James Jensen: Welcome everyone. I'm James Jensen, a contractor supporting Western Area Power Administration in the Office of Indian Energy Policy and Program, Tribal Energy Webinar Series. I'm filling in for Randy Manion as today's webinar chair. Today's webinar titled Understanding the Power Grid and Organized Markets. It's the 5th webinar of the 2018 DOE Tribal Energy Webinar Series.
Let's go over some event details. Today's webinar is being recorded and will be made available on DOE's Office of Indian Energy Policy and Program's website, along with copies of today's PowerPoint presentation. These will be available in about one week. Everyone will receive a post-webinar email with the link to the page where the slides and the recording will be located.
Because we are recording this webinar all phones have been muted for this purpose. We will answer your questions during the presentation. You can ask questions two ways. You can ask written questions by entering questions in the webinar Control box or you can raise your hand and I will try to unmute your phone in reasonably short order, at which point you'll be able to verbally ask your question. So use either method that you prefer. If you submit written questions we won't answer those questions until a break in the presentation. After each subject area we'll pause to answer those written questions.
We will try to keep the webinar to no longer than two hours. Let's get started with opening remarks from Lizana Pierce.
Miss Pierce is a senior engineer and deployment supervisor in the Office of Indian Energy Policy and Programs, duty stationed in Golden, Colorado. Lizana is responsible for managing technical assistance service, implementing national funding and financing programs and administrating the resultant tribal energy project grants and agreements.
She has more than 20 years of experience in project development and management and has been assisting tribes in developing their energy resources for the last 18 years. She holds a bachelor's of science degree in mechanical engineering from Colorado State University and received a master's in business administration through the University of Northern Colorado.
Lizana the virtual floor is yours.
Lizana Pierce: Thank you James and hello everyone. I join James in welcoming you to the fifth webinar of the 2018 series. This webinar series is sponsored by two US Department of Energy Organizations, the Office of Indian Energy Policy and Programs and the Western Area Power Administration. The Office of Indian Energy direct, fosters, coordinates, and implements energy planning, education, management, and programs that assist tribes with energy development, capacity building, energy infrastructure, energy costs, and electrification on Indian lands and homes.
To provide this assistance our deployment program works within the Department of Energy across government agencies and with Indian tribes and organizations to help Indian tribes in Alaskan native villages overcome the barriers to energy development.
Our deployment program is composed of a three-pronged approach consisting of financial assistance, technology assistance, and education and capacity building.
This tribal energy webinar series is just one example of our education and capacity building efforts. The webinar series part of the Office of Indian Energy efforts to support fiscally responsible energy business and economic development decision making and information sharing among tribes is intended to provide attendees with information on tools and resources to develop and implement tribal energy plans, programs, and projects to highlight tribal energy case studies and to identify business strategies tribes can use to expand their energy options and develop sustainable local economy.
Today's webinar will build knowledge related to the operation and function of the electric power grid in organized markets, essential subject areas for tribes who are interested in developing energy projects and selling energy into the wholesale electricity market. The intent is for the webinar attendees to gain knowledge of transmission markets management, ownership structures, transmission planning and operations, and fundamentals of the power grid.
We hope the webinar series is useful and we welcome your feedback so please let us know if there are ways we can make the series better. With that I'll turn it over the virtual floor to James and welcome Al and hope you enjoy the webinar.
James Jensen: Thank you Lizana. Our guest speaker today is Alan Austin. Al is a technical lead in the Western Area Power Administration or other ways known as "WAPA," Power System Office located in Phoenix, Arizona. He has worked in the energy business for the past 34 years and has spent time in both public and private sectors. He spent the early part of his career working in the distribution layer side of the business, but then shifted his focus to the transmission generation and marketing side of the business where he has spent the last 20 years. One of his current responsibilities has been to keep abreast of the rapid changes that are occurring in energy markets and to identify possible impacts to WAPA and its customers.
So with that I'll bring up Al's presentation and he can dive in for us.
Al Austin: Well thank you very much Lizana and James. I appreciate the opportunity to present, make this presentation and I'm excited about this opportunity to share some information about energy markets and what's going on in the energy landscape in the United States.
As James said I've been in the energy business for a number of years now and it's been really interesting to see the evolution of where we were back in the '80s to where we are today. It can be somewhat daunting because depending on where you stand oftentimes our only interaction with the power company is when we pay our bill and we look at our bill and, "Okay I've got to pay that." But once you start looking at your bill it can be kind of daunting, it's "What are all these charges for?"
