
120
TN-En
There is a single wholesaler that buys from
multiple IPPs and sell to customers.
Demand
Demand for 8-9 am, 5th of next month
Retailer Offer
to buy
TN-Wholesaler
Amount
MWh
530
Price
$/MWh
100
7
IPP
Supply for 8-9 am, 5th of the next month
Ordered by increasing price
Page
Wholesale Market with a Single Buyer
Day by Day – Hour by Hour
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Wholesale Market with a Single Buyer
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150
$/MWh
Luminant
100
Dynamo
Wholesale Market Price
Dynamo
TN-Wholesaler
TN-En
Luminant
Luminant
50
TN-En
Accepted Quantity
380 MWh
50

100
150
200
250
300
350
400
450
MWh
500
Single buyer TN-Wholesaler is critical in determination of the market price and accepted quantity (of
energy). Wholesaler actually fixes the market price and accepted quantity follows from the market price.
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Wholesale Market with a Single Buyer
Offering Less
/~metin
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150
$/MWh
Luminant
100
Dynamo
Dynamo
Wholesale Market Price
TN-En
TN-Wholesaler
Luminant
Luminant
50
TN-En
Accepted Quantity
300 MWh
MWh
50



100
150
200
250
300
350
400
450
500
If TN-Wholesaler offers $90/MWh, IPP Dynamo will sell nothing.
SO (system operator) monitors the setting of the market price.
Generators as Speculators: As noted by Thomas and Thea (Merit’14), generators can buy at a low
price in the Forward Wholesale market to sell it later at a higher price in the Forward/Spot Market.
Genco
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Demand for 8-9 am, 5th of next month
Ordered by decreasing price
Genco
Genco
Genco
Retailer Offers
to buy
Wholesale Market
Transmission Lines
Disco
Disco
Customers
Customers
Customers
Bids
to sell
Supply same
as before
TX-En
Customers
Customers
Amount
MWh
Price
$/MWh
100
60
Luminant
50
70
Luminant
50
80
100
90
Dynamo
80
100
Dynamo
80
110
Luminant
40
120
TX-En
Demand from Discos
Disco
Amount
MWh
Price
$/MWh
Relergy
50
170
Green Mntn
60
160
JcPenney
90
150
Airports
100
130
TXU
30
120
DART
30
110
Cirro
70
100
Prosper Coop.
40
90
Terralex
60
80
10
Genco
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Wholesale Market with Multiple Buyers
/~metin
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200
Relergy
150
Green Mntn
JcPenney
Airports
TXU
Luminant
DART
Dynamo
100
TX-En
Dynamo
Cirro
Prosper
Terralex
Luminant
Luminant
50
TX-En
50
100
150
200
250
300
350
400
450
500
MWh
11
$/MWh
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Wholesale Market with Multiple Buyers
/~metin
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200
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SO(System Operator) determines accepted offers, bids
and hence wholesale market price.
SO settles the market but does not profit from it.
Relergy
150
Green Mntn
JcPenney
Airports
TXU
100
Luminant
DART
Dynamo
Wholesale Market Price
TX-En
Dynamo
Cirro
Prosper
Terralex
Luminant
Luminant
50
TX-En
TX-En earns
$10/MWh
TX-En earns
$40/MWh
50
100
150
200
250
300
Accepted Quantity
380 MWh
350
400
450
500
MWh
12
$/MWh
Page
Wholesale Market with Multiple Buyers
Market Price and Accepted Quantity
/~metin
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200
Relergy
150
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Green Mntn
JcPenney
Airports
100
Wholesale Market Price
TX-En
Lumi wants 20 MWh
at $110/MWH Luminant
TXU
DART Lumi Dynamo
Dynamo
Cirro
Prosper
Terralex
Luminant
Luminant
50
TX-En
Luminant earns
$40/MWh or
$10*50 more
50
100
150
Accepted Quantity
400 MWh
Luminant earns
$40/MWh or
$10*50 more
200
250
300
350
400
450
500
MWh
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Lumi is a subsidary of Luminant.
Lumi wants 20 MWh at $110/MWh.
This will later be sold at $80/MWh.
Loss from this transaction: $600=20*30.
Gain from pulling market price up: $1000
Motivation for manipulation: $400
$/MWh
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Speculating Manipulator
/~metin
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


