Electric Utility Industry 101
Webinar
David Schlissel
Cathy Kunkel
March 4, 2015
Webinar Outline
• History: regulation and deregulation
• Regional electricity markets
• Types of companies
• How investment decisions are made
• Industry trends
• Components of power plant costs
• Metrics for evaluating power plant performance
• Where to find data
©2015 The Institute for Energy Economics & Financial Analysis 2
History
• 1935: Public Utility Holding Company Act
• Restricted utility corporate structures and mergers
• 1990s: Restructuring of electric utility industry
in some states
• Break-up of vertically integrated utilities into power
generation companies, transmission companies, and
distribution companies
• Only distribution companies remain under state public
service commission regulation
• Not all states deregulated
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Independent System Operators (ISOs)
• Federal Energy Regulatory Commission
encouraged formation of Independent System
Operators and Regional Transmission
Organizations (RTOs)
• Ensure open access to the transmission grid,
to facilitate competition
• Created and manage wholesale markets for
electricity
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Map of ISOs
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Electricity Markets - Energy
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$/MWh
20.00
40.00
60.00
80.00
120.00
140.00
180.00
100.00
160.00
.00
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
On-peak
Aug-09
Nov-09
Feb-10
May-10
Off-peak
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
Historic power prices (PJM Western Hub)
May-12
©2015 The Institute for Energy Economics & Financial Analysis
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Historical PJM Energy Market Prices
7
Electricity Markets - Capacity
• Supposed to ensure that there are enough
power plants to meet reliability goals
• Forward auction to purchase capacity several
years in advance
• Have not provided stable price signal
• Only in PJM, NYISO, ISO-NE and MISO
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PJM Capacity Market Prices
©2015 The Institute for Energy Economics & Financial Analysis 9
Types of Investor-Owned Companies in the Electricity
Industry
Type of Company Function Regulator Examples
Merchant Owns power plants in None NRG, Dynegy
Generator deregulated markets
Transmission Owns transmission Federal Energy PATH (Potomac
lines Regulatory Allegheny
Commission Transmission
Highline)
Distribution Owns distribution State Public Pepco, National
system Service Grid
Commission
Vertically Owns power plants, State Public Alabama Power,
Integrated Utility transmission and Service Northwestern
distribution Commission Energy
©2015 The Institute for Energy Economics & Financial Analysis 10
Utility Holding Companies
• One investor-owned holding company can own a
number of different subsidiaries and affiliates:
• Southern Company owns:
• Regulated vertically integrated utilities
• Merchant generation
• Exelon Corporation owns:
• Merchant generation
• Transmission
• Distribution
• AEP and FirstEnergy each own:
• Merchant generation
• Transmission
• Distribution
• Regulated vertically integrated utilities
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Types of Power Plant Owners
• Merchant Generation Companies
• Vertically Integrated Investor Owned Utilities
• Public Power utilities
• Electric Membership Co-operatives (EMC)
• Power agencies
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Investment decisions
Company Type Factors driving investment
Merchant generators • Wholesale electricity price outlook
• Not interested in investing in capital- intensive
generation (e.g. nuclear, coal) if prices are expected
to remain low
Vertically integrated • Regulatory environment and expected rate of
utilities return
• Want to make capital-intensive investments (new
generation, pollution control equipment) to earn a
rate of return through electric rates
Publicly owned utilities • Cost of debt
©2015 The Institute for Energy Economics & Financial Analysis 13
Merrimack – Example of Benefits to IOU
of Making Expensive Investments (1)
Plant Investment in Rate Base (millions of dollars) $600
$500
$400
$300
$200
$100
$0
Existing Plant Investment Plant Investment with Scrubber
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Merrimack – Example of Benefits to IOU
of Making Expensive Investments (2)
Merrimack Station (millions of dollars)
$60
Pre-tax Return on Rate Base From
$50
$40
$30
$20
$10
$0
Existing Plant With Scrubber
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Financial incentives driving corporate policy
• Merchant generation companies:
• Interested in driving up wholesale electricity market
prices
• Advocate for rule changes at ISOs
• Want to block competition from other sources, e.g.