Then you're driving around and seeing the wires and wondering, "Well how does that all work?" I think my goal today in talking about energy markets and the power grid is to hopefully simplify some of those things, these concepts and to educate so that you as tribes as you work your energy plan can go about in it from a point of knowledge and we can hopefully erase and eliminate some mystery to the whole negative process.
So with that what I'd like to start out with the next slide is I wanted to kind of give you an overview of WAPA and what we do. So as James said I work for WAPA which is Western Area Power Administration and we're a federal agency. We are under the Department of Energy. What we do is we market, transmit, and delivery low cost federal reliable hydropower to federal entities and preference customers. We've got over 700 customers. Our customer base is made up of co-ops, public power entities, irrigation districts, a lot of tribes and so forth. Next slide please.
What we do is WAPA is one of four power marketing administrations in the country. So we've got BPA up in the Northeast, WAPA kind of in the Midwest and West and then SWPA and SEPA. Next slide please.
So our service territory, our customers are really our customers here at WAPA are located in 15 of the western states. We're divided up into you know 5 different, 4 regional offices and then 1 management center office. So we've got things kind of split by region.
We operate 56 hydroelectric power plants. We've got 10,000, almost 10,500 megawatts of installed hydroelectric capacity that we market our energy from. We also operate and maintain over 17,000 miles of high voltage transmission lines. Next slide please.
So as I said our power comes from various hydroelectric plants and these power plants were constructed under federal authority and they're intended use was they're multiuse projects. Generally what we say by that is a lot of them were intended not only to generate electricity but primarily to reclaim water. Some of the dams that we operate in the desert southwest region that I'm a part of is that we operate Hoover Dam. Its intended use was to reclaim and secure a large secure storage for water. So we work closely with the Bureau of Reclamation who operates and owns and operates the dams. What we do is take the energy produced at these various dam sites and we market it and transmit and deliver it to federal customers all over the west. Next slide please.
As I said these hydro projects are marketed on a project-specific basis. These marketing plans were developed through an intense public process. Part of these marketing plans when the federal government built Hoover Dam they built back in the '30s and then what they did is they developed a marketing plan to say, "Well how are we going to take the energy from this plant and deliver it and who are we going to deliver to," so they developed a marketing criteria.
The market criteria really says how that energy is to be sold and then it actually designates typically some sort of allocation criteria to say, "All right who's going to receive the power and what are the rules for delivering it?" One of the requirements it's not intended to serve a hundred percent of any customer's total load. It's only intended to really be a supplemental supply of energy for these customers.
But each of the projects was built on its own, has its own accounting, has its own structure, and has its own marketing plan. So they're treated very separately, but then we integrate the energy together operationally and make those deliveries seamlessly to the customer. Okay next slide please.
So some of the services that we provide at WAPA to our customers and you can look at us as kind of a utility if you will, the only difference is we don't really have a lot of native load if you will. We don't have a lot of residential loads that we serve. We're really more of a wholesaler. So we generate the electricity, wheel it across transmission lines and then drop it off to small utilities who in turn serve those customers. But some of the services that we provide is we provide supplemental energy procurements.
As I said some of your customers you know we deliver their federal hydro power, but many of them have come to us and said, "Can you help us procure additional energy, because the energy you provide to us as an allocation from that federal hydro project doesn't cover all of our load needs?" So we will assist them in making supplemental energy procurements.
We do contract negotiations, we provide scheduling services. We help them manage their resources and help optimize those. We do demand forecasting. We have people that monitor the grid 24/7 and we're constantly looking for opportunities to reduce costs. Then we do a lot of planning and that's on a short, mid, or long-term basis. So we kind of provide a full suite of services to our customers. Next slide please.
Does anyone have any questions about what WAPA does? If not we can just move on.
James Jensen: Yeah so raise your hand if you have a question and I'll unmute you. Al I do have one question for you. So it's been pretty dry here out west this winter, is that going to affect how WAPA provides energy to its customers?
Al Austin: Yeah that's a great question. There is really a direct relationship between the hydrology or the supply of water or the level of water in the lakes and the amount of energy that we can produce. So we're constantly – we coordinate with the Bureau of Reclamation who handles all the water. So what the Bureau does is they take care of any of the water deliveries. Then what we do is it's really dependent on how a particular hydro project has been marketed.