Scarcity: TX-En cannot provide 100 MWh at $90/MWh because of an unplanned maintenance at a plant?
Abundance: Airport authority needs less energy than forecast because a major airline is downsizing?
If lucky, deductions cancel out.
Otherwise suppose Airport authority needs 10 MWh more due to increased heating/cooling needs.
This creates an imbalance in real time.
Supply and demand imbalances in real time are common:
–
–

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What if
–
–

14

Page
Need for (Managed) Markets
Inaccurate demand forecasts
Failures in the generators or in the grid
Wholesale markets are settled several days in advance so only spot markets can be used to mitigate
imbalances in real time.
Imbalances (blackouts) have so extreme consequences that their mitigation cannot be left to an
unaccountable spot market. An accountable SO instead manages the spot market and is responsible
for imbalances / blackouts.
Wholesale Market matches distributions
Spot Market matches actuals
MWh
Distribution
of supply
in 𝑡 for T
𝑡 < 𝑇.
Distribution
of demand
in 𝑡 for 𝑇
Time = 𝑡
Actual demand
in 𝑇 for 𝑇
𝑇 − 𝑡=several
days or hours
Real time
mismatch
Actual supply
in 𝑇 for 𝑇
Time = 𝑇
/~metin
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–
Pump-and-dump: Giving excessively positive signals to the market about a certain product before selling that product.
» E.g., Plano commercial real estate market after the announcement of Toyota Headquarter’s move.
Index manipulation by arranging quantities (amount and price)
–
–
–

Physical Witholding: The price of a commodity increases with its scarcity. Pull (buy and store the commodity) from the market with
an intention of raising its price.
» E.g., generators scheduling maintenance during peak periods in CAISO in the 2000s.
» E.g., transmission companies overscheduling transmission to create an appearance of congestion.
» E.g., Apple makes iPhones unavailable even at their launch.
Economical Witholding: The supplier of the commodity offers a high-priced bid to sell. The bid is not accepted and the market price
materializes at a higher value than it would otherwise. If the supplier has multiple bids (energy from nuclear and gas plants), the
supplier can make enough revenue from accepted bids even after forgoing a few bids by pricing them high.
Information manipulation
–

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Witholding or Market Starvation
–

15

Page
Market Manipulation Tactics
/~metin
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False reporting price or trade level: The price and volume of the after-hours or bilateral trades can be misreported. This happens
when a market participant reports fictitious transactions to an index.
» E.g., interest rate underreporting by major banks to LIBOR (London interbank offered rate)
Wash trading: To increase the traded volume, the same amount is sold and bought by the same participants in a short while.
Round-trip trading: To increase the volume, the seller of a commodity agrees to buy it back later. Round-trip trading can have two or
more participants.
Index manipulation by setting the time of the trade
–
–
Marking the close: Trade towards the end of the day to affect the closing price. Closing price can be pulled up or pushed down. A
holder of a contract based on closing price has incentive to manipulate it.
» Brian Hunter, Amaranth Advisors bought large long positions in Nymex NG contracts, which he sold rapidly during the
contract’s final settlement period with the intent of pushing down the settlement price. He engaged in this behavior while he
concurrently held larger short positions (contract to sell gas at a fixed price at ICE) in financial look-alike contracts, principally
on the Intercontinental Exchange (ICE), which benefited from a lower Nymex NG price.
Banging the open: Trade at the beginning of the day to affect the opening price or to set the early-prices as reference prices for the
future. Early trades signal information about a commodity to the other participants.
»
Pages 125-128 of 5. Market Manipulation in A Handbook of Energy Market Basics by staff at the Division of Energy Oversight at FERC, July 2012.
»

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2008 Bear Stearns acquisition suggested/forced by the Fed came with 27 power plants.
 The Federal Reserve Bank of New York gave JPMorgan a letter stating that “any assets or activities acquired from Bear
Stearns that JPMorgan is not currently permitted to own or engage in shall be treated as permissible assets or activities
for a period of two years.”
2010 Huntington acquisitions and RBS/Sempra acquisitions, each came with 2 power plants
–

