Resource Adequacy, Tail Risk, and Institutional Capability
Jun 10, 2024
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Energy experts Ahlmahz Negash, Conleigh Byers, and Farhad Billimoria discuss FERC Order 1920, resource adequacy, hedging tail risk, and institutional capability in the electric sector. They explore challenges in grid modernization, energy market trends, strategic planning, information asymmetry, reliability externality, fat tail events, and the evolution of the energy sector.
FERC Order 1920 emphasizes grid modernization for rising electricity demand and extreme weather challenges.
Risk management in energy markets includes challenges like price caps, reliability concerns, and the need for effective hedging strategies.
Transitioning to renewables diversifies risk exposure, reducing reliance on thermal fuels and showcasing the importance of innovative contracting mechanisms.
Deep dives
Evolution of Energy Policy Discussion at Harvard
The episode delves into the evolution of energy policy discussions at Harvard, focusing on hedging, tail risk, resource adequacy, and institutional capability. Farhad Bila-Moria's paper on hedging and tail risk in electric markets, co-authored with Jacob Mays and Ramit Poudinay, is highlighted. The discussion also previews a study on how institutional capability has evolved in different eras of the electric sector, showcasing a comprehensive exploration of energy policy concerns.
FERC Order 1920 and Long-term Transmission Planning
The podcast presents the recent approval of FERC Order 1920, aimed at modernizing the grid to handle rising electricity demand and shifting generation patterns amidst extreme weather conditions. The approval, featuring differing views from commissioners, focuses on long-term transmission planning and cost allocation. Various industry experts and officials commend FERC's efforts to support transmission planning and investment, emphasizing the significance of grid infrastructure development.
Market Updates and Discussion on Risk Management in Energy Markets
The episode delivers insights on market updates, including spot power prices in different regions and natural gas prices. It transitions into a detailed discussion on risk management in energy markets, exploring the challenges and solutions related to offering forward energy contracts to consumers. The conversation touches on the impact of price caps, reliability externalities, and the need for effective risk hedging strategies to enhance grid reliability and economic efficiency.
Impacts of Unhedged Exposures on Smaller Retailers
During price spikes or market volatility, smaller retailers face financial challenges due to inadequate hedging, leading some to offer customers incentives to switch providers or cease services. In contrast, energy-only markets exhibit a vibrant short to medium-term derivatives market, providing liquidity and flexibility in contracts. However, long-term contracting raises concerns about asset viability and investment certainty, particularly with thermal fuels showing high volatility patterns.
Transition to Renewables and Risk Management
Transitioning to renewables and storage in the energy mix shows a potential shift in risk exposures. The historical volatility of thermal fuels impacts electricity prices directly, while renewables present differing risk factors due to reduced reliance on fuel costs. Integrating more solar and wind resources diversifies risk exposure, potentially lowering the high hedge prices required for long-term contracts. This shift highlights the importance of innovative contracting mechanisms to adapt to evolving energy landscapes.
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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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."
Requirement to conduct and periodically update long-term transmission planning to anticipate future needs.
Requirement to consider a broad set of benefits when planning new facilities.
Requirement to identify opportunities to modify in-kind replacement of existing transmission facilities to increase their transfer capability, known as “right-sizing.”
Customers pay only for projects from which they benefit.
Expands states’ pivotal role throughout the process of planning, selecting, and determining how to pay for transmission facilities.
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.
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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