Assumptions: For the price of electricity, the average electricity price for the 1000 largest utilities in the U.S. based on EIA data for 2006 (except CA, where existing tiered rates structures were used). A 6% price derate factor was assumed to remove fixed billing charges. TOU rates included (+20% price adjustment) for select states in 2007, and all states in 2015. Electricity price escalated at 1.5% per year in moderate case and at 2.5% per year in more aggressive case. The solar performance is based on NSRDB weather station closest to the center of the utility service territory, assuming a south facing array, at 25 deg tilt. An 82% derate factor is used to account for inverter and other PV system loses, but no performance degradation over life of the PV system is assumed. For the financial analysis, the installed system price is set at $8.5/Wp in the current case and $3.3/Wp in 2015. The system is assumed to be financed with a home equity loan or through mortgage (i.e., interest is tax deductible), with a 10% down payment, 6% interest rate, with the owner in the 28% tax bracket, and a 30 year loan/30 year evaluation period. Incentives included are the Federal ITC worth $500/kW due to $2000 cap and individual state incentives as of December 2007 in the current case and no Federal ITC or state incentives in 2015.
13% real increase in price of electricity. In this case, solar PV is very attractive in states in the Southwest, largely due to good solar resource and high electricity prices, especially in California. PV is also very attractive in the Northeast, due to high electricity prices.
22% real increase in price of electricity. Potential factors influencing future electricity prices: emerging climate regulations, other environmental issues, transmission constraints, the rising cost of key commodities used in the construction of traditional power plants, and rising fossil fuel prices. In this case, PV is at “breakeven” in a much larger area of the country, including much of the Central, Midwest, and Southeast U.S.
U.S. Electric Industry Undergoing restructuring and moving towards deregulation. Traditionally dominated by regulated monopolies that vertically integrate generation, transmission and distribution. Shifting towards an industry featuring a mix of competitive generators, common transmission operators, and distribution companies.Source: Energy Information Administration, Status of Electricity Restructuring by State, September 2008. http://www.eia.doe.gov/cneaf/electricity/page/restructuring/restructure_elect.html
Electric Utility Industry Structure Power Sellers Power Wholesalers and Buyers Power Retailers and Buyers • Utilities Wholesale • Power marketers Bilateral• Investor owned utilities Bilateral • Aggregators Load Serving Entities Retail• Public Utilities Transactions Retail• Independent Power • Utility Distributors Pilot Customers Producers • Power marketers Programs• Cogenerators Competitive • Power Exchanges • Aggregators Markets Futures - ISO Controlled Markets Exchanges - Private Exchanges Direct Sales
FERC Standard Market Design Major Elements Independent Transmission Provider (ITP) Organized Exchange Markets Market Power Mitigation (unbundling) Regional Transmission Planning, ATC*, OASIS***ATC – Available Transfer Capacity **OASIS – Open Access Same-Time Information System Source: Federal Energy Regulatory Commission, RTO/ISO Map, January 2008. http://www.ferc.gov/industries/electric/indus-act/rto/rto-map.asp
Electric Market Restructuring - Landmark Policies1935 – Federal Power Act (FPA) Made the Federal Power Commission (later became FERC) the regulatory body for electric industry.1978 – Public Utility Regulatory Policies Act (PURPA) Required utilities to buy power, at avoided costs, from non-utility generating facilities that use renewable energy sources or cogeneration.1992 – Energy Policy Act (EPAct) Opened transmission networks to allow wholesale transactions for electricity. Left it up to individual states to determine opening of retail markets.1996 – FERC Order 888 and 889 Established standards for non-discriminatory transmission access and stranded cost recovery. Required utilities to establish electronic systems to share information on a non-discriminatory basis.
Electric Market Restructuring - Landmark Policies (cont.)1999 – FERC Order 2000 Requested formation of Regional Transmission Organizations (RTOs) to - Improve efficiencies in grid management. - Improve reliability and planning.2002 – FERC Standard Market Design (SMD) Proposes standards for establishment of competitive electric markets.2005 – Energy Policy Act - Improved reliability standards and modernized transmission infrastructure. - Net metering and smart metering standards for states to consider.
Composition of U.S. Electricity Industry Composition of the US Electric Industry, 1996 Federal 10 Investor-Owned 243 Cooperative 932 Publicly Owned 2010 Nonutilities 1994 Power Marketers 80 0 500 1000 1500 2000 2500 Net Generation, Average of 1990-1996 Investor-Owned, 74.80% Cooperative, 5.60% State Government, Municipals, 4.50% 9.00% Federal, 6.20%Source: Energy Information Administration, Electric Power Annual 1996, Volume II, DOE/EIA-0348(96/2) (Washington, DC, 1997).
