LMP Electricity Markets: Market Operations, Market Power, and Value for Consumers EMRI Symposium...

LMP Electricity Markets:Market Operations, Market Power,

and Value for Consumers

EMRI Symposium

American Public Power AssociationFebruary 5, 2007

Presented by Ezra Hausman and Robert Fagan

LMP Electricity Markets:Relatively Weak, Short-Term Price Signals

for Consumers who Can’t Respond and Producers who would Prefer Not To

EMRI Symposium

American Public Power AssociationFebruary 5, 2007

Presented by Ezra Hausman and Robert Fagan

3 www.synapse-energy.com | ©2007 Synapse Energy Economics Inc. All rights reserved.

SECTION I – LOCATIONAL MARGINAL PRICING

SECTION II – PRICE SIGNALING

SECTION III – COMPETITIVENESS AND MARKET POWER

SECTION IV – IMPACTS ON CONSUMERS

Overview of Synapse LMP Report

…how it is supposed to work

…what it is supposed to do

…who makes the money

…and who pays the price


LMP: Single Clearing Price Markets

0

50

100

150

200

250

300

0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

Cumulative Capacity (MW)

Mar

gin

al C

ost

or

Off

er (

$/M

Wh

)

Instantaneous load

Clearing price for interval

Rule: Dispatch the cheap stuff first.


LMP: Locational Clearing Price Example

B

C

A

Import limit = 300 MW

Load = 800 MW

Capacity = 300MWOffer = $50/MWhDispatch =100

Capacity = 400MWOffer = $15/MWhDispatch = 400MW

Capacity = 1000 MWOffer = $20/MWhDispatch = 300 MW

Rule: Dispatch the cheap stuff first… …subject to transmission constraints

LMP = $20/MWh

LMP = $50/MWh


LMP Price Signaling

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

Dom

inio

n

PS

EG

PE

PC

O

AE

CO

BG

E

RE

CO

JCP

L

DP

L

PE

CO

Met

-Ed

PP

L

AP

PE

NE

LEC

AE

P

Com

Ed

DA

Y

DLC

O

PJM Zone

Pri

ce (

$/M

Wh

)

2004 All-Hours

2005 All-Hours

Tier I Tier II Tier III Tier IV


LMP Price Signaling

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

PSEG peak

BGE peak

PPL peak

PSEG off-peak

BGE off-peak

PPL off-peak


LMP Price Signaling

-$5

$0

$5

$10

$15

$20

$25Ja

n-99

Ma

y-99

Sep

-99

Jan-

00

Ma

y-00

Sep

-00

Jan-

01

Ma

y-01

Sep

-01

Jan-

02

Ma

y-02

Sep

-02

Jan-

03

Ma

y-03

Sep

-03

Jan-

04

Ma

y-04

Sep

-04

Jan-

05

Ma

y-05

Sep

-05

Month

Pri

ce D

iffe

ren

ce (

$/M

Wh

)

PSEG vs. PPL On-Peak

PSEG vs. PPL Off-Peak


LMP Price Signaling

Generation New Entry

Generation Retirement

Merchant Transmission

Demand Response

We reviewed the response in terms of…


LMP Price Signaling: New Generation

0

1000

2000

3000

4000

5000

6000

1999 2000 2001 2002 2003 2004 2005 2006

In-Service Year

MW

Ad

ded

Oil and Diesel

Hydro and Renewable

Nuclear

Coal

Gas


LMP Price Signaling

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

Dom

inio

n

PS

EG

PE

PC

O

AE

CO

BG

E

RE

CO

JCP

L

DP

L

PE

CO

Met

-Ed

PP

L

AP

PE

NE

LEC

AE

P

Com

Ed

DA

Y

DLC

O

PJM Zone

Pri

ce (

$/M

Wh

)

2004 All-Hours

2005 All-Hours

Tier I Tier II Tier III Tier IV


LMP Price Signaling: New Generation

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1999 2000 2001 2002 2003 2004 2005 2006

Year

Cap

acit

y A

dd

itio

ns

(MW

)

