1. U.S. Electric Utility Markets:
An evolving paradigm
Karthik Krishna, 2008
Copyright © 2008 by Karthik Krishna

2. U.S. Electric Industry
 Undergoing restructuring and moving towards deregulation.
 Traditionally dominated by regulated monopolies that vertically
integrate generation, transmission and distribution.
 Shifting towards an industry featuring a mix of competitive
generators, common transmission operators, and distribution
companies.
Source: Energy Information Administration, Status of Electricity Restructuring by State, September 2008.
http://www.eia.doe.gov/cneaf/electricity/page/restructuring/restructure_elect.html

3. Electric Utility Industry Structure
Power Sellers Power Wholesalers and Buyers Power Retailers and Buyers
• Utilities
Wholesale • Power marketers Bilateral
• Investor owned utilities Bilateral • Aggregators Load Serving Entities Retail
• Public Utilities Transactions
Retail
• Independent Power • Utility Distributors Pilot Customers
Producers • Power marketers Programs
• Cogenerators Competitive • Power Exchanges • Aggregators
Markets Futures
- ISO Controlled Markets
Exchanges
- Private Exchanges
Direct Sales

4. FERC Standard Market Design
Major Elements
 Independent Transmission Provider (ITP)
 Organized Exchange Markets
 Market Power Mitigation (unbundling)
 Regional Transmission Planning, ATC*, OASIS**
*ATC – Available Transfer Capacity **OASIS – Open Access Same-Time Information System
Source: Federal Energy Regulatory Commission, RTO/ISO Map, January 2008.
http://www.ferc.gov/industries/electric/indus-act/rto/rto-map.asp

5. Electric Market Restructuring
- Landmark Policies
1935 – Federal Power Act (FPA)
Made the Federal Power Commission (later became FERC) the
regulatory body for electric industry.
1978 – Public Utility Regulatory Policies Act (PURPA)
Required utilities to buy power, at avoided costs, from non-utility
generating facilities that use renewable energy sources or
cogeneration.
1992 – Energy Policy Act (EPAct)
Opened transmission networks to allow wholesale transactions for
electricity.
Left it up to individual states to determine opening of retail markets.
1996 – FERC Order 888 and 889
Established standards for non-discriminatory transmission access
and stranded cost recovery.
Required utilities to establish electronic systems to share
information on a non-discriminatory basis.

6. Electric Market Restructuring
- Landmark Policies (cont.)
1999 – FERC Order 2000
Requested formation of Regional Transmission Organizations
(RTOs) to
- Improve efficiencies in grid management.
- Improve reliability and planning.
2002 – FERC Standard Market Design (SMD)
Proposes standards for establishment of competitive electric
markets.
2005 – Energy Policy Act
- Improved reliability standards and modernized transmission
infrastructure.
- Net metering and smart metering standards for states to consider.

7. Composition of U.S. Electricity Industry
Composition of the US Electric Industry, 1996
Federal 10
Investor-Owned 243
Cooperative 932
Publicly Owned 2010
Nonutilities 1994
Power Marketers 80
0 500 1000 1500 2000 2500
Net Generation, Average of 1990-1996
Investor-Owned,
74.80%
Cooperative,
5.60%
State Government, Municipals, 4.50%
9.00%
Federal, 6.20%
Source: Energy Information Administration, Electric Power Annual 1996, Volume II, DOE/EIA-0348(96/2) (Washington, DC, 1997).

8. Today’s U.S. Electricity Cost Landscape
• Conservative forecasts
show residential electricity
prices reaching 12 c/kWh
by 2009
• EIA shows historic national
average retail electricity
prices outpacing inflation
by ~1.2%
EIA National Retail Electricity
(cents / kwh)
2007 10.64
2006 10.40
+ 4.7% per annum
2005 9.45
2004 8.95
2003 8.72
2002 8.44
Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/

9. Hurdles Faced By
Traditional Generation Sources
• Coal prices have nearly tripled over the past
five years.
$ / short ton
• Coal power plants face increasing project
uncertainty due to carbon and siting concerns.
• Natural gas prices have more than doubled
during the same time period.
• Nuclear industry groups estimate the next
generation nuclear plants will not be online until
2015.
Source: Simmons & Co.
Coal and natural gas prices are increasing at much faster rates than 4.7% per
year, while nuclear faces regulatory, financing and siting issues.
Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/

10. U.S. Electric Retail Prices
2007 Average Residential Retail Prices
20
18
States with restructured electric markets
16
States with regulated rates
14
Cents/kWh
12
10
8
6
4
2
0
 In states that implemented retail market deregulation, prices have
increased faster that the national average.

