ECON 366: Energy Economics

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.title[
# ECON 366: Energy Economics
]
.subtitle[
## Topic 3.1: Electricity Basics
]
.author[
### Andrew Leach, Professor of Economics and Law
]
.date[
### <a href="mailto:aleach@ualberta.ca"> aleach@ualberta.ca</a> <a href="https://github.com/leachandrew"> leachandrew</a> <a href="https://twitter.com/andrew_leach"> @andrew_leach</a> 
]

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# Electricity Basics
At the end of this section, you should feel comfortable answering all of these questions:
- What are the main sectors of the electricity industry?
- What do we mean by peak loads?
- What's a merit order?
- What is the difference between energy and capacity?

You should also feel (more) comfortable with (some) electricity units:
  - kW, kWh, MW, MWh, volts, watts, amp, Hz

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# Why should you care about electricity?
- Price volatility:
  - Electricity prices are an order of magnitude more volatile than oil or gas prices
  - Both supply and demand in Alberta affect us more than global or regional supplies and demands in oil and gas markets
- New technology:
  - Electricity is, arguably, changing faster than any other energy market
  - Alberta's electricity market is entering a period of market- and regulatory-driven transition
- Economics 101 in action
  - Nowhere else will you see supply and demand curves actually mapped out in real time determining prices as clearly as in Alberta's power market
  
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# Why should you care about electricity?

- Application of other concepts you learned in 101, 102, 281, etc.
  - regulation of natural monopolies
  - collusion and oligopoly
  - externalities
  - capture theory

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# Volatility

<img src="images/prices_and_loads_ep.png" width="1000px" style="display: block; margin: auto;" />
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# New Technology (Source: [MPower](http://www.mpoweruk.com/grid_storage.htm))
<img src="images/grid_storage.png" width="870px" style="display: block; margin: auto;" />
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# New Technology (Source: [Brian Batholomew](https://twitter.com/BPBartholomew/status/1766692040014758344))
<img src="images/cali_batts.jpg" width="1000px" style="display: block; margin: auto;" />
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# New Technology 
<img src="images/renew_clean.png" width="1000px" style="display: block; margin: auto;" />
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# Econ 101 in Action!

<img src="images/merit_type.png" width="1200px" style="display: block; margin: auto;" />
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# Market Participants
- Generation
- Transmission
- Distribution
- Ancillary Services
- Load (users)
- Storage
- Microgeneration

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# Market Regulation in Alberta
- Generation is a competitive market
- Transmission is regulated on a cost-of-service basis
- Distribution (local wires) is regulated through [performance-based regulation](https://efiling-webapi.auc.ab.ca/Document/Get/794425)
- Ancillary Services is a competitive market
- Load (i.e. customers) may contract for electricity supply (i.e. retail is competitive)
- Storage (Still a lot TBD, but depends on the sector in which it's built)
- Microgeneration (free market for self-supply)

---

# Energy units - electricity
-  Watts: measure of capacity (instantaneous production, installed capacity, or instantaneous demand)
  - Alberta system demand or internal load: e.g. 10,700 MW (megawatts or million watts)
  - Capital Power's Genessee 3 power plant has a nameplate capacity of 450 MW
- Watt hours: measure of energy (production or demand during a given period of time; i.e. flow through)
  - Production over a day, week, month, year
  - A 7.5W LED bulb on all day (24hr) uses 180Wh of electricity (.18kWh)
- Volts: measure of the electrical potential or the ability to convert charge to power (Watts=amps x volts)
  - Transmission lines: 150-765 kV
  - Distribution lines: 13,800 Volts
  - Household wiring: 120-240 (110/220) Volts