from energy efficiency and renewables
• Vertically integrated companies:
• Interested in increasing sales to earn more money
(rates set on a per kWh basis)
• Incentive to oppose energy efficiency and customer-
owned power generation (e.g. rooftop solar)
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Recent Industry Trends
• Opposition to energy efficiency and rooftop
solar
• Move back towards regulation
• Acquire regulated utilities
• Sell merchant generation business
• Transfer assets from merchant generation to
regulated subsidiaries
©2015 The Institute for Energy Economics & Financial Analysis 17
Webinar Outline
• History: regulation and deregulation
• Regional electricity markets
• Types of companies
• How investment decisions are made
• Industry trends
• Components of power plant costs
• Metrics for evaluating power plant performance
• Where to find data
©2015 The Institute for Energy Economics & Financial Analysis 18
Components of Power Plant Costs
• Capital cost is the cost of building the power plant
and making periodic equipment replacements, major
repairs and/or plant upgrades.
• Cost of financing these capital expenditures are
included in ongoing cost of generating power:
• For investor-owned companies these financing costs are a
blend of shareholder provided funds (equity) and borrowed
money (debt).
• For publicly-owned utilities and electric membership co-ops,
financing costs are debt.
• General Rule -- The more it costs to build the plant,
the higher the annual financing costs will be –
depending on the equity and debt borrowing rates.
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Components of Power Plant Costs (Cont’d)
• Annual depreciation expenses.
• the cost of building a power plant is amortized (spread) over
the expected life of the plant. The plant owner collects this
amount each year as a depreciation expense.
• For example, if it costs $1 billion to build a new fossil-fired
plant with an expected depreciation life of 25 years, each
year the plant owner will recover $40 million (that is, $1
billion divided by 25) through the cost of the power
generated by the plant. .
• Plant operating & maintenance (O&M) costs.
• Labor, materials, etc.
• Fuel costs.
• Cost of transmitting power from plant where it is
generated to places where it is used.
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Fixed vs. Variable Power Plant Operating Costs
• Fixed vs. variable costs.
• Financing & almost all O&M costs are ‘fixed” – have to be
paid whether or not plant generates any power or how much
it generates.
• Other costs, like fuel and some O&M, are ‘variable.’ These
fluctuate depending on how many MWh are generated.
• Examples of variable O&M costs include costs of operating
plant environmental control equipment
©2015 The Institute for Energy Economics & Financial Analysis 21
Example of Rising Plant Construction Costs –
Kemper IGCC Coal Plant - Mississippi
$7 ??
$6.10 $6.15
$6 $5.50
$5.00 $5.04
$5 $4.72
Billions of Dollars
$4.29
$4
$3.44
$2.92
$3
$2
$1
$0
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Relative Costs Among
Supply-Side and Demand-Side Resources
Need to Include
Non-Fuel Transmission
Technology Capital Costs O&M Costs Fuel Costs Costs
New nuclear Extremely high High Very Low Yes
Coal High Moderate Low to Moderate Yes
Low to Moderate
to High
depending on
Natural Gas Moderate Moderate where and when Yes
Integrated
Gasification
Combined Cycle Moderate to
(IGCC) Very high High Low to Moderate Yes
High but
Wind declining Low None Yes
Distributed solar High but
PV declining rapidly Low None No
Energy Efficiency Very Low None None No
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Power Plant Cost Components –
Example Prairie State Energy Campus
$250
Dollars per Megawa -Hour
$200
$150
$100
$50
$0
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Cost of Ge ng Power from plant site in Illinois to Paducah, KY
KMPA Major Maintenance Reserve
Prairie State Debt Cost
Prairie State Opera ng Cost (fuel + O&M)
©2015 The Institute for Energy Economics & Financial Analysis
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Power Plant Metrics - Capacity & Energy
• Capacity is a measure of the power that a plant
can produce at any one moment or instance –
measured in megawatts (MW) which are
millions of watts.
