The Electricity Market By: Steven Reed Commission Secretary / General Counsel Missouri Public Service Commission P.O. Box 360 Jefferson City, MO 65102 (573) 751-3015 steven. reed@psc. mo. gov www.psc.mo.gov

June 2010 The Missouri Electricity Market Summary of Presentation

• Development of the Current US Market and Missouri Electricity Market • Resulting Market Structures – Centralized Wholesale Market • Midwest Indeppyp()endent System Operator (MISO) and Southwest Power Pool (SPP) • Ancillary Services Market • Financial Transmission Rights – Decentralized Bilateral Markets – Renewable Energy Markets Development of the Current MkMarkets • Late 19th Century: electric utilities develop as small central power plants with limited distribution networks • Generally vertically integrated monopolies: generation, transmission and distribution • Early 1900’s: State Regulation of Retail Rates of Monoppyoly Utilities: rates were regulated and utilities were granted exclusive service areas Development of Current Market: LiliLegislation • Federal Power Act of 1935 – Established Federal Power Commission oversight of interstate sales of wholesale power and transmission – Rates must be reasonable and nondiscriminatory – Wholesale and interstate sales were small, generally long-term contracts by investor owned utilities to sell and deliver power to cooperatives and municipal providers Current Market: Legislation Public Utility Regulatory Policies Act (PURPA) of 1978

• Response to Energy Crisis of the 1970’s • Goal to promote conservation and alternative energy technologies • Required electric utilities to interconnect with andhd purchase power from cogenera tidtion and small power producers • Prices were set at the incremental cost of production: the utility’s avoided cost of power • Result: Non-utilityy( (indep endent )g) generation suppliers proliferate Current Market: Legislation Energy P oli cy Act of 1992 • Intended to promote competitive generation of electricity • Formally exempted wholesale generators from PURPA of 1978 • Expanded Federal Energy Regulatory Commission (formerly Federal Power Commission))y authority to order utilities to provide transmission service for wholesale power sales Current Market: Regulation Federal Energy Regulatory Commission (FERC) Order 888 • In 1996 Order 888 directed public utilities that own transmission to file open access transmission tariffs: utilities must allow wholesale generators to use the utility’s transmission system • Also encouraggged grid re gionalization through formation of independent system opp()yerators (ISO): voluntary transfer of operational control of transmission assets Current Market: Regulation FERC O rd er 2000 • In response to continued complaints of discrimination and lack of transmission availability • Encouraged Regional Transmission Organizations (RTO) that could eliminate residual discrimination, eliminate rate- pancaking, and increase region wide reliability – PkiihtPancaking is where a transm iitission customer mus t pay separate access charges for each utility service territory crossed Energy Market in Missouri: ISOs and RTO s i n Mi ssouri • Approved by FERC • Midwest Independent System Operator (MISO) • Southwest Power Pool (SPP) • Participating utilities transfer operating control of transmission facilities to the RTO to ensure independent operation of the grid • Coord in ate r egi on al pl annin g • Coordinate dispatch of generators

Market Participants: Retail

• No retail competition in Missouri • Retail electricity suppliers in Missouri – Verti ca lly in tegra te d inves tor owne d u tilities regulated by the Missouri Public Service Commission – Publicly owned municipal systems serving a city or region surrounding a city – Not for profit customer owned electric cooperatives: located in rural areas 2010 Prices per Kilowatt Hour

• The three states with the highest average price of electricity are: – Hawaii ((p27.46 cents per kilowatthour ) – Connecticut (19.08 cents per kilowatthour) – New York ((p17.89 cents per kilowatthour ) • The three lowest states were: – ((p7.05 cents per kilowatthour ) – Missouri (7.20 cents per kilowatthour) – Idaho (7.73 cents per kilowatthour) • Source: US Energy Information Administration Website, June 3, 2010 Investor Owned Electric Utilities Regu late d by t he Missour i PSC • AmerenUE – St. Louis • City Power & Light – Kansas City • KCP&L Grea ter Missour i Opera tions – Kansas City • Empire District Electric Company - Joplin Market Participants: Wholesale

• Not regulated by the PSC • Regulated by the FERC • Ind epend en t P ower P rod ucers in Missour i – Dogwood Energy – Combustion Turbines owned by an Ameren affiliate – Wind farms in northwest Missouri What do RTO’sDo? s Do?

• MISO – Provides all market services for energy, operating reserves, and transmission service – Acts as the Midwest balancing authority – Administers the day ahead and real time energy market – Responsible for planning transmission projects in the MISO footprint Market Structures

•Day Ahead Market-MISO – Forward market: MISO receives offers and bids for energy, determines unit commitment and hourly dispatch and hourly prices – The ISO uses computer software to determine minimum cost at which supply equals demand – Considers transmission constraints on the grid, minimum/maximum output, ramp rates – One day prior to physical exchange, suppliers submit offers and load serving entities submit bids for energy Day Ahead Market Continued

• Prices are determined by location as the marginal cost of meeting the last unit of load at each location • Prices will vary by location because of transmission congestion and losses • The ISO will perform a load forecast for the next day to determine if sufficient capacity is scheduled, if not it will commit additional units Locational Marginal Pricing (LMPs) • Calculation of the marginal price for energy, including congestion and losses, at all ppgoints or nodes on the grid • In an unconstrained system, all LMPs would be equal • LMP is the cost to deliver the last unit that balances suppl y and demand at that location • In MISO, there are hundreds of nodes MISO Day Ahead Market LMPs