What I mean by that is let's take Hoover Dam, the Boulder Canyon Project. That project has been marketed as a capacity contingent product, which means that the contractors, the customers are entitled to get 100 percent of whatever the dam is capable of at any point in time. But that capability of the dam is going to vary. It's varies from time-to-time based on the lake levels. So Western or WAPA has no obligation to deliver anymore than is available behind the dam.
There are other projects however where we do forecasts out and we forecast how much energy we think we're going to get off of the project or off of the dams and then we let the customers know when we allocate to them a certain amount of energy. And assuming that our forecast is good we may or may – so we may have to end up either buying or selling energy to make-up for those obligations to kind of supplement. So we try our hardest for forecast but it really depends on the project.
That's a great question.
James Jensen: Interesting, thanks. So we haven't had any other questions comes in so let's just move on. But audience I encourage you to ask questions as they come up, because we only have one presenter today so it can be an interactive as possible; let's make it as valuable as possible.
Al Austin: All right what I wanted to do today was I wanted to provide you an overview of the electricity supply chain and kind of where you fit in. Talk about energy availability and affordability, because those are really two things that really affect markets. Then we're going to talk about just some energy market basics. Then we'll discuss maybe some – talk about opportunities for the tribes. I've got some resources pooled together that maybe I can, that I'll provide to you as to where you might go to get some help. Okay? All right next slide.
James Jensen: Let's just stop here a second Al I just got a question come in.
Al Austin: Okay.
James Jensen: It says: "Can individuals tribes be WAPA customers?"
Al Austin: Yes. In fact we have a number of tribes who are federal hydro recipients for our various ______ [audio break] projects. So yes an individual tribe can be a WAPA direct customer and we've got many tribes that receive federal hydro power.
James Jensen: There's a second related question: "Is all of WAPA's power allocated or are you still seeking customers particularly in the Southwest region?"
Al Austin: All of it is currently allocated. We just went through a remarketing process for Boulder Canyon through Hoover Dam and that concluded on – and those new contracts went into effect October 1, 2017 and we added I believe 32 new customers and took some of the existing capacity and kind of parsed it out. I think Parker David Project or the Chris Project is going to be remarketed sometime within the next five years, but it's not a regular thing. These allocation processes are very timely. When we allocate them those contracts are usually like 30-year contracts, so they're very, very long term.
I think like I said the next ones that are coming up will either be the Parker David or the Chris, but it's in a few years out. I don't really have, I don't know that for sure. I don't know the date specifically.
James Jensen: Great, thanks Al. Sorry to interrupt.
Al Austin: No, no that's fine. Okay next slide.
I really wanted to kind of kick things off today and really talk about the energy industry and kind of what's going on. There's a lot of stuff going on today. If you're at all aware and you're kind of watching what's going on I mean there's just a lot of news about utilities, markets, things that are going on.
Some of the things that I just put down here I listed some bullet items of things that have been kind of going on in the last couple of years. In California they've implemented an Energy Imbalance Market a few years ago and that's really been expanding. So you've got a lot of people out west that are kind of joining into the marketplace and so that's really picked up a lot of speed.
You've got other utilities in the west who are exploring other market options and we're going to talk about that a little bit more later on and I'll show you some – I'll give you some information about what's going on out in the west.
In California again there's Community Choice Aggregation is expanding. What Community Choice Aggregation means is you've got big blocks of customers, whether they're industrial, commercial customers are banding together and then going to their utility and saying, "Look we want to procure our own energy and deliver it on your wires." What they're doing is they're aggregating all of their demand, their consumption, and they're going out and making purchases on behalf – they're taking control of their supply and they're entering into contracts and then the utilities are delivering that energy and taking care of the wires for them.
So it's really kind of shift from the old monopoly utility model where the utility did everything from start to finish. So we're going to talk a little bit more about that. But that's really pushing this old historic utility model is really being pushed and things are expanding.
You've got whole prices for solar and wind energy are now become – are now comparable with natural gas. Five, six, seven years ago they implemented or Congress instituted tax credits for solar and wind. Obviously you're aware that they're just been a huge influx of solar and wind construction not only on the retail side, you know solar on rooftops solar and that sort of thing, but also on the utility scale projects. Now with those subsidies the whole prices for that solar and wind energy have been really now come down so far as to be directly competitive with natural gas and other forms of supply. So it's really created a lot of opportunity for those resources.