Tier 1

Tier 2

Tier 3

Tier 4


LMP Price Signaling: Retirements

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

1999 2000 2001 2002 2003 2004 2005 2006

Year

MW

New

Retired

Cumulative net additions (MW)

Net Annual Additions (MW)


LMP Price Signaling: Retirements

0

100

200

300

400

500

600

1999 2000 2001 2002 2003 2004 2005 2006

Year

Cap

acit

y R

etir

emen

ts (

MW

)

Tier 1

Tier 2

Tier 3

Tier 4


LMP Price Signaling: Net new entry

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1999 2000 2001 2002 2003 2004 2005 2006

Year

Cu

mu

lati

ve N

et A

dd

itio

ns

(MW

)

Tier 1Tier 2Tier 3Tier 4


LMP Price Signaling: Congestion Costs

$0

$200

$400

$600

$800

$1,000

$1,200

Aug

03

Oct

03

Dec

03

Feb

04

Apr

04

Jun

04

Aug

04

Oct

04

Dec

04

Feb

05

Apr

05

Jun

05

Aug

05

Oct

05

Dec

05

Feb

06

Apr

06

Jun

06

Month

Gro

ss C

on

ges

tio

n C

ost

s($

Mil

lio

n)

Other

EAST

WYLIERID500 KV TRAN 5

WYLIERID500 KV TRAN 7

KMF

50045005

KAMMER 765 KV T200

BRANCHBU500 KV 500-1

LINE 500 KV DOU-MTS

LINE 500 KV MTS-PRU

BED-BLA


LMP Price Signaling: Congestion Costs

$0

$20

$40

$60

$80

$100

$120

Aug 0

3

Oct 03

Dec 0

3

Feb 0

4

Apr 0

4

Jun

04

Aug 0

4

Oct 04

Dec 0

4

Feb 0

5

Apr 0

5

Jun

05

Aug 0

5

Oct 05

Dec 0

5

Feb 0

6

Apr 0

6

Jun

06

Month

Un

hed

gab

le C

on

ges

tio

n C

ost

(Mill

ion

$ p

er M

on

th)

All Others

BRIGHTON 500 KV NO.1TR

LINE 230 KV ADA-BENX

CEDAR

JACK ME 115 KV 5 BA-S

WALDWICK 345 KV 345-2

LINE 500 KV MTS-PRU

LINE 500 KV CLO-LEX

BRANCHBU500 KV 500-1

BED-BLA

Detail area(Fig. 3.16)


LMP Price Signaling: Merchant Transmission

From PJM RTEP (April 2006):2.4: Merchant Transmission Activity

Once thought to offer a long-term solution to long distance transmission needs, few merchant transmission proposals have emerged. Financing has proven difficult for projects given uncertain revenue streams in part the result of insufficient subscription up front. Further, the difficulties, risks and realities associated with securing rights-of-way and environmental clearances have also had a dampening effect on the emergence of long distance proposals.


LMP Price Signaling: Demand Response

0

100

200

300

400

500

600

700

$0 $50 $100 $150 $200 $250

Payment for Load Reduction ($/MWh)

200

5 M

Wh

Sh

ed

per

MW

in

Pro

gra

m


LMP Price Signaling: Demand Response

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

$0 $50 $100 $150 $200 $250

Payment ($/MWh)

Ch

ang

e in

% P

art

icip

ati

on

fro

m 2

005

to

20

06


LMP Price Signaling: Why doesn’t it work?

• Short-term and volatile nature of price signals

• More compelling reasons for choosing sites, such as access to existing infrastructure, zoning restrictions, and local opposition.

• The lumpy nature of infrastructure investments

• Investments may curtail or eliminate the price signal

• Prices reflect bids, not cost

• Free riders

• No certainty of return on investment

• Relatively Weak, Short-Term Price Signals for Consumers who Can’t Respond and Producers who would Prefer Not To

Is RPM the answer?