• Large fossil and nuclear power plants have full power
ratings in the range of 250 MW to 1500 MW.
• A large power plant will generally have several units at
the same site.
• Energy is a measure of how much power the
plant generates over time, whether hours,
days, months or years – measured in
Megawatt-Hours (MWh)
• Example – a 100 MW power plant that generates at full
power for 10 hours will produce 1,000 MWh
©2015 The Institute for Energy Economics & Financial Analysis 25
Power Plant Metric - Capacity Factor
• A power plant’s ‘capacity factor’ is a measure
of how much energy (in MWh) it generates
during the period of time being examined.
• Capacity factor is given as a % - the plant’s
actual generation (in MWh) in the period
divided by the power it would have generated if
it had operated at full power for all hours.
• Example – a power plant with a full power rating of
100 MW operates at only 50 MW for all of the hours of
the period – its capacity factor is 50%.
• The amount of power generated by a plant will change
(perhaps frequently) in response to plant outages,
equipment problems or economic factors.
• The higher the capacity factor, the better.
©2015 The Institute for Energy Economics & Financial Analysis 26
Capacity Factors - a Tale of
Two Power Plants at the Same Site
90%
80%
70%
Annual Capacity Factors
60%
50%
40%
30%
20%
10%
0%
5 6 7 8 9 0 1 2 3 14
200 200 200 200 200 201 201 201 201 o f 20
hs
M on t
t 1 1
F i rs
Plant Barry Natural Gas-Fired Combined Cycle Units Plant Barry Coal-Fired Unit 5
©2015 The Institute for Energy Economics & Financial Analysis
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Power Plant Metric - Heat Rate
• A power plant’s ‘heat rate’ measures how efficiently
the plant burns fuel – the more efficiently the plant
burns fuel, the less fuel it needs, and, consequently,
the lower its fuel costs.
• Heat rate is measured in British Thermal Units (btu)
– energy input from fuel - per kilowatt-hour of
electricity generated – btu/kwh
• The lower the heat rate, the better – this means it
requires less energy input from the fuel to produce
an average kwh of electricity.
©2015 The Institute for Energy Economics & Financial Analysis 28
Illustrative Power Plant Heat Rates
14,000
13,000
12,000
11,000
Average Heat Rate (btu/kwh)
10,000
9,000
8,000
7,000
6,000
4,000
2,000
0
New Coal Plant Older Coal Plant New Natural Gas- New Gas-Fired
Fired Combined Combus on Turbine
Cycle Plant
©2015 The Institute for Energy Economics & Financial Analysis
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Fuel or Generation Mix – New England in 2013
SOLAR, 0.1% WIND, 1.6%
OIL,
0.3%
COAL,
REFUSE,
5.6%
6.1%
NUCLEAR, 33.2%
GAS, 45.6%
HYDRO,
7.5%
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Where Can You Find Information about
Power Plant Operations and Costs
• Investor-owned companies (both regulated
utilities and merchant) - Form 10-K annual filings
to U.S. Securities and Exchange Commission.
• Regulated investor-owned utilities – Form 1
annual filings to state utility commission and/or
Federal Energy Regulatory Commission.
• Data filed by plant owners with the U.S. Energy
Information Administration of the Department of
Energy – especially Forms 860, 861, 923.
• Public power utilities and electric membership
cooperatives – Ask nicely, find a friendly board
member to ask for info, file Freedom of
Information Act requests (FOIA) requests.
• Ask IEEFA or Synapse Energy Economics.
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Thank you!!
Contact:
David Schlissel: david@[Link]
Cathy Kunkel: ckunkel@[Link]
©2015 The Institute for Energy Economics & Financial Analysis 32
