Why Are Electricity Prices Rising in New England, and What if anything Should We Do About It

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Why Are Electricity Prices Rising in New
England, and What(if anything) Should We Do
About It?

• Richard D. Tabors, Ph.D.
• Vice President
• May 19, 2006

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Why Are Electricity Prices Rising?

• The Easy Answer
• Today, on the margin, we have all virtually
  identical gas fired combined cycle generation
• Natural gas goes up in price
• Electricity goes up in price
• BUT Is this the right question?
• The right question may be the ICAP (LICAP)
  question
• Are Prices Going UP ENOUGH?

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Missing Money (From PJM analysis) for a peaker
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A FAR TOO SIMPLE ANALYSIS

• Using GE MAPS for New England
• Holding fuel prices constant at the 2006/7 level
• Allowing Demand to increase as forecasted
• Allowing no new entry beyond what is currently
  nearing completion
• Allowing no further retirements
• Not a bad scenario in some ways, particularly
  w/r/t new construction

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New England Average Monthly Costs in 2005
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New England Average Monthly On-Peak Costs in 2005
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Why isnt the Demand Side the Answer?

• The market signals may not be right for those for
  whom cost is a driving force.
• Not the residential sector
• Not (probably) the small commercial sector
• BUT
• Large Commercial
• Industrial
• Governmental
• LMP provides the correct (real-time) information
  but not when large users need it.

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Fixing LMP (making the market work)

• Day ahead is when the large user needs the hourly
  price information for the next day
• But
• A large buyer must state what they need before
  they know what the cost will be. Then after the
  market clears they find out what the hourly cost
  will be.
• Real time it is the same story. You find out
  after you consume in that case

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A possible solution

• Requires a LARGE aggregator (needs to take
  advantage of law of large(r) numbers)
• Day Ahead the aggregator puts in a bid for
  quantity, (a forecast of the hourly needs of the
  aggregate of their customers)
• Once they get hourly prices based on this
  estimated quantity they GUARANTEE this price on
  an hourly basis to their customers.
• Customers schedule against a known price having
  paid a small premium to the aggregator for their
  assuming the risk of both quantity and price.
• In real-time customers consume what they consume
  but at a price certain
• After real-time the aggregator pays or is paid
  the difference between the day ahead quantity and
  that actually consumed but at the real-time price

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Why does this work

• The Law of large numbers on the aggregator side
• Price certainty a day ahead (for automated
  scheduling) for large consumers
• Aggregator is able to absorb the risk of a slight
  error one way of the other whereas the large
  consumer is not.

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Richard D. Tabors CRA International 50 Church
Street Cambridge, MA 02138 (617)
354-5304 rtabors_at_crai.com