16
JPMVEC (JPM Ventures Energy Cooperation) is a JP Morgan’s subsidiary with a strong interest to own power plants:
– JPMVEC is not authorized to operate power plants but it acquired the control of 31 by 2010 through
»

Page

/~metin
JPM is a Market Manipulator
or Not?
.edu
June 20, 2010: After requests from JPM, the Fed eventually authorized JPM to enter into tolling (plant rental)
agreements, energy management contracts, and long-term supply contracts with power plants, but declined to
authorize JPM to take direct ownership of a power plant, as an impermissible mixing of banking and commerce.
– February 23, 2011, JPMorgan notified the Fed that … JPMorgan intended to assert merchant banking authority to
continue owning them [power plants]. In Fall of 2014, JPM still owned the plants.
JPM’s Houston office was run by Francis Dunleavy reporting to Blythe Masters, head of JPM Commodities. They hired
John Bartholomew from Southern California Edison, he was a key designer of the bidding strategies.
– “On April 29, 2010, Mr. Bartholomew’s resume made its way to … Mr. Dunleavy… On his resume, he stated that
he had identified a “flaw in the market mechanism … causing CAISO to misallocate millions of dollars.”
– Strategy: Submit low-priced winning bids to the wholesale market: E.g., Bid $60/MWh when cost is $65/MWh.
CAISO/MISO’s make-whole payment mechanism: Compensate generators at above-market prices to provide an
incentive for plant owners to participate in the bidding auctions.
– “JPMVEC used the make-whole payments in connection with its bidding strategies to more than make up for the
money it lost at market rates, frequently receiving, in the end, twice its costs plus the same market payments that
other market participants received, without adding any grid reliability benefits.”
– E.g., Market price=$62/MWh, JPMVEC receives $62 not $60 per MWh. It also receives twice the cost = $130.
JPMVEC operated plants in CAISO and MISO and is alleged by FERC
– “to make profits from power plants that were usually out of the money in the marketplace.”
– JPMVEC’s schemes caused California and Michigan to pay ~ $124 million in “excessive” payments to JPM.
»
Pages 340-346 of “Section VI. JP Morgan Chase” in Wall Street Bank Involvement with Physical Commodities. This senate report released by
Permanent Subcommittee on Investigations chaired by Carl Levin and John McCain on Nov 20-21, 2014.

Sellers: TX-En to produce 200 MWh; Luminant to produce 100 MWh; Dynamo to produce 80 MWh.
Buyers: Relergy to buy 50 MWh; Green Mntn to buy 60 MWh; JcPenney to buy 90 MWh; Airports to buy
100 MWh; TXU to buy 30 MWh; DART to buy 30 MWh; Cirro wanted to buy 70 MWh but can get only 20
MWh at $100/MWh.
Sellers (generators) also provide bids to increase production or offers to decrease production.
–
–
–

Dynamo has two units each at 80 MWh; one is to be used and the other is idle.
Dynamo bids for the idle unit 80 MWh at $105/MWh to the SO.
Dynamo offers to decrease the scheduled 80 MWh production at the operational unit down to at least 10
MWh if the SO pays $20/MWh. It wants to keep the unit on at 10MWh or above to avoid a shutdown.
Buyers (retailers) provide bids to decrease demand or offers to increase demand.
–
–
Cirro offers to buy 50 MWh more at $105/MWh.
Cirro bids to decrease its demand down to 0 MWh if it is offered $30/MWh. In this case, Cirro might be
thinking of satisfying its demand from another resource where the spread is less than $30/MWh.
- Contractual positions from Wholesale Market
- Bids to increase production / decrease demand
- Offers to decrease production / increase demand
- Updated customer demand forecast

SO
Managed
Spot
Market
Accepted bids and offers
SO matches 50 MWh extra capacity bid of Dynamo  the offer of Cirro.