Today’s U.S. Electricity Cost Landscape• Conservative forecasts show residential electricity prices reaching 12 c/kWh by 2009• EIA shows historic national average retail electricity prices outpacing inflation by ~1.2% EIA National Retail Electricity (cents / kwh) 2007 10.64 2006 10.40 + 4.7% per annum 2005 9.45 2004 8.95 2003 8.72 2002 8.44Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/
Hurdles Faced By Traditional Generation Sources• Coal prices have nearly tripled over the pastfive years. $ / short ton• Coal power plants face increasing projectuncertainty due to carbon and siting concerns.• Natural gas prices have more than doubledduring the same time period.• Nuclear industry groups estimate the nextgeneration nuclear plants will not be online until2015. Source: Simmons & Co. Coal and natural gas prices are increasing at much faster rates than 4.7% per year, while nuclear faces regulatory, financing and siting issues.Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/
U.S. Electric Retail Prices 2007 Average Residential Retail Prices 20 18 States with restructured electric markets 16 States with regulated rates 14Cents/kWh 12 10 8 6 4 2 0 In states that implemented retail market deregulation, prices have increased faster that the national average.
Electric Industry Deregulation Why has competition in electric industry not brought price benefits to consumers? Inelastic demand and lack of price signals. Technical feature of the industry that requires supply and demand to be in balance at all times (electricity cannot be stored). Poor market design which essentially has the least efficient plant set the wholesale market price for all generation. Lack of incentives for consumers switching electric suppliers since there is little to choose from in terms of service differentiation.Sources: Rosenberg, A. E., 2008, “A way to reorganize organized markets”, The Electricity Journal, Vol. 21, Issue 1,ppg 9-17.  Joskow, P., and Tirole, J., 2006, “Retail Electricity Competition”, Rand Journal of Economics, Vol. 37, No. 4, ppg. 799-815.
Existing Power MarketersSome recently started power marketers in Texas (Jan 2008) Green Mountain Energy - Marketed as nation’s leading provider of cleaner energy. - Customers are given the opportunity to choose how their power is made via direct access retail electric service. Affordable Energy - Sells electricity through a large independent sales base which increases their sales organization through word of mouth and enthusiastic sells pep rallies. - Untested customer service and billing system. Cirro Energy - Appears to offer most competitive electric rates but requires a 12 month contract at variable energy rate (which can be raised for any reason). - Most other companies offering variable electric rate products leave the agreement as a month to month contract. Champion Energy - Lehman Brothers company which is well-capitalized and has tremendous experience in commodity marketplaces. - Ensures you will receive accurate and straightforward billing.
Distributed Generation Definition Small-scale production of electricity at or near customers’ homes and businesses. Drivers Decline in costs of small-scale generation Increase in utility-supplied power prices Benefits Improved reliability Reduced costs Increased use of renewable energy Increased energy security Barriers Difficulty in standardizing technology and grid interconnection. High initial costs. Utility monopoly rules (stranded costs & interconnection fees) Public’s lack of knowledge about the electric industry.Source: Sovacool, B. k., and Brown, M. A., 2007, “Energy and American Society – Thirteen Myths”, Springer Publishing, Netherlands
Costs of Selected DG Technologies- Levelized Cost is the average cost of electricity (cents per kWH) over theoperating life of the generating equipment.- Cost estimate that the systems powered by fossil fuels will be operated90% of the time and that wind and solar PV systems will run 40% and 27%of the time respectively.- Costs do not include effects of tax credits and other direct subsidies forspecific technologies.
