Electric Power Industry Challenges: Competitive Electricity Markets Are Key

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Electric Power Industry Challenges Competitive
Electricity Markets Are Key

• William L. Massey
• Covington Burling LLP
• On Behalf Of
• COMPETE Coalition
• RETECH 2009
• Las Vegas, Nevada
• February 25, 2009

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COMPETE Coalition

• 280 electricity stakeholders, employing over 7
  million American workers
• Electricity customers, suppliers, generators,
  renewable energy companies, demand response
  providers, transmission owners, trade
  associations, and economic development
  corporations
• COMPETE supports well-structured competitive
  electricity markets for the benefit of
  consumers. 
• www.competecoalition.com

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Overview

• Electric power industry is facing at least four
  major challenges.
• Renewable resources and efficiency gains have a
  critical role to play in meeting these
  challenges.
• Federal policy is focusing on bold targets for
  renewables and integrating renewables into
  electricity supply
• Competitive wholesale and retail electricity
  markets are the best means of addressing the four
  challenges and integrating renewables.

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Four Challenges

• Invest 1.5 trillion over the next 20 years to
  replace and modernize electricity production,
  transmission and distribution infrastructure.
• Over 2 trillion if we include costs of limiting
  carbon emissions.
• Significantly reduce greenhouse gas emissions
  from our Nations electricity generating fleet.
• Maintain U.S. competitiveness in the global
  economy.
• The costs of infrastructure investment and carbon
  control make innovation, efficiency and cost
  containment an imperative for the electricity
  sector.
• Reduce dependence on foreign sources of energy
  and develop domestically produced low-carbon and
  renewable sources of energy.

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Federal Policy

• Congress
• Stimulus legislation billions for clean
  energy
• Renewable Energy Standard (RES)
• Transmission siting
• Efficiency standards
• Greenhouse gas emissions (cap and trade)

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Federal Policy (contd)

• Federal Energy Regulatory Commission (FERC)
• Tariffs friendly to intermittent resources
• Tehachapi order
• Zephyr order anchor shipper concept
• March 3 conference on integration of renewables
• Promote demand response

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FERC PolicyCompetitive Markets Overview

• Regional Organized Wholesale Markets (ISOs, RTOs)
• FERC jurisdiction
• Single, transparent market clearing prices
  (energy and capacity)
• Incentive to lower costs lowest available cost
  resources are dispatched.
• Large regional geographic scope
• Largest number of competitors lowest available
  costs
• Independent administration and fair rules
• Level playing field creates confidence needed to
  attract investment and participants.
• Independent market monitoring
• Retail markets
• State PUCs have jurisdiction
• Customer choice of service providers (supply,
  demand response)
• Investment and operation risk borne by providers,
  not customers
• Incentive to lower costs

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Organized Wholesale Electricity Markets
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Challenge Electricity Infrastructure

• In regional competitive markets, transparent
  prices that vary by location signal when and
  where facilities are needed.
• Market incentives attract the right type of
  investment for energy efficiency, transmission,
  generation or demand response at the lowest cost.
• Recent PJM capacity auction prices comparable to
  2001
• Competitive regional electricity markets have
  proven attractive to generation developers,
  particularly wind power.
• Backlog of facilities seeking interconnection
  with the grid.
• Competitive suppliers operate 40 of U.S.
  generation and built the vast majority of new
  capacity in last 10 years
• During the last major electricity infrastructure
  build-out in the 1980s, traditional monopoly
  regulation performed poorly.
• Excess capacity excessive costs
• Consumers bore much of the costs of unwise
  investment decisions.
• In competitive markets, investors bear financial
  risks.

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Challenge Greenhouse Gas Emissions Policy

• Incentives for improved performance (created by
  good market rules) are more effective in
  achieving environmental policy objectives than
  regulating monopolists behavior through
  traditional command-and-control regulation.
• Transparent price signals and fair rules enable
  environmentally friendly demand response,
  conservation and efficiency efforts by consumers.
• Competitive regional electricity markets have a
  proven track record of improving operating
  efficiency, which allows us to do more with less.

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Challenge Greenhouse Gas Emissions Policy
(contd)

• Rules and regional scope of competitive markets
  facilitate and are attractive to renewable
  resources.
• Over 70 of U.S. installed wind capacity is in
  regions with organized competitive electricity
  markets, but these areas represent only 44 of
  wind potential.
• Competitive wholesale electricity markets and
  investment by competitive electricity suppliers
  are responsible for over 85 of new wind
  capacity.
• Competitive electricity markets allow demand
  response providers to compete on a level playing
  field with other resources.
• Demand resources in the competitive markets have
  displaced the need for more than 23,000 MWs of
  generation.
• Demand response and conservation are critical to
  achieving carbon reductions.

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Challenge Global Competitiveness

• Competitive electricity markets - where risk is
  borne by investors, not consumers - have improved
  operating efficiency and generator availability
• Annual cost savings in PJM, NY and Midwest
  markets range from 800 million to 2 billion
  each
• Large geographic scope of organized regional
  markets increases the generation choices for
  least-cost dispatch
• Competitive electricity markets spur innovative
  products and services.
• Customers empowered to manage energy use and
  lower their costs.

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Challenge Global Competitiveness (contd)

• Transparent price signals and demand response
  programs allow customers to shift usage times and
  aggregate their demand to lower costs
• Demand resources in competitive markets displaced
  23,000 MW of generation
• Competitive markets will be good incubators for
  innovative smart grid investments

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Challenge Energy Security

• Improved operational efficiency means existing
  resources are used more wisely, thereby
  decreasing fossil fuel use.
• Renewable energy, conservation, efficiency and
  demand response technologies are easier to
  implement in organized competitive electricity
  markets.
• These intrinsically domestic low- or no-carbon
  resources reduce energy imports and create
  American jobs.
• Electrification of the transportation sector
  substitutes clean domestically produced
  electricity for oil
• Reduces dependence on foreign energy sources
• Reduces greenhouse gas emissions.
• Plug-in hybrid electric vehicles (facilitated by
  competitive electricity markets)
• Offer state-of-the-art communication and control
  tools
• Potential to serve as a resource to the grid.

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Competitive Markets - Not Deregulated

• FERC and state PUCs have comprehensive regulatory
  authority over
• Generation and delivery services at wholesale and
  retail levels
• Financial and reliability matters.
• Strong oversight of electricity markets.
• FERC screens out sellers that can exercise market
  power and monitors conditions in wholesale
  markets on a daily basis.
• FERC can levy fines of up to 1 million/day per
  violation for market manipulation or violations
  of any FERC rules.
• FERC standards for reliable operation and
  generation adequacy.

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Competitive Markets - Not Deregulated (contd)

• FERC can order interconnections and power sales
  to maintain reliability.
• Approvals needed for acquisitions and
  dispositions of public utility assets, security
  issuances, and liability assumptions.
• Organized competitive wholesale markets provide
  additional safeguards.
• Price caps
• Creditworthiness requirements
• Real-time monitoring by independent market
  monitors.

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Competitive Electricity Markets

• Infrastructure transparent market prices and
  incentives attract needed investment
• Greenhouse gas emissions policy markets drive
  efficiency and promote renewable and demand
  response resources
• Competitiveness market incentives and regional
  scope keep costs down, spur innovation, and
  foster efficiency
• Energy security improved efficiency, more
  renewable resources, advanced technologies and
  increased demand response reduce dependence on
  foreign energy sources
• Rigorous regulatory oversight