2003 Summer Energy Market Assessment Staff Report by the: Office of Market Oversight and Investigations (OMOI) Federal Energy Regulatory Commission Office of Market Oversight and Investigations 1
As we head into the heat of summer 2003 � Market participants have taken steps toward transparent market designs and trading platforms, as open and competitive energy markets evolve. � New power plant investments now provide higher reserve margins across much of the country. � Market participants are addressing concerns about the quality of natural gas price reporting. � Energy markets are rebounding from a period characterized by adverse financial conditions. Office of Market Oversight and Investigations 2
Nonetheless, there are challenges for energy markets this summer � A tight supply-demand balance in natural gas markets is raising natural gas and electricity prices. � Demand response, an effective tool for dampening price spikes, is missing from electricity markets. � Financial conditions have reduced the number of companies active in energy markets, consequently limiting market liquidity and effectiveness. Office of Market Oversight and Investigations 3
Futures market participants expect natural gas prices to remain above those of 1990s Source: Historical data are Nymex settlement prices from GASdat. Futures prices are Nymex settlement prices on May 29, 2003. Office of Market Oversight and Investigations 4
Natural gas-fired generation frequently sets the regional wholesale electric price . Note: Percent of time natural gas or oil is projected to be on the margin in 2003. Source: Cambridge Energy Research Associates (CERA), April 30, 2003. Office of Market Oversight and Investigations 5
Throughout the country, natural gas prices have doubled since last summer $7 June 2002 $6 June 2003 $5 $4 Price ($/MMBtu) $3 $2 $1 Note: Prices shown are the monthly average actual mid-point prices. June 2003 numbers include data through June 18 only. Price points $0 selected are representative points for the regions of the United States b s u . n e a 4 s p e . . . H c a l t G d Y . e a a Y e e p t a r l n ) analyzed in the 2003 Summer Energy e . t a k u s g N . y n A g l r N a n a a r m O J - e o g - y C 6 n , a m v - Z s y - n n - e h t e y t . i o i e a i x a u c Market Assessment. Source: Gas l o H , c d C S e o t G T n i S S d n c E o c o , n , p ( 6 a e , & 6 Z s a g i o t i r h s n d b e l G Daily. e a d s e e , S o n a i m c h r n a w P n r c o o i t n P o T u h r a h s Z l o h o Z F l C l t n o E r N n t o , s , a o C . a N n r u c T P o n s H e n T a r T Office of Market Oversight and Investigations 6
Depending on the role of natural gas in the region, some regions’ electricity prices have increased $70 June 2002 $60 June 2003 $50 Price ($/MWh) $40 $30 $20 Note: Prices shown are the average $10 actual on-peak day-ahead load- weighted prices. June 2003 numbers include data through June 18 only. Price points selected are representative points for the regions $0 of the United States analyzed in the P T y a y d 5 5 n t h P O g d g E e a 1 1 G s r 2003 Summer Energy Market b J i t S C d i P P e r e r r m r b e e o u e h o r N e W R e m S H t n o N n n n t l u F E V i C u o o M E C Assessment. Source: Megawatt s o P o l s Z Z o J S P a l , , a C k k P A M P - Daily. r r M o o d / L i Y Y M O w w O P e e E N N N Office of Market Oversight and Investigations 7
To address high natural gas prices market participants are taking action Industry Actions Commission Actions � More drilling is occurring in response to prices. � Expediting new certificates for pipeline � Industry is seeking access to new supply capacity, including out of the Rockies � Enhanced Certificate Streamlining sources. � Competitive pressures could displace some Initiative � Revised LNG terminal policy inefficient natural gas-fired generators with � Regional Infrastructure Conferences new, efficient natural gas-fired units. Office of Market Oversight and Investigations 8
Small reductions in demand can lower spot market electricity prices significantly for all customers Source: Confidential bid data and illustrative demand curves. Office of Market Oversight and Investigations 9
Demand response has many benefits for customers Demand response in electricity markets: • reduces peak prices • moderates price volatility • reduces peak loads, reduces congestion and improves local reliability • reduces supplier market power • moderates long-term price levels by lowering spot market prices Office of Market Oversight and Investigations 10
Demand response will play a limited role this summer � Demand response participation identified in organized electricity markets was low in 2002. - 0% in CAISO - 0% in ISO-NE - 3% in NYISO - 3% in PJM � Outside organized markets, reliable demand response data are not available. Office of Market Oversight and Investigations 11
To address the lack of demand response market participants are taking action Industry Actions Commission Actions � Some regions are promoting demand � FERC has proposed market design rules response aggressively to help meet reliability that allow demand resources to participate needs this summer, such as in New York and on an equal footing with supply resources in Connecticut. wholesale markets. � ISO-NE revised its tariff to provide more � FERC requires market monitors to report on price certainty to customers. demand response in annual reports and � NYISO has tied activation of demand monitors electric markets to ensure that response to prices in the spot market. demand resources are treated fairly. � States are working to implement new demand � FERC has approved revisions to demand response tariffs or improve existing ones, response tariffs in ISO-NE, NYISO and such as in California and Florida. PJM. � FERC is creating standard interconnection rules for small generation. � Along with DOE, the Commission is conducting analysis of distributed generation and its effect on electricity market prices and reliability. Office of Market Oversight and Investigations 12
Financial conditions have dampened energy market liquidity � Current financial conditions have forced market participants to exit trading, reducing the liquidity of physical and financial energy markets and, consequently, their effectiveness. � Longer-term implications of the lack of liquidity include reductions in available capital for infrastructure investments and storage injection. � Current financial conditions highlight the need to ensure that the conditions of nonregulated affiliates do not harm regulated utility customers. Office of Market Oversight and Investigations 13
To address financial conditions, market participants are taking action Industry Actions Commission Actions • Restructuring to improve financial conditions • Enhanced oversight of corporate financial and remain competitive in the longer-term management to protect regulated • Using innovative techniques to increase customers. For example, review of effectiveness, such as credit clearing Section 203 and 204 policies and adoption of an interim rule for “Regulation of Cash Management Practices” • Proposed additional quarterly financial reporting • Continued oversight of credit standards for pipelines and electric transmission owners • Work to implement the wholesale market platform • Continuing work to bring closure to western market issues, providing regulatory certainty to market participants Office of Market Oversight and Investigations 14
Further information on OMOI’s 2003 Summer Energy Market Assessment � This presentation will be available following the meeting on www.ferc.gov. � The complete 2003 Summer Energy Market Assessment , including Regional Assessments, will be available in the next several weeks from www.ferc.gov. � Please contact Lisa Carter (Lisa.Carter@ferc.gov) or Jolanka Fisher (Jolanka.Fisher@ferc.gov) with any questions. Office of Market Oversight and Investigations 15
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