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# Usage in my house

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# Energy Prices
- Electricity prices: expressed in power delivered over time
  - Cents/kilowatt-hour (c/kWh)
  - Dollars per megawatt-hour (\$/MWh)
- Levelized costs of electricity (supply costs) in \$/MWh
- Capacity costs are expressed in a cost per megawatt or cost of capacity
  - Genessee 3 cost approximately \$1.5 million/MW or \$1.50 per watt to build
  - Solar panel prices have declined to now lie under \$1/W of capacity
  - Balance of system costs imply that a solar system costs \$2-3/W of installed capacity
- Other prices matter for electricity markets as well
  - Renewable energy credits (usually prices in \$/MWh)
  - Emissions credits or permits (\$/tonne)
  - Capacity payments (\$/MW)
  - GHG or other emissions permits or credits (\$/tonne)
---

# North American Electricy Regions (Source: [Level 10 Energy](https://www.leveltenenergy.com/post/energy-markets-101))

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# North American Electricy Markets (Source: [Level 10 Energy](https://www.leveltenenergy.com/post/energy-markets-101))

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# Electricity Sector: Regulatory characteristics
-  Rate-regulated or or state-owned utilities
  - EPCOR (legacy) or BC Hydro
  - PG & E in California
- Competitive markets
  - Energy only markets: ERCOT and Alberta
  - Energy and capacity markets: MISO, PJM
- Real-time vs day-ahead prices: PJM and others have day-ahead market and then a real-time differences market
- Many other design characteristic differences between restructured or competitive markets

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# Alberta Wholesale Energy Market Design
- Energy-only market (single price, $/MWh)
- Real time, spot pricing, no day-ahead market
- Single node
- Capacity market was contemplated, but not pursued

Ancillary services: 
- separate, competitive market for operating reserves, transmission-must-run, load-shed and black start

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# Alberta Transmission
-  Regulated monopoly within a service area
-  Congestion free (no nodal pricing) across the province
-  No transmission rights
-  Paid for (mostly) by load (consumers)

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# Nodal Pricing Example ( Source: CAISO)

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# The Alberta Wholesale Market
- Suppliers place offers of power at particular price
- Generators must offer, must run
- Demand-side bids placed for power with a maximum price
- Supply offers are sorted from low to high
- Demand offers are sorted from high to low
- Marginal price is set at the price which equates supply and demand - economics 101 at work!
- Import and renewable supply is bid-in at \$0, but everyone receives the market price
- Export demand is bid-in at \$999, so they do not set the price directly but pay the marginal price
- Renewables default offer at zero
- Consumer default bid allows AESO to go up merit order to meet observed demand

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# Econ 101 in Action!

<img src="images/merit_type.png" width="1200px" style="display: block; margin: auto;" />
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# Econ 101 in Action!

<img src="images/bids.png" width="1200px" style="display: block; margin: auto;" />
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# Equilibrium Supply

<img src="images/gen_mix.png" width="1200px" style="display: block; margin: auto;" />
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# Equilibrium Supply

<img src="images/renew_mix.png" width="1200px" style="display: block; margin: auto;" />
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# Demand side of the market

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# Demand side of the market

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# Demand side of the market

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# Equilibrium Prices

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# Equilibrium Prices

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# What is considered on-peak, off-peak? What's a super peak?

- The AESO uses four different time blocks: on-peak, off-peak, AM super peak, and PM super peak

- Time definitions generally use *hour ending*, e.g. 5 p.m. to 6 p.m. is HE18 (HE=hour ending 18:00)

The four different time blocks are:
  - On-peak: HE 8-23
  - Off-peak: HE 1-7 and HE 24
  - AM super peak: HE 6-8
  - PM super peak: HE 17-24 in November, December and January and HE 18-24 in all other months

AESO uses these 7 days of the week. My graphs count Sundays and holidays as off-peak.

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# Up Next

- generation mix here and elsewhere in Canada
- plant costs
- plant revenues
- levelized cost of electricity (equiv. supply costs)
- challenges of renewable integration
- market power and market power mitigation (see [here](https://www.albertamsa.ca/assets/Documents/Q4-2022-Presentation.pdf))
- distribution and transmission regulation
- government policies (GHG and renewable procurement)