Electricity Generation Statistics

• Electricity, referred to as power, is the apex of energy commodities with all others convertible into power.
• Electricity is unstorable, making its price an instantaneous reflection of various energy prices.
• Electricity functions as a real-time clearing market for input fuels.

Electricity Generation Statistics

• The total world electricity generation in 2011 was about 22,000 terawatt/hours.
• The total world electricity generation in 2021 was about 28,548 terawatt/hour.
• Electricity accounts for approximately 15% of total global primary energy consumption, assuming 100% conversion efficiency.
• In 2010, fossil fuels generated about 60% of global electricity, and the rest was from hydro and nuclear.
• An efficient combined-cycle generator uses around 7 MMBtu of natural gas to produce one megawatt-hour of power which is a conversion efficiency of about 50%.
• North America, Europe/Eurasia, and Asia Pacific are the dominant electricity producers.
• Asia Pacific has been the largest electricity producer since approximately 2003.
• Global electricity generation dropped in 2009 due to the credit crisis.

Electricity Infrastructure and Markets

• Electricity is vital for lifestyle and commercial activities in most societies.
• Electricity's lack of storability necessitates robust infrastructure for reliability.
• Electricity transport can be costly due to expensive transmission lines and regulatory hurdles.
• Transmission over long distances results in losses.
• Electricity systems and markets are usually organized locally or regionally.
• Electricity was initially generated by large hydro, coal, or nuclear facilities located away from population centers.
• By the 1990s, deregulated power markets emerged in areas of the United States and Europe, as well as in Australia and New Zealand.

Components of Power Delivery

• Power delivery has four components: generation, transmission, supply, and distribution.

Generation

• The creation of electricity using various technologies and energy sources.

Transmission

• Long-distance high-voltage transmission that links generation sources to demand centers.

Supply

• The procurement and sale of power directly to retail customers.

Distribution

• Local transmission from high-voltage lines directly to end users.

Deregulated Power Markets

• Deregulated markets are managed by independent organizations to maintain market order and system reliability.
• Electricity markets are grouped into pool markets, markets with bilateral trades, and electricity exchanges.
• Pool markets require all electricity generation and demand to be bid into a single clearing market to set spot prices.
• Bilateral markets set spot prices through market clearing of positions net of bilateral trades and are similar to pool markets.
• Electricity exchanges are voluntary markets where generators and suppliers can offer and bid.

Independent System Operators

• Regardless of market design, an independent entity is responsible for market clearing, balancing, and system reliability.
• In U.S. Markets these administrator is called independent system operators (ISOs) or regional transmission organizations (RTOs).
• In other markets these administrator is called transmission systems operators (TSOs).
• The PJM RTO in the Midatlantic region is the largest market in United States by power consumed and derivative market liquidity.
• PJM is also the most mature U.S. market, evolving gradually since the late 1990s.
• Other mature U.S. markets include the New York ISO, the New England RTO, and the ERCOT.
• California has been involved in electricity deregulation since the 1990s, with the western power crisis of 2000-2001 causing regulatory and market mechanic changes.
• As of 2012, California is seen as a relatively unpredictable marketplace.

Power Demand

• Power demand, or load, changes rapidly and can be hard to predict.
• Demand is dual peaking, with maxima in summer and winter and minima in spring and fall.
• Temperature is a primary driver of power demand.
• Dual peaking demand is increased as heating drives a demand increase at low temperatures.
• Visible gaps in loads that range between roughly 50 and 65F, is another manifestation of the difference in demand on business versus nonbusiness days.

Power Forwards

• Electricity demand and price vary on short time scales meaning that typical forwards and swaps may not provide enough granularity.
• Trading hourly forwards can be too cumbersome and power forward markets have evolved to accommodate simplicity and intraday demand variations by trading in buckets.
• Power forwards reference ratable delivery over standard time buckets, which are divided into high-demand and low-demand periods

Peaking

• Eastern markets: 7 a.m. to 11 p.m. EST Monday through Friday excluding holidays
• Western markets: 7 a.m. to 11 p.m. PST Monday through Saturday excluding holidays
• Texas (ERCOT): 6 a.m. to 10 p.m. CST Monday through Friday excluding holidays

Offpeak

• The complement of peak.

Peak Buckets

• Eastern and ERCOT peak buckets are called "5x16" and Western markets at it is "6x16".
• Offpeak is split into nights ("7x8") and weekend peak ("2x16" or "1x16" in the West), swaps on separate buckets are much less liquid.
• Basic problem is designing market clearing mechanics that can meet highly variable demand at a low cost with high reliability.

Generation

• The cheapest generation available is usually the least flexible in output, which requires market-clearing algorithms to couple different delivery periods meaning optimization is control theoretic in nature.
• An electricity system delivers power through nodes/busbars connected by transmission lines.
• Infrastructure can fail unpredictably.
• Differential equations governing alternating-current power systems are nonlinear.

Electricity Generation Classes

• Generation is grouped into fossil fuel and non-fossil fuel.
• Generation powered by coal, natural gas, or refined products converts a traded energy commodity into electricity.
• Non-fossil fuel includes hydro, wind, solar, and nuclear.
• Nuclear fuel does not trade like natural gas or crude oil but nuclear generation provides power at low, slowly varying marginal cost.