U.S. Solar PV Industry Despite being the most expensive DG technology, Solar PV industry has had exponential growth recently and is projected to continue this growth pattern. Growth is due to : - Volatile electric prices - Tax incentives and policy initiatives - Advances in PV technologies - Consumer interests in renewable energy and to be more energy independent U.S. Domestic PV Shipments (1997 - 2006) 250000 PV Modules (Peak KW) 200000 150000 100000 50000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YearSources: Sovacool, B. k., and Brown, M. A., 2007, “Energy and American Society – Thirteen Myths”, Springer Publishing, Netherlands  Borenstein, S., 2008, “The Market Value and Cost of Solar Photovoltaic Electricity Production” Center for the study of Energy Markets Working Paper, University of California – Berkeley campus. http://www.ucei.berkeley.edu/PDF/csemwp176.pdf
U.S. Solar PV IndustrySource: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/
2007 Residential PV Price Attractiveness Electricity Price differences with Existing Incentives• Currently PV is financially competitive where there is some combination of high electricity prices, excellent sunshine and/or state/local incentives.Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/ 17
2015 Residential PV Price Attractiveness Electricity Price differences without incentives and moderate increase in grid prices• Attractive in about 250 of 1,000 largest utilities, which provide ~37% of U.S. residential electricity sales.• 85% of sales (in nearly 870 utilities) are projected to have a price difference of less than 5 ¢/kWh between PV and grid electricity.• In large areas, PV is cheaper than grid electricity Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/ 18
2015 Residential PV Price Attractiveness Electricity Price differences without incentives and aggressive increase in grid prices• Attractive in about 450 of 1,000 largest utilities, which provide ~50% of U.S. residential electricity sales.• 91% of sales (in nearly 950 utilities) have a price difference of less than 5 ¢/kWh between PV and grid electricity.• Across most of the highest U.S. population areas, PV is cheaper than grid electricity. Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/ 19
Electric Supply Business ModelsTraditional Model (Customer view) Use electricity supplied by monopolistic utilities. For implementing DG, invest your own resources (time, money, knowledge) and undertake risks on investment due to intermittent generation.Sustainable Model (Customer view) Get into a contract to buy electricity from a electric service provider/power marketer and allow suitable DG to be installed and maintained by the provider.
Offering from New Model Financial solution for greater penetration of DG. - Cost structure over contract life of DG technologies is internalized by the service provider (lease to own approach). - Risks due to generation intermittency is shifted away from consumers. Commercial engine that drives technological advances towards localized energy independence/sustainability. - DG technology management. - Smart metering. Industry savings from reduced transmission costs and congestions. Lower carbon footprint for the industry that is the single largest in emitting CO2.
Financial Derivatives and Electric Markets Electricity spot prices are volatile due to unique physical attributes of electricity - Non-storability - Uncertain and inelastic demand - Most renewable resources are dependent on weather - Steep supply function Financial derivative tools are not fully understood and utilized in the electric industry. In Feb. 2004, persistent high prices in TX during a 3-day ice storm led to the bankruptcy of a retail electric provider that was exposed to spot market prices. The 2000 California electricity crisis is largely attributed to the fact that major utilities were not properly hedged through long-term supply contracts.Source: Deng, S. J., and Oren, S. S., 2006, “Electricity derivatives and risk management”, Energy Journal, 31, ppg. 940-953.
Financial Derivatives and Electric Markets Most of electricity futures and options are traded on the New York Mercantile Exchange (NYMEX). Types of electricity financial instruments: - Electricity forwards, futures and swaps - Options (call, put, spread, swing options) - Structured transactions (tolling, load-serving contracts) - Financial derivatives on transmission capacity Risk management applications - Hedging a generators output - Ensuring generation adequacy - Callable service contracts - Hedging congestion risk of bilateral transactions. Tools for planning under uncertainty and asset valuation.Source: Deng, S. J., and Oren, S. S., 2006, “Electricity derivatives and risk management”, Energy Journal, 31, ppg. 940-953.
References• Borenstein, S., 2008, “The Market Value and Cost of Solar Photovoltaic Electricity Production” Center for the study of Energy Markets Working Paper, University of California – Berkeley campus. http://www.ucei.berkeley.edu/PDF/csemwp176.pdf• Deng, S. J., and Oren, S. S., 2006, “Electricity derivatives and risk management”, Energy Journal, 31, ppg. 940-953.• Energy Information Administration, Electric Power Annual 1996, Volume II, DOE/EIA- 0348(96/2) (Washington, DC, 1997). Energy Information Administration, Status of Electricity Restructuring by State, 2008. http://www.eia.doe.gov/cneaf/electricity/page/restructuring/restructure_elect.html Federal Energy Regulatory Commission, RTO/ISO Map, 2008. http://www.ferc.gov/industries/electric/indus-act/rto/rto-map.asp• Joskow, P., and Tirole, J., 2006, “Retail Electricity Competition”, Rand Journal of Economics, Vol. 37, No. 4, ppg. 799-815.• Rosenberg, A. E., 2008, “A way to reorganize organized markets”, The Electricity Journal, Vol. 21, Issue 1,ppg 9-17.• Sovacool, B. k., and Brown, M. A., 2007, “Energy and American Society – Thirteen Myths”, Springer Publishing, Netherlands.• United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/
Contact InformationFor any questions or comments on this presentationContactKarthik KrishnaGraduate Student, School of Business & EconomicsMichigan Technological UniversityEmail: email@example.comTelephone: (330) 685 7278