Understanding Reliability Externality in Energy Contracts

Conleigh, Farhad, Ahlmahz, and Paul debrief on coverage of FERC Order 1920 then discuss resource adequacy, hedging tail risk, and preview business capability models.

Ahlmahz Negash, Conleigh Byers, and Farhad Billimoria scan news stories after FERC’s release of Order 1920, then Conleigh Byers explains Resource adequacy, and Farhad Billimoria explains Hedging & Tail Risk in Electricity Markets.

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03:17 - Short-to-Ground (FERC Order 1920 Edition)

• On May 13th the Federal Energy Regulatory Commission approved a sweeping long-term transmission planning and cost-allocation rule aimed at modernizing the grid
• In the Special Transmission Reform Meeting, Chair Willie Phillips said the U.S. faces "an unprecedented surge in demand for affordable electricity while confronting extreme weather threats to the reliability of our grid and trying to stay one step ahead of the massive technological changes we are seeing in our society."
• FERC is helping to pave the way for a much-needed investment in our transmission infrastructure
• The Federal Energy Regulatory Commission’s fact sheet for Order 1920 states that the grid rule contains five major elements:
  1. Requirement to conduct and periodically update long-term transmission planning to anticipate future needs.
  2. Requirement to consider a broad set of benefits when planning new facilities.
  3. Requirement to identify opportunities to modify in-kind replacement of existing transmission facilities to increase their transfer capability, known as “right-sizing.”
  4. Customers pay only for projects from which they benefit.
  5. Expands states’ pivotal role throughout the process of planning, selecting, and determining how to pay for transmission facilities.
• “Landmark transmission reform could dramatically speed US energy transition”
• Large Public Power Council’s president, John Di Stasio’s, written statement
• Americans for a Clean Energy Grid’s Executive Director, Christina Hayes, applauded FERC for finalizing a, quote, “strong and comprehensive regional planning and cost allocation rule.”
• Spot market power in the U.S.
• Wholesale spot prices for the National Electricity Market (NEM)
• Energy Information Administration’s Natural Gas Weekly Update

41:03 - Hedging and Tail Risk in Electricity Markets By: Farhad Billimoria , Jacob Mays , Rahmat Poudineh

Abstract: A concern persistent in scarcity-based market designs for electricity over many years has been the illiquidity of markets for long-term contracts to hedge away volatile price exposures between generators and consumers. These missing markets have been attributed to a range of factors including retailer creditworthiness, market structure and the lack of demand side interest from consumers. Using a stochastic equilibrium model and insights from insurance theory, we demonstrate the inherent challenges of hedging a legacy thermal portfolio that is dominated by volatile fat-tailed commodities with significant tail dependence. Under such conditions the price required for generators to provide such hedges can be multiples of the expected value of prices. Our key insight is that when the real-world constraints of credit and financing are considered, the volatility of thermal fuels and their co-dependence under extremes may be a key reason as to why electricity markets have been incomplete in terms of long-term hedging contracts. Counterintuitively, in the context of the energy transition, our results show that, ceteris paribus, increasing the penetration of low carbon resources like wind, solar and energy storage, can add tail-diversity and improve contractability.

22:16 - The Future of Resource Adequacy in a Decarbonized Grid w/ Conleigh Byers

Conleigh Byers Resource Adequacy Harvard Energy Policy Seminar 25 4.93MB ∙ PDF file DownloadDownload

1:02:23 - Institutions in the electric sector are evolving like the eras of Taylor Swift, but are their business models evolving with them?

Public Power Underground, for electric utility enthusiasts! Public Power Underground, it’s work to watch!

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