11. Electric Industry Deregulation
Why has competition in electric industry not brought
price benefits to consumers?
 Inelastic demand and lack of price signals.
 Technical feature of the industry that requires supply and
demand to be in balance at all times (electricity cannot be
stored).
 Poor market design which essentially has the least efficient
plant set the wholesale market price for all generation.
 Lack of incentives for consumers switching electric suppliers
since there is little to choose from in terms of service
differentiation.
Sources:[1] Rosenberg, A. E., 2008, “A way to reorganize organized markets”, The Electricity Journal, Vol. 21, Issue 1,ppg 9-17.
[2] Joskow, P., and Tirole, J., 2006, “Retail Electricity Competition”, Rand Journal of Economics, Vol. 37, No. 4, ppg. 799-815.

12. Existing Power Marketers
Some recently started power marketers in Texas (Jan 2008)
 Green Mountain Energy
- Marketed as nation’s leading provider of cleaner energy.
- Customers are given the opportunity to choose how their power is made via
direct access retail electric service.
 Affordable Energy
- Sells electricity through a large independent sales base which increases
their sales organization through word of mouth and enthusiastic sells pep
rallies.
- Untested customer service and billing system.
 Cirro Energy
- Appears to offer most competitive electric rates but requires a 12 month
contract at variable energy rate (which can be raised for any reason).
- Most other companies offering variable electric rate products leave the
agreement as a month to month contract.
 Champion Energy
- Lehman Brothers company which is well-capitalized and has tremendous
experience in commodity marketplaces.
- Ensures you will receive accurate and straightforward billing.

13. Distributed Generation
Definition
Small-scale production of electricity at or near customers’ homes and
businesses.
Drivers
 Decline in costs of small-scale generation
 Increase in utility-supplied power prices
Benefits
 Improved reliability
 Reduced costs
 Increased use of renewable energy
 Increased energy security
Barriers
 Difficulty in standardizing technology and grid interconnection.
 High initial costs.
 Utility monopoly rules (stranded costs & interconnection fees)
 Public’s lack of knowledge about the electric industry.
Source: Sovacool, B. k., and Brown, M. A., 2007, “Energy and American Society – Thirteen Myths”, Springer Publishing, Netherlands

14. Costs of Selected DG Technologies
- Levelized Cost is the average cost of electricity (cents per kWH) over the
operating life of the generating equipment.
- Cost estimate that the systems powered by fossil fuels will be operated
90% of the time and that wind and solar PV systems will run 40% and 27%
of the time respectively.
- Costs do not include effects of tax credits and other direct subsidies for
specific technologies.

15. U.S. Solar PV Industry
 Despite being the most expensive DG technology, Solar PV
industry has had exponential growth recently and is projected to
continue this growth pattern.
 Growth is due to :
- Volatile electric prices
- Tax incentives and policy initiatives
- Advances in PV technologies
- Consumer interests in renewable energy and to be more energy independent
U.S. Domestic PV Shipments (1997 - 2006)
250000
PV Modules (Peak KW)
200000
150000
100000
50000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Sources:[1] Sovacool, B. k., and Brown, M. A., 2007, “Energy and American Society – Thirteen Myths”, Springer Publishing, Netherlands
[2] Borenstein, S., 2008, “The Market Value and Cost of Solar Photovoltaic Electricity Production” Center for the study of Energy
Markets Working Paper, University of California – Berkeley campus. http://www.ucei.berkeley.edu/PDF/csemwp176.pdf

16. U.S. Solar PV Industry
Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/

17. 2007 Residential PV Price Attractiveness
Electricity Price differences with Existing Incentives
• Currently PV is
financially
competitive where
there is some
combination of high
electricity prices,
excellent sunshine
and/or state/local
incentives.
Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/
17

18. 2015 Residential PV Price Attractiveness
Electricity Price differences without incentives and
moderate increase in grid prices
• Attractive in about
250 of 1,000 largest
utilities, which
provide ~37% of
U.S. residential
electricity sales.
• 85% of sales (in
nearly 870 utilities)
are projected to
have a price
difference of less
than 5 ¢/kWh
between PV and
grid electricity.
• In large areas, PV is
cheaper than grid
electricity
Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/
18