In Las Vegas you've got casino who've gone to their host utility, NV Energy, and they've paid – they've determined that they wanted to again be their own supplier of energy and just use the utility's wires. So the utilities said, "If you want to do that that's fine, but we are going to charge you a large exit fee to capture some of these stranded costs that we have." So these casinos literally pay tens of millions of dollars just to pay-off the utility so that they could then retain the rights. So there's a lot of people wanting control.
There's expansion of wind and solar supplies in California. It's really posed operational challenges. The grid operators, the people that run the system are constantly looking for new technologies to integrate these renewable into their system.
At the end of the day what's happening is people really want choice. They want to choose who their energy supplier is going to be. They want to take control over their energy consumption. What's happening is and it's because energy represents such a significant portion of people's budgets. And whether that's a retail consumer or a business or an industry energy is one of the largest costs to run a business and especially – in some businesses it's actually the largest cost and so people are very, very – getting to be more and more savvy about what they can do to control those costs and control their ______. Next slide please.
So you might say to yourself, "Yeah, that's really interesting, but what does I mean to me?" Well next slide please.
What I wanted to do that depends on where you fit into the energy supply chain, okay? We're all consumers, we all consume energy, but really it depends on where you sit. Do you self-supply your own energy? Are you a tribal utility? Do you have any co-generation on your tribal lands? Do you take transmission service from your local utility? Is your load residential, commercial, industrial? It's like who are you and how do you fit into the energy supply chain?
Really all these issues and all of this variance in what's going on in the energy industry may or may not have impact, but it really is dependent on what your situation is. Next slide please.
So what I'd like to do is let's talk about what are your energy goals? What do you want to do as a tribe as an energy consumer? Is your goal to be more responsible and informed consumer? Do you want to maintain long term price stability? Are you looking for supply assurance? Is one of your goals to be more environmentally conscious? Or are you looking to generate revenue and jobs?
I mean so really it really comes down to what are your goals when it comes to energy? And really if you don't have well defined goals then my recommendation to you is to develop an energy plan. Because if you don't have energy plan then you're just going to be left to beck-and-call of the utility. So I know DOE has a lot of resources dedicated to assisting tribes in helping them develop sound energy plans. So if you don't have an energy plan I would suggest that you reach out to DOE and the tribal office and see what you could do to get an energy plan in place, because they can help you answer a lot of these questions so that you can kind of get a plan together to know you can be proactive instead of reactive. Okay next slide please.
So what I wanted to do now is I wanted to really kind of talk about electricity in general and then talk about the supply chain. So the interesting thing about electricity is that it requires really a physical path or the wires to move from one place to another. Unlike the phone business there is no wireless electrical network yet, okay? So electricity requires a physical connection from the point at which it's delivered or generated to the point at which it's consumed.
Storing electricity at least on any large scale has been impossible, just has been really impossible up until the last few years. What we're seeing now is that large energy storage, battery storage projects are really popping up. Energy storage is one of the hot sectors in the power business because it's one of the new technologies that really shows a lot of promise. So utilities are putting in battery storage installations to help them manage their loads and resources and it provides them a clean, renewable resource that they can use to operate the grid. So that storage is actually really picking up some speed.
The physics of electricity require a constant balance between supply and demand or really bad things can happen. So we're going to talk about that. When we talk about the grid we have people who consume electricity by just plugging something in, but there's people out there whose sole focus is to assure that the power is flowing and that the supply and the demand is constantly in balance; lines are not being overloaded, power plants are doing what they're supposed to, and that energy we can maintain a constant, reliable supply of energy.
Another thing about electricity is that producing it and all of the necessary infrastructure to deliver it is really a capital intense effort. These are not insignificant costs. To build a natural gas power plant today is on the order of $750 million. To put in a nuclear plant you're looking at just billions. Even a large-scale solar and wind plant it's certainly a lot cheaper, but there's a lot of costs that go into producing whether it's a dam, a natural gas plant, a wind farm, or solar installations. Because not only is the actual generator that gets produced, oftentimes you'll need transmission lines and infrastructure to deliver that electricity to the grid.
All of that infrastructure is very cost and capital intensive. So utilities historically have been the ones to make those investments. What we're seeing is kind of shift away from the utilities to private capital. But the fact of the matter is those kinds of upgrades and modifications and things are very, very capital intensive. Next slide please.