(RPM = Rate Payers’ Money…)


Competitiveness and Market Power in LMP RTOs

• Overview

• PJM Market Structure, Conduct, Performance

• PJM Monitoring / Mitigation

• Quantitative Analysis of Bid (Offer) Data in PJM and ISO NE


Competitiveness and Market Power in LMP RTOs - Overview

• Competitiveness– Prerequisites: low supplier concentration, ease of entry,

elastic demand, transparent information, foresight– These are not attributes of the electricity “marketplace”– Result: need for regulatory oversight, and/or mitigation

• Market Power – Supplier concentration – Demand elasticity– Product and geographic markets: energy, capacity, local

constraint relief

• Market Monitoring and Mitigation– Present in all LMP RTOs, for spot markets


Competitiveness and Market Power in LMPRTOs - PJM 2005 (after 5/1) Structural Concentration

• Low-to-moderate aggregate market concentration (low HHI), but averages mask locational, temporal, segment deviationsHHIs (PJM SOM 2005):– Energy, Aggregate, 855-1565, average=1200– Energy, by Segment (base, intermediate, peak),

717-10,000, average= 1362/2793/4437– Capacity, 896-917

• Very high concentrations in local market power areas


Competitiveness and Market Power in LMP RTOs – PJM Concentration - Select Constraints

• Supplier HHI “behind” constraint – local market power

Region or Interface Constraint HHI

PSEG Roseland-Cedar Grove 8198

Branchburg transformer 2998

Eastern interface - 1575

AECO Laurel-Woodstown 9012

PENELEC Erie West transformer 3306

PECO Chichester-Linwwood 2988

AEP Cloverdale-Lexington 1078

Kanawha R-Matt Funk 1066

Mahans Lane-Tidd 10000

AP Mitchell-Shepler Hill 10000

Mt. Storm-Pruntytown 1048

Bedington-Black Oak 1083

Western interface - 1130


Competitiveness and Market Power in LMP RTOs – PJM Conduct / Performance

• Conduct: Offer prices above marginal cost

Lerner Index

Year PJM Raw PJM Adjusted ISO NE

2002 2.0 % 11.0 %

2003 3.0 % 12.0 % 9 %

2004 3.4 % 8.4 % 3 %

2005 0.3 % 3.9 % 6 %

Sources: PJM State of the Market Reports for 2005, 2004, 2003 and 2002; ISO NE 2005 Annual Markets Report


Competitiveness and Market Power in LMP RTOs – PJM Monitoring / Mitigation

• Monitoring– Spot markets monitoring– Bilateral market: no public data akin to analysis in State

of the Market reports

• Mitigation– $1,000/MWh Offer Cap (unconstrained system)– Marginal cost + 10%, local market power (constrained

system)– Local market power: three pivotal supplier test used– Exemptions from offer cap


$0

$100

$200

$300

$400

$500

$600

$700

$800

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

Day in July 2005

Off

er P

rice

($/

MW

h)

Single Company “E1” Offer Data – PJM – by day, July 2005


0

50

100

150

200

250

300

010

0020

0030

0040

0050

0060

0070

0080

0090

00

1000

0

1100

0

1200

0

1300

0

1400

0

1500

0

1600

0

1700

0

Cumulative Capacity (MW)

Pri

ce (

$/M

Wh

)

July 6 Offers from E1

July 13 Offers from E1

Single Company “E1” Portfolio – Offer Curve Comparison


Concluding Thoughts

What elements will impact consumers?• RGGI, other state policy

– Considerably increased energy efficiency

• State level procurement changes– Greater use of long-term contracting

• Transmission Improvements– RTEP, Economic– Reduced congestion

• Locational capacity markets– Will the incentives work? Lessons from LMP


Thank you…

Invaluable assistance from Synapse staff:David White, Kenji Takahashi, Alice Napoleon, Bruce Biewald, Jennifer Kallay, and Melissa Whited

Support and feedback from APPA:Elise Caplan and John Kelly

THANK YOU!

LMP Electricity Markets: Market Operations, Market Power, and Value for Consumers EMRI Symposium...

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