Document

Report
Overview of Retail Energy
Markets
Presentation to YPO Energy Summit
April 23, 2009
Sean Casten
President & CEO
Recycled Energy Development, LLC
ISO-New England
Holyoke, MA
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Of inverted yield curves and…
INVERTED
Bond Yield
Bond Yield
NORMAL
Time to Maturity
Time to Maturity
 Inversion signals either a pending recession or an arbitrage
opportunity, in either case, in quickly returns to normal.
 But while it lasts, capital has a preferential bias away from
long-term investments
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…modern power markets.
Electric Price
TODAY
Electric Price
NORMAL
Prod’n Wholecost
sale
Retail
Prod’n Wholecost
sale
Retail
 Like bond yield curves, current situation drives capital away
from long-term investments.
 Unlike bond yield curves, it is not readily fixable – and
power markets have not yet fully factored in long-term
consequences.
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New England specifics
•
Inversion is most noticeable in regions that have
historically depended on coal, nuke and hydro.
•
In these regions, new-build economics are much higher than historic
rates. Not as visible in NE given higher fundamental energy costs.
•
But your business will be affected by national volatility
that affects your suppliers and customers.
•
Fundamentals that have driven the inversion – and
obstacles to new capital deployment in the energy sector –
are national.
•
Bottom line: there are region-specific differences, but the
important story is national.
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US Avg Retail Elec Price, c/kWh (2008 $)
20 years of falling electricity costs
are over.
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
1976
1986
1996
2006
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Restructured mkts have responded
more quickly to fundamentals, but
are not the cause of higher prices.
Inflation-adjusted power price (1990 = 100)
Federal EPACT
(Wholesale Access)
105
First State
Restructuring
Legislation (CA, PA,
NY, RI, NH)
100
First restructuring
implementation (RI)
95
90
85
80
75
70
1990
Restructured States
Fully Regulated States
1995
2000
2005
2010
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Reason: no growth in nuke capacity
since 1990…
Installed Nuclear Capactiy (GW)
110
100
90
80
70
60
50
40
30
1976
1986
1996
2006
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…or coal.
Installed Coal Capactiy (GW)
330
310
290
270
250
230
210
190
170
150
1976
1986
1996
2006
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Rising capacity factors on lowmarginal cost generation  falling
prices – but unsustainable.
Capacity Factor (5 year trailing
average)
100%
90%
80%
70%
60%
Nuclear
Coal
50%
40%
1985
1990
1995
2000
2005
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(Coal CF Growth) - (Retail Sales Growth)
Don’t be fooled by the coal fleet CF –
it’s running as hard as it can.
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
1985
1995
2005
Growth % shown is 5-year trailing average
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The problem: the system needs LT
capital investment, but the market
signals aren’t encouraging.
•
The things we think are cheap aren’t.
•
•
•
Restructured markets haven’t provided long-term price
certainty necessary to build new generation.
•
Spot prices (set, in part by low marginal cost, amortized units) have
rationalized dispatch, but not encouraged new construction
•
Liquidity / depth of market hasn’t yet matured to facilitate strips beyond
5 – 10 years (and much shorter today)
Energy users still see significantly subsidized price signals
that discourage behind-the-meter investment.
•
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Nuke and coal are lousy investments; no one without guaranteed rate
recovery tries to build them: “American Electric Power said Thursday it
must raise electricity rates 45 percent… over the next three years, to
cover [new coal plant investments]” – Aug 7, 2008
Irony / opportunity: they have the lowest cost opportunities for new
generation (see next).
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The cheapest options for new
generation are intimately tied to
industrials…
Clean Electricity Generation Options:
Cost / Delivered MWh
Solar PV
Biomass Elec.
G
e
n
e
r
a
t
i
o
n
Conc. Solar
Wind off Shore
NG CCGT
Wind on Shore
Coal w/ Seq.
Nuclear
Chart Key
IGCC
Renew able Energy
Geo- thermal
O
p
t
i RE Elec. Only
o
RE w/ CHP
n
Conventional Options
Biomass CHP
Waste Energy Recycling
Fossil CHP
$4
50
$4
00
$3
50
$3
00
$2
00
$1
50
$1
00
$5
0
$0
$2
50
2008 Average Retail Electricity Price
Existing Coal
Dollars / Delivered MWh
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…as are the lowest-cost (AKA, most
profitable) approaches to CO2
reduction.
Cost per Ton of CO2 Reduction Vs. Old Coal
Solar PV
Biomass Elec.
Conc. Solar
NG CCGT
Savings
Coal w/ Seq.
Wind off Shore
IGCC
Wind on Shore
Nuclear
Geo- thermal
Renew able Energy
Biomass CHP
Conventional Options
Fossil CHP
RE Elec. Only
Waste Energy Recycling
$3
50
$3
00
$2
50
$2
00
$1
00
$5
0
RE w/ CHP
$0
-$
50
T
y
p
e
Chart Key
Costs
$1
50
G
e
n
e
r
a
t
i
o
n
Dollars / Avoided Ton of CO2
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What it all means for energy
consumers.
•
•
•
Bad news
•
Your retail power price is a lousy predictor of long-term energy price /
reliability.
•
You don’t have any easy way to arbitrage this gap
Good news
•
The lowest cost options for new generation are within industrial facilities
and unlikely to be built by the traditional players; prices on markets will
rise, and low-cost generation will be come steadily more valuable.
•
The regulatory environment, while far from perfect is finally starting to
move in the right direction (energy bills are now every 2 years, instead
of every 10)
Fixing the problems are possible, but require regulatory
reform, in both our energy and environmental policy.
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Potential fixes
•
•
•
Energy: Fix incentives / remove barriers to efficiency
•
Requires changes at state and federal level. RTOs/ISOs have key role to
play (and ISO-NE has been a leader)
•
Hard issue: utility commissions approve capital based on holistic value of
system, but independents can only capture economic value for those
discrete elements (energy, capacity, etc.) for which public markets exist.
Environment: Increase carrot/stick ratio
•
Clean Air Act provides substantial penalties for emissions release, but no
direct incentive (and in some cases, outright disincentives) for emissions
reduction below minimum allowable levels.
•
Carbon policy is on a track to repeat the same mistakes.
Consequences of inaction are South African
•
Electric prices were maintained at marginal cost to facilitate economic
growth, but didn’t encourage new-build. Now face massive rolling
blackouts and penalties to any industrial who doesn’t reduce demand.
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All good fixes rely on markets
•
Capital investment exceeds government resources, but
electricity markets don’t rationally allocate capital.
•
Huge barriers to entry/exit
•
Regulated utilities have massive ability to independently affect price
•
System is rife with subsidies that preclude full price transparency
•
This creates an opportunity, since rationalized captial
allocation would lead to lower cost, lower CO2 power.
•
Barriers to reform are political, not fundamental (don’t
confuse wealth transfers with wealth reductions!)

“…[regulation has a] corollary goal of preserving those distorted, crosssubsidizing rate structures… [which were removed through deregulation]
even as regulators and incumbents alike attempt[ed] to preserve the
artificially elevated prices needed to finance cross-subsidies.” (Alfred
Kahn, reviewing telecom deregulation in 2004)
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How quickly could markets respond
if barriers were removed?
US Installed Generation Capacity, by Fuel Type
Installed GW
450
400
Natural Gas
Nuclear
350
Coal
300
250
Final FERC rehearing
of 888 to clarify initial
rule in 1998
200
150
100
50
FERC Order 888 mandates
non-discriminatory
transmission access
1992 Energy Policy Act opens
competitive markets
0
1975
1985
1995
2005
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