All right so to understand electricity today you have to take a step back. I took these pictures, well I didn't take them, but I got them off the internet, but I thought they were really interesting because these are representative of how electricity was – how thing really looked around the turn of the 19th Century. So it was right around 1890 and 1900, this is New York City.
What was happening at the time is electricity was very new and so you could generate and there was a big war between Edison and Tesla between alternating current and direct current. I won't go into the boring details of all that. But at the end of the day what happened is they determined that alternating current was the best technology to deliver electricity. So what they did is it became very competitive. As I said you had a multitude of suppliers rushing in to deliver, to create and deliver this new commodity to all of these consumers, whether they're businesses, residences, apartments, whatever. So what you ended up with was this and as I said in order to deliver electricity you have to have a physical connection between the consumer and the supplier.
So what you ended up with initially was just this myriad of wires, because every different supplier had to build their own wires to get from their supply, from their generator to the consumer. So what happened is it soon became evident that it was just from a logistical perspective it was really nightmare to be able to – it wasn't feasible to have all these various suppliers basically trying to supply individual customers here and there; it became just a nightmare.
So what happened was this is what drove the industry to finally to restruct, to get restructured into what became the vertical integrated utility structure. That is the utilities went to the government and the regulators and said, "You know what we will allow you to regulate us but in return what we're looking for is we will assure – you give us a particular geographic area that we serve and we will provide the full spectrum of services. We'll generate, we'll own and operate the wires and we'll deliver. We'll make sure that that energy is delivered to the consumers and we will subject ourselves to your regulations and that way we eliminate all of the duplicity of effort and infrastructure. In return what we simply ask is that we are able to make a reasonable return on what our costs to do business are." That's what really started around 1900 or the early 1900s.
That model has been in place and is still in place today. It's interesting because that's kind of how we ended up with the standard utility model or this what we call "a vertical integrated utility." That is a company that does everything and has a discrete set of customers that it provides energy to, okay? But this is the reason it started was it was a nightmare and in response to that the government stepped in and said, "Okay we need to do something." So they implemented regulations to kind of control service territories. Okay next slide please.
That kind of gives you an idea, this helps to kind of lay the groundwork to know how markets, where we are today with regard to markets.
So let's talk about the power grid. Really as I've been saying the power is generated in a number of different power plants and those power plants can be are fueled by nuclear, by various fuel sources. That power then is transmitted generally over long distances especially out west, over long distances on high voltage transmission lines. It's usually brought into population centers, cities, towns, those areas, urban areas and then it's distributed through a lower voltage distribution system and then it's delivered to businesses, homes, residential, commercial, industrial users and those types of things.
Out west the proximity of power plant to load or demand is very, it's far away. So it's very common out west to have hundreds of miles between a power plant and the load that it serves. That's for good reason, because nobody wants a coal plant in their backyard and they were built way out in remote sites and then hundreds of miles of transmission line were built. Out east a little bit more concentrated and dense, but still the concept is still the same. It's produced in a power plant, wheeled across transmission lines and then distributed and consumed. Okay? Next slide please.
So this power grid really is kind of similar to our roadways. The high voltage transmission system is like our interstate highway system. So if you think about it it's the high voltage lines connecting these power plants to the load centers is much like our interstate highway system. Then at some point you hop off the interstate and the distribution system would be much like our city streets. It kind of – the traffic gets distributed out to individual residences and so forth. So it's a fairly good analogy there. Okay next slide please.
So what about this supply chain and where do you fit in? So the way I like to look at is on the generation side is really the supply. That's where the actual commodity is being produced. Then we take that commodity and that megawatt or that kilowatt of energy and we push it out onto a transmission line, wheel it across this transmission system and then step it down and then drop it off onto a distribution system where they ultimate load or demand is consumed.
So most of the utilities, these vertical integrated utilities were responsible for all facets of that supply chain. So historically they've been the ones to go out and construct the power plant and own and operate them. They've built transmission lines that they own and operate so that they can then deliver this energy to this discrete set of customers that were located in a geographic service territory.
That's the way the utilities have operated up until probably the '80s and '90s when markets began to get deregulated and we saw a splitting up if you will. But probably 60 percent of the country is in markets, but about 40 percent still operate in this integrated utility monopolistic if you will model. Okay next slide please.
So does anyone have any questions about the supply chain or anything I've talked about thus far?