19. 2015 Residential PV Price Attractiveness
Electricity Price differences without incentives and
aggressive increase in grid prices
• Attractive in about
450 of 1,000 largest
utilities, which
provide ~50% of
U.S. residential
electricity sales.
• 91% of sales (in
nearly 950 utilities)
have a price
difference of less
than 5 ¢/kWh
between PV and
grid electricity.
• Across most of the
highest U.S.
population areas,
PV is cheaper than
grid electricity.
Source: United State Department of Energy Solar Energy Technologies Program, May 2008. www.eere.energy.gov/solar/solar_america/
19

20. Electric Supply Business Models
Traditional Model (Customer view)
 Use electricity supplied by monopolistic utilities.
 For implementing DG, invest your own resources (time, money,
knowledge) and undertake risks on investment due to intermittent
generation.
Sustainable Model (Customer view)
 Get into a contract to buy electricity from a electric service
provider/power marketer and allow suitable DG to be installed and
maintained by the provider.

21. Decentralizing Generation
Service Provider

22. Offering from New Model
 Financial solution for greater penetration of DG.
- Cost structure over contract life of DG technologies is internalized
by the service provider (lease to own approach).
- Risks due to generation intermittency is shifted away from
consumers.
 Commercial engine that drives technological advances towards
localized energy independence/sustainability.
- DG technology management.
- Smart metering.
 Industry savings from reduced transmission costs and congestions.
 Lower carbon footprint for the industry that is the single largest in
emitting CO2.

23. Financial Derivatives and Electric Markets
 Electricity spot prices are volatile due to unique physical
attributes of electricity
- Non-storability
- Uncertain and inelastic demand
- Most renewable resources are dependent on weather
- Steep supply function
 Financial derivative tools are not fully understood and
utilized in the electric industry.
 In Feb. 2004, persistent high prices in TX during a 3-day ice
storm led to the bankruptcy of a retail electric provider that
was exposed to spot market prices.
 The 2000 California electricity crisis is largely attributed to
the fact that major utilities were not properly hedged
through long-term supply contracts.
Source: Deng, S. J., and Oren, S. S., 2006, “Electricity derivatives and risk management”, Energy Journal, 31, ppg. 940-953.

24. Financial Derivatives and Electric Markets
 Most of electricity futures and options are traded on the
New York Mercantile Exchange (NYMEX).
 Types of electricity financial instruments:
- Electricity forwards, futures and swaps
- Options (call, put, spread, swing options)
- Structured transactions (tolling, load-serving contracts)
- Financial derivatives on transmission capacity
 Risk management applications
- Hedging a generators output
- Ensuring generation adequacy
- Callable service contracts
- Hedging congestion risk of bilateral transactions.
 Tools for planning under uncertainty and asset valuation.
Source: Deng, S. J., and Oren, S. S., 2006, “Electricity derivatives and risk management”, Energy Journal, 31, ppg. 940-953.

25. References
• Borenstein, S., 2008, “The Market Value and Cost of Solar Photovoltaic Electricity
Production” Center for the study of Energy Markets Working Paper, University of
California – Berkeley campus. http://www.ucei.berkeley.edu/PDF/csemwp176.pdf
• Deng, S. J., and Oren, S. S., 2006, “Electricity derivatives and risk management”,
Energy Journal, 31, ppg. 940-953.
• Energy Information Administration, Electric Power Annual 1996, Volume II, DOE/EIA-
0348(96/2) (Washington, DC, 1997).
 Energy Information Administration, Status of Electricity Restructuring by State, 2008.
http://www.eia.doe.gov/cneaf/electricity/page/restructuring/restructure_elect.html
 Federal Energy Regulatory Commission, RTO/ISO Map, 2008.
http://www.ferc.gov/industries/electric/indus-act/rto/rto-map.asp
• Joskow, P., and Tirole, J., 2006, “Retail Electricity Competition”, Rand Journal of
Economics, Vol. 37, No. 4, ppg. 799-815.
• Rosenberg, A. E., 2008, “A way to reorganize organized markets”, The Electricity
Journal, Vol. 21, Issue 1,ppg 9-17.
• Sovacool, B. k., and Brown, M. A., 2007, “Energy and American Society – Thirteen
Myths”, Springer Publishing, Netherlands.
• United State Department of Energy Solar Energy Technologies Program, May 2008.
www.eere.energy.gov/solar/solar_america/

26. Contact Information
For any questions or comments on this presentation
Contact
Karthik Krishna
Graduate Student, School of Business & Economics
Michigan Technological University
Email: kkrishna@mtu.edu
Telephone: (330) 685 7278