Fossil Fuel Generators

• Fossil-fuel generators function like a spread option between input fuels and power prices meaning If power price exceeds generation cost then it makes sense to generate.
• Non-fossil-fuel generation is like fixed-price options with a strike defined by the cost of nontraded inputs and normalized maintenance costs.

Generation Variables

• How much a generator produces at any time t, denoted as Qt.
• How much input fuel is required to produce each megawatthour of power at time t, denoted by H*.
• Conversion ratio H* is generating unit's heat rate, an attribute of the generator, which is independent of market prices.
• Formula for optionality embedded in generation - max[F(t, t) – HG(t, t), 0] = G(t, t) max[ F(t, t) /G(t,t) - H, 0].
• Spreads of the form F(t,t) – HG(t,t) are referred to as a spark spreads, spark spreads depend on H.
• Spot market heat rate is the ratio of the market price of power to the market price of the fuel F(t,t)/G(t,t) .
• Run generator if market heat rate exceeds the unit heat rate.

Relevant Characteristics of a Fuel-Driven Generator

• Operating limits
• Start costs
• Thermal effects
• Varying heat rate
• Ramp rates
• Minimum downtimes
• Operating costs

Generator Operation and Market Implications

• Generators can run at lower levels, even when losing money, to avoid start costs and minimum downtime constraints.
• A typical market such as PJM has many hundreds of generators.

Cost and Renewable Sources

• The lowest-price generation is usually comprised of wind, solar, and other renewable sources.
• Tax incentives are provided for wind generation through production tax credits that subsidize generation.

Hydro and Nuclear

• Next in the "stack" is hyrdo which has very low marginal cost to generate.
• Nuclear generation follows, involves large initial capital expenditures but relatively low marginal cost once operating.
• Nuclear Units are highly efficient but ramp slowly and once offline usually take days to return to maximum output.

Coal and Natural Gas

• Coal is generally next in the stack, with marginal costs that vary based on coal price, transport costs, and emissions.
• Coal generation is also slow to start and ramp.
• Next are combined-cycle natural gas generators and fuel oil generation, which start and ramp more quickly.

Peakers

• The most expensive fossil-fuel generation consists of natural gas or distillate-fired jet turbines.
• Peakers can start very rapidly to meet unanticipated fluctuations in supply or demand.

Demand-Side Contracts

• Demand-side management contracts, or demand response contracts, are a relatively recent development.
• Such contracts are sometimes considered part of the "stack" and are more expensive than peaking units.
• A stack is formally constructed from a set of generator capacities [C1, ..., CN] sorted so that the associated marginal costs in $/MWh [p1,...,pN] are increasing.

Supply Stacks and Costs

• Supply stack graphs pn versus Cn = ∑1 is what is presented at point that k is less than n. Ck that is presented for 1 is less than or equal to n that is less than or equal to N.
• At lower natural gas prices, coal generation would be displaced by natural gas meaning less coal is burned and the power price dynamics could be affected, offpeak power prices likely to be increasingly coupled with natural gas prices.
• This is coal switching as fuel prices change.

U.S Generation Capacity

• Nuclear generation is has a relatively modest capacity of 10 percent but is used in 20 percent of actual megawatt-hours since it has a lower position on the stack.
• Coal generated 30% capacity and 45% of megawatt-hours.
• Natural gas, being higher on the stack, is dispatched less frequently.
• Demand peaks in the summer with a smaller peak in the winter as seen in previously explained figures.

Electricity Generation Outages

• Nuclear units require roughly a month for refueling and maintenance once every eighteen months.
• Such maintenance is usually scheduled in the shoulder months in order to minimize economic loss.
• The stack varies in composition seasonally and is subject to random perturbations due to outages.
• In competitive markets, generators often bid their capacity above their marginal costs.
• Quantifying future bidding behavior of generators is an obstacle to stack-based pricing forecasts.
• Most competitive markets are nodal-markets that are called locational-marginal pricing (LMP) markets.

Locational Marginal Pricing Markets

• In LMP, the spot price at each node is established via security-constrained optimal dispatch.
• Generators and loads submit offers at an hourly time scale, submit bids.
• Market-clearing computations are performed subject to reliability constraints, security constrained, that ensure that the resulting configuration of generation dispatch, transmission, and load are stable to certain perturbations.
• Spot prices are the shadow prices at each node from this.
• Spot price for power at any node is the cost of incremental additional demand at the node.
• Transmission constraints and losses result in nodal prices that are not uniform over the system.
• Transmission and stability constraints result in subsets of the system that have very similar market-clearing prices known as congestion zones or simply zones.
• Liquid swaps markets almost always reference zonal or hub prices which are averages of a set of nodal prices.
• LMP market has a design payout for commodities.
• Market design incentivizes building new generation as transmission in where such receive higher prices or revenues and ultimately reducing cost of power for the end user.
• From an asset purchaser of tradertrying to hedge a portfolio of generation perspective, nodal pricing can introduce challenges.
• Swaps liquidity is concentrated at hubs, but economic exposures are at the nodes and the investors have to bear the risks of the node-to-hub spreads.
• Rational long-term investment decisions are more effective at competitive markets that that are zonal or regional.