James Jensen: Yeah please raise your hand if you want to ask a verbal question. In the meantime Al we do have a few written questions that came in.
Al Austin: Okay.
James Jensen: We're going to go back. So a follow-up question related to tribes being customers of WAPA, it says: "Can you only buy power from sources within your region?"
Al Austin: It really depends as I said it really depends on the marketing criteria. Because each of those federal hydro projects has a marketing plan that it operates by. And within that marketing plan actually determines what criteria are used to determine how that energy is going to get allocated.
So you may or may not have to live or be in that specific region or not. But if you're not you may be disconnected from where that federal project actually can deliver. You're still going to have to make arrangements to move that energy from if you're not physically connected, if you system is not physically connected to the federal transmissions system they you're going to need to make arrangements to move that energy from the federal transmission system to wherever it is you are. Those arrangements that would be up to the customer to make and that would go into all of the – they'd have to factor that into their decision processes to the economics of whether or not that federal hydro allocation would make sense to them.
James Jensen: Gotcha. So a related question I think would be: "How does an entity know that there's an opportunity to potentially procure this federal hydro? Is there a central database or how are potential customers informed?"
Al Austin: Like I said any time these projects go through their remarketing process, which occurs very infrequently there is a federal – there's postings on the Federal Register and there's a public process that is gone through. So yes there is a process. I think probably the best thing to do is I know WAPA you can go to WAPA's website. You can contact them and ask them and have them – I think the best thing to do would be to contact WAPA. If you want to send me an e-mail I can put you in touch with someone here. Probably the best thing and depending on where you are whether it's WAPA or SEPA or SWPA, any of those federal power administrations we could put you in touch with somebody from that federal power administration who then could provide you at least the answer as to when the next remarketing of their federal hydro might be. And that's the key question and I don't have that answer, but I could certainly get you connected with someone who could answer that.
But it is a very long term process and it doesn't happen very often like I said because the contracts are you know 30-year contracts and 40-year contracts, they're very long term.
James Jensen: Understood. Thanks Al. So for the audience Al's contact information is available on the last slide of his presentation. So we'll pause there and you guys can write his e-mail down if you want to reach out to him.
Another question: "What are the Las Vegas casinos that are leaving NV Energy?" Excuse me, "Where are the Las Vegas casinos that are leaving NV Energy getting their electricity from?"
Allstate What they're doing – that's a really good question. So what they've done is they have hired a company who is a wholesale energy marketing company and what they've done they've hired them to go out into the wholesale energy marketplace and purchase energy on a long-term basis and then facilitate the delivery of that energy and they just drop it right off their at Nevada Power and then Nevada Power takes that energy and pulls it into their system to serve the casino loads. They just pool it with all the rest of their energy.
So there's companies out there that there is a wholesale energy market that trades everyday for the next day. So there's people out there who trade it not only an hour ahead, a day ahead, but there's also people who are trading energy in what we call the "term market" or the "forward market." So it's an active wholesale commodity market for energy.
What the casinos did was say, "We want somebody to do that for us, rather than NV Energy because we think we can control our supply." They were really very concerned as well about going green. So they said, "Well if we take over the procurement side of it then we can also control how green that energy is, rather than leaving it to NV Energy." So there's a third party that they went to who's doing all of their procuring for them.
James Jensen: Gotcha. Another related question and this: "How do the casinos know the scale where it's a good deal to choose their own energy market?" So I think it's based on how much consumption they have. At what point might it make sense to you know procure your own energy? Do you have any sense on that?
Al Austin: Well and that's a good question. So I think really what it amounts to is what they've said is they've looked at their bills and I don't mean to simplify it, but I mean really it's a matter of okay… Most of your utilities now is you know they have broken out their rates and they've said, "Okay so what am I paying per kilowatt hour for my energy?" I think what the casinos have done is you know these guys are huge consumers of electricity you know? They are some huge, huge loads. So what they've done is said, "Look if I can drop my cost per kilowatt hour just a penny or two cents the difference is phenomenal, it's huge."
So what they did is they just basically compared the rates that they were paying to NV Power or NV Energy and they simply said, "All right well this is what I'm paying for them to supply it, I'm not out there going to – I can out into wholesale market and for that same amount of energy I can get it for X and yet Nevada is charging why? I think I can do better or at least as well but I will maintain control." They've just done the economics and said, "You know what