Node Type Value HE 1 HE 2 HE 3 HE 4 HE 5

AEC Interface LMP 23.16 23.43 23 23.1 23.04

AECI Interface LMP 19.77 19.65 19.18 18.93 18.89

AECI.ALTW Loadzone LMP 16.26 16.37 15.86 14.89 14.35

AECI.AMMO Loadzone LMP 21.56 21.25 20.68 20.7 21

AECI.APM_1.AZ Hub LMP 20.89 20.47 19.89 19.84 20.14

AECI. APM_ 2. AZ Hub LMP 19. 53 19. 44 18. 87 18. 56 18. 59

AECI.CWLD Loadzone LMP 19.53 19.44 18.87 18.56 18.59

AEP Interface LMP 23.9 22.21 21.67 22.39 23.47

ALTE.ALTE Loadzone LMP 17.14 14.86 14.35 14.02 15.43

ALTE.AZ Hub LMP 17.14 14.85 14.34 14.02 15.43

ALTE.CC.RIVS1 Gennode LMP 16.19 14.52 14.02 13.4 14.32

ALTE.CC.RIVS2 Gennode LMP 16.19 14.52 14.02 13.4 14.32 Market Structures • Real-Time Markets in MISO – Acts as an energy imbalance market – The RTO receives offers and bids for supply and demand of power in real time – The RTO determines the price at supply and demand locations every 5 minutes – If a generator supplies less than that scheduled a day ahead, it must pay the real time price for the decrease – If a load’s demand is greater than scheduled, it must pay the real time price for the increase Southwest Power Pool (SPP) Energy Imbalance (Real Time) Market

• Day Ahead bilateral market, not centralized: utilities submit schedules of supply and demand a day ahead • Imbalances are settled using day ahead schedules • SPP is mov ing to a cen tra lize d day a hea d market by 2012 MISO Ancillary Services Market

•“Regulation” in the MISO – Instantaneous balancing of supply and demand within the control area by the balancing authority – Flows into and out of MISO are metered on an instantaneous basis – If flows into MISO are too large, generators providing regulation will automatically decr ease output – If flows out of MISO are too large, generators will automatically increase output to restore the balance MISO Ancillary Services Market

• Spinning Reserves: generators on line that are held in reserve and ready to meet demand with electricity • Supplemental Reserves: generators not on line but can be within 10 minutes MISO Ancillary Service Market

• In MISO, qualified generators can submit offers to supply both energy and ancillary services such as regulation, spinning and supplemental reserves • MISO determines the mix of resources that minimizes the overall cost of providing these services Ancillary Services-Tariff Price DiiDetermination • Where centralized markets do not exist for regulation, spinning reserves and supplemental reserves, wholesale tariffs are approved by the FERC for pricing ancillary services • SPP is moving to markets for ancillary services in 2012 Financial Transmission Rights (FTRs) i n MISO • LMPs have 3 components: Energy cost, Congestion cost, and Losses • FTRs are the right to congestion cost credits along an energy path • FTR holder receives the hourly congestion price times the number of megawatts specified from a source to a load • Purpose is to hedge congestion costs between generation and load FTR Example LMP at load node is $39, includes congestion cost component at load of $14 LMP at generation node is $27, congestion component of LMP is $5 When energy is delivered from generator to load, load must ppyay $39 to RTO, but RTO pays generator only $27 An FTR held byyg the generator entitles it to receive part of the congestion price difference ($9) times the MW level des igna te d in the FTR – acthdts as a hedge Decentralized Bilateral Markets

• Wholesale bilateral agreements between supplier and a load serving entity – Full Reqqppyuirements Contracts: firm supply of capacity and energy – MW Limited Contracts for maximum or miiinimum megawa tts per hour, capac ity an d energy – Blocks of Energy Contracts: must take energy at specified times – Intermittent Energy Contracts: wind and solar Decentralized Bilateral Markets

• Financial Markets – Forward markets for specific products – Market participants include those wanting to hedge physical sales and purchases, and speculators – Speculation is allowed in order to provide liquid markets Renewable Energy Markets

• Many states have passed legislation requiring utilities to generate or purchase electricity from renewable sources – Wind – Solar – Thermal – Crops grown for energy production – Methane from landfills Missouri Renewable Energy RiRequirements • 2% of electric sales for 2011 to 2013 • 5% for 2014 to 2017 • 10% for 2018 to 2020 • 15% each year beginning in 2021 • 2% of each of the above requirements must be satisfied with solar energy • Only investor owned utilities regulated by the Missouri PSC must comply Renewable Energy Credits (RECs)

• Represents 1 megawatt hour of renewable energy generated by a renewable resource • RECs can be unbundled from the energy and sold on the market • Utilities may satisfy renewable energy stddbbitandards by buying RECs Market for RECs

• Solar RECs from New Jersey may trade at $678 (represents 1 megawatt hour of renewable energy) • Compare to the average cost of a kilowatt hour generated by fossil fuels: $.0720/KWH or $72/MWH Any Questions?

By: Steven Reed Commission Secretary / General Counsel Missouri Public Service Commission P.O. Box 360 Jefferson City, MO 65102 (573) 751-3015 [email protected] www.psc.mo.gov

June 2010