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2020 Energy Primer Energy Primer A Handbook of Energy Market Basics April 2020 The Energy Primer is a staff product and does not necessarily reflect the views of the Commission or any Commissioner. Energy Primer A Handbook of Energy Market Basics Table of Contents Chapter 1 Introduction ............................................................................................................. 1 Physical Fundamentals ............................................................................................... 1 Financial Markets and Trading ................................................................................... 2 Market Manipulation ................................................................................................... 3 Additional Information ................................................................................................ 3 Chapter 2 Wholesale Natural Gas Markets .............................................................................. 5 Natural Gas .................................................................................................................. 5 Natural Gas Industry ................................................................................................... 5 Natural Gas Demand ................................................................................................... 7 Natural Gas Supply .................................................................................................... 10 Liquefied Natural Gas ............................................................................................... 18 Natural Gas Processing and Transportation ............................................................. 21 Natural Gas Storage ................................................................................................... 28 Natural Gas Markets and Trading .............................................................................. 32 Chapter 3 Wholesale Electricity Markets ................................................................................ 35 Electric Power Industry ............................................................................................. 36 Electricity Demand .................................................................................................... 41 Electricity Supply and Delivery ................................................................................. 47 Wholesale Electricity Markets and Trading............................................................... 56 RTO Markets and Features ......................................................................................... 59 Regions ....................................................................................................................... 66 Southeast Wholesale Market Region ........................................................................ 66 Western Wholesale Market Regions .......................................................................... 68 CAISO .......................................................................................................................... 72 ISO-NE ........................................................................................................................ 77 MISO ........................................................................................................................... 82 NYISO .......................................................................................................................... 87 PJ M .............................................................................................................................. 93 SPP ............................................................................................................................. 98 Energy Primer | i Chapter 4 U.S. Crude Oil and Petroleum Products Markets ................................................ 103 Petroleum ................................................................................................................ 104 U.S. Crude Oil Supply ............................................................................................... 105 Petroleum Reserves ................................................................................................ 106 Crude Oil Refining ................................................................................................... 107 Crude Oil and Petroleum Products Transportation ................................................ 109 Crude Oil and Petroleum Products Demand .......................................................... 110 Crude Oil and Petroleum Products Markets and Trading ...................................... 111 Chapter 5 Financial Markets and Trading ............................................................................. 113 Financial Markets and Mechanisms ........................................................................ 113 Physical Products .................................................................................................... 119 Financial Products ................................................................................................... 120 Trading and Transacting .......................................................................................... 121 Capital Markets ........................................................................................................ 123 Chapter 6 Market Manipulation ............................................................................................ 127 Manipulative Trading Techniques and Cross-Product Manipulations .................. 128 Information-Based Manipulations .......................................................................... 129 Withholding .............................................................................................................. 119 Representative Matters ............................................................................................ 130 The Federal Energy Regulatory Commission retains rights to all photographic images included in the Energy Primer. ii | Energy Primer Federal Energy Regulatory Commission Introduction Natural gas, electricity, and crude oil are forms of energy that are of particular interest to the Federal Energy Regulatory Commission (FERC) pursuant to its authority under the Natural Gas Act, the Federal Power Act, and the Interstate Commerce Act. This primer explores the workings of the wholesale markets for these forms of energy, as well as energy-related financial markets. Energy markets consist of both physical and financial energy to consumers and how they form prices. These elements. The physical markets contain the natural resources, physical fundamentals will be covered in Chapter 1 (Wholesale infrastructure, institutions and market participants involved Natural Gas Markets), Chapter 2 (Wholesale Electricity in producing energy and delivering it to consumers. The Markets), and Chapter 3 (U.S. Crude Oil and Petroleum financial markets include the buying and selling of financial Products Markets). instruments that derive value from the price of the physical Market participants buy and sell energy based financial commodity. These financial markets have their own set of contracts for a number of reasons. Physical market market structures and institutions, market participants, and participants, such as producers and large consumers, traded products which have their own drivers of supply and usually use financial contracts to manage price risk and to demand. In general, physical and financial markets can be protect against price volatility. That is, financial contracts distinguished by the products and by the intentions of the can serve as a tool for managing risk akin to insurance. market participants involved. Other market participants use the energy markets to Much of the wholesale natural gas and electric power speculate, or to assume a market risk in hope of profiting industry in the United States trades competitively, while from market fluctuations. Additionally, companies turn to some markets and their prices are established through the capital markets if they need to raise or invest money. administrative processes based on the cost of providing This primer explores the market participants, products, service. In competitive markets, prices are largely driven by market mechanisms and trading at work for natural gas and the economic concepts of supply and demand. Underlying electricity in the financial markets in Chapter 4, Financial the supply and demand for energy are physical fundamentals Markets and Trading. - the physical realities of how markets produce and deliver Energy Primer | 1 Where there are markets, there will be those who attempt to manipulate the markets for their own benefit. These practices undermine the market’s ability to operate efficiently, reduce other market participants’ confidence in the markets and distort market outcomes, including prices. Some of these practices are discussed in Chapter 5, Market Manipulation. This primer is written to be used either as a traditional text – read front to back – or as a reference guide. Consequently, some material is repeated in different sections and references are provided to other parts of the primer where a concept is addressed in greater detail. Further information about various aspects of energy markets and FERC regulation can be found at www.ferc.gov; then navigate to the Market Oversight tab. You can find the market oversight pages here: https://www.ferc.gov/market-
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