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Variable peak pricing and hedging jun 2006

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Presentation by Dr. Bernie Neenan, and economist with the Electric Power Research Institute.

Referenced in this May 26, 2011 eMeter blog post: http://bit.ly/k1cKVR

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Variable peak pricing and hedging jun 2006

  1. 1. A Comparative Assessment of DefaultService Pricing Plans National Town Meeting and Symposium on Demand Response Berkeley, CA June 26-27, 2006 Bernie Neenan UtiliPoint International
  2. 2. I. Challenge Mandate – CT legislature mandated three-part TOU default service rates for customers over 300 kW starting in mid-2006 Challenge: Design an electric default service rate for C&I customers that fulfills multiple objectives: Reduces Federally Mandated congestion charges Promotes switching to competitive suppliers Compatible with competitive outsourcing of default service Cost effective and feasible 2 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  3. 3. II. Design ConsiderationsMost eligible customers have TOU-like plans areinterval metering low cost relative toMeter to cash system is in place or more dynamic structuresunder development for TOUISO-NE has reliability programs Is CPP designed toUncertain ICAP market structure reduce system peak or convey priceImpact on outsourcing of supply volatility?Complement to or substitute for High value to usingISO-based energy DR programs market prices to direct usage 3 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  4. 4. Candidates Three-part TOU (TOU3) price schedule with peak, shoulder and off-peak prices Critical Peak Pricing - TOU schedule with event overcall on peak period price to reduce system coincident peak Dynamic market-based pricing that reflects LMPs wholesale prices Day-ahead LMP indexed pricing Real-time LMP indexed pricing Others? 4 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  5. 5. Design ChallengesTOU Finding peak season and day definitions that induce response but reflect the underlying LMP topologyRTP LMP topologies that induce a response are limited to a few day a year Exposure to LMP is all day every day Transaction costs are high for customers and the supplierCPP How are events defined and priced? Impact on outsourcing of supply 5 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  6. 6. Variable Peak Pricing Use TOU design to establish off-peak prices Select a peak period and season definition that captures most price volatility Off-peak price reflects year’s forward LMP topology Modify RTP design to set peak prices Use zonal day-ahead LMPs Peak price base is the average of corresponding day ahead peak LMPs, marked for losses and uplift costsVPP offers: Simplicity and limited LMP exposure of CPP Efficiency and customer benefits of RTP 6 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  7. 7. III. Simulating Benefits of AlternativeDefault Service Pricing Plans Characterize alternative pricing plans Set base price to correspond to forward LMP Add hedge premium to establish price points (RTP=0; VPP=3%, CCP= 7% TOU-3 =12% TOU2 =13% Characterize the market supply curve Quantify impact of load change in LMPs Monetize the benefits to spot market and bilateral contract purchasers Characterize demand response Use forward LMPs to set price points Impact of prices on usage (elasticities) 7 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  8. 8. Benefits of Dynamic PricingParticipant Benefits Avoid full hedging premium Price response savings Capacity paymentsBenefits to all Electricity Consumers Lower LMPs result in Lower default service prices Lower overall capacity costsMarket Performance benefits Net social welfare improvement 8 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  9. 9. Benefits of Dynamic Pricing (2) Other Benefits Improved reliability Because these Market power mitigation are hard to Reduced emissions quantify, More choices redundant, or both, Portfolio risk reduction they are second Vertical market development tier selection (enabling technologies) criteria 9 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  10. 10. Participant Benefits (Five Years) 14% 12% 10%% of Original Bill 8% 6% 4% 2% 0% TOU3 CPP VPP RTP Risk Premium Demand Response 10 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  11. 11. Benefits to All Customers (FiveYears) $25 $20 $15 $Millions $10 $5 $0 TOU3 CPP VPP RTP Capacity Energy Bilateral 11 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  12. 12. Peak Load Reduction (Five Years) 200 180 160 140 120 MW 100 80 60 40 20 0 TOU3 CPP VPP RTP Max Non-Coincident Ave. Coincident 12 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  13. 13. Change in NSW (Five Years) $2.0 $1.0 $0.0 $Millions -$1.0 -$2.0 -$3.0 -$4.0 -$5.0 TOU3 CPP VPP RTP 13 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  14. 14. VI. Some ObservationsVPP has a lot going for it as the default rate Lower customer involvement, high benefit potential Nearly equals RTP efficiency gains Benefits are related to expected and actual market price volatility Compatible with ISO-based reliability and capacity programsCPP presents some formidable challenges Who underwrites capacity benefits: default utility or contracting supplier? Switching risks to supplier if capacity value is imbedded into eh rate Are the welfare losses justifiable? 14 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary
  15. 15. I welcome comments and criticism. Name Bernie Neenan Email: @utilipoint.com Phone: 315.478.9974 15 © Copyright 2005 UtiliPoint® International, Inc. All rights reserved. Confidential and Proprietary

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