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Several hours before the time block (for which transactions are considered), wholesale market
closes. This is called “gate closure”.
At the gate closure, sellers and buyers report their position to the SO:
–
–

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
Page
From Wholesale Market to Spot Market
Cirro pays $50*105 to Dynamo in the spot market. Note that matching of extra capacity with extra demand
is through the SO. Buyer and seller cannot engage in a bilateral transaction in real time.
If there is excess demand, ERCOT orders shut downs – phone calls to industrial facilities.
/~metin
.edu
Genco
Genco
Genco
Genco
Wholesale Market
Transmission Lines
Retailer
Retailer
Retailer
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Genco
Page
Retail Market
/~metin
.edu
• Retailers buy electricity in the wholesale market and sell it in
the retail market.
• Electricity price in the wholesale market depends a lot on the
demand. It is about $20-30/MWh when demand is at medium
levels. It can grow to several hundred, even $1000/MWh with
the demand.
• The cap on the wholesale price is increased to $4,500/MWh
from $3,500/MWh in Ercot region in April 2012.
Retailer
Retailer
Retail Market
Distribution Lines
For about 1000 hours
price was above $50
Customers
Customers
Customers
Source: 2010 State of the Market Report for the
Ercot Wholesale Electricity Markets.
www.potomaceconomics.com/markets_monitored/ERCOT
365*24=8768
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Frequency
Page
Traditionally, constant prices for
residential customers and some time-of-use
(ToU) prices for industrial customers .
Retailer faces risk in wholesale prices.
Retailer
In addition to price, Retailers differentiate products by
- Contract terms:1 – 60 months
- Early termination fees: none or some.
- Fuel type: Renewable, Fossil fuel burnt for energy
- Distribution costs
- Special project costs
Frequency
Wholesale price
Retailer can pass
the same or less
risk to consumers.
Retail price
/~metin
Retailers are Subject to Volatile Input Price
What should retailers do?
.edu
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Seasonal Prices: Monthly
Demand during the summer is high and during the winter is low.

Georgia Power Standard Rate Residential Contract
www.georgiapower.com/residential/rate-plans/standard-service.cshtml
Winter Season  Low Demand
Summer Season  High Demand
36.24=650*5.5747
16.74=350*4.7817
32.42=350*9.2614
52.98=36.24+16.74
68.66=36.24+32.42
$
80
Summer
Quantity Induced
Premium
$/kWh
9.6
For
For
Consuming
Consuming
A Lot
More
8.6
7.6
6.6
5.6
4.6
64
48
32
For
For
Consuming Consuming Base Price
More
A Lot
Winter &
Summer
Winter
Quantity Induced
Discount
16
Consume Consume
A Lot
Base Rate More
650
1000
kWh
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Traditionally retailers have charged a constant (over both year and day) price to consumers.
–
–

Page

Since they were integrated with power generators, wholesale price and its variability were not apparent.
Deregulation of markets have revealed wholesale price variability.
A retailer may charge the wholesale price to the consumers by passing all the price risk to consumers.
–

Wholesale price increases to $1000 per MWh in Ercot area or more during summer time. This extreme price
plan can bankrupt some consumers.
An intermediate pricing strategy is to blend wholesale price with a constant price.
– To make this strategy implementable, keep it constant during peak and off-peak hours.
$ / kWh
0.20
Wholesale price
0.16
Intermediate price
0.12
Implementable price
Constant price
0.08
0.04
0
2
4
6
8
10
12
14
16
18
20
22
24=0 Time-of-use
/~metin
Extreme, Intermediate and Implementable
Retailer Prices: Hourly
.edu
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Suppose your utility is charging two prices:
– Plan A: $0.08/kWh until noon and $0.12/kWh afterwards
– Plan B: $0.06/kWh until noon and $0.14/kWh afterwards
– Plan C: $0.04/kWh during until noon and $0.16/kWh afterwards

Your activities are
Consume
kWh


Plan A
Plan B
Plan C
Air conditioning
25
No change
No change
AM
Charge car
20
AM
AM
AM
Lighting
6
No change
No change
No change
Gaming, TV, Internet surfing
5
No change
AM
AM
Laundry (washing/drying)
4
AM
AM
AM
Cooking (range top, oven)
3
PM
PM
?
Running dishwasher
3
PM
?
?
Industrial customers responded to ToU prices.
Residential customer prices in TX might be too low to change habits!
22

Page
What would you (consumer)
do with ToU prices?
/~metin
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utdallas
Real-time
Day-ahead
Real-time
Wholesale Market
Wholesale Market
Wholesale Market
Day-ahead
Real-time
Retail Market
Retail Market
Retail Market
Visible Hand of a Regulator over Markets
23
Day-ahead
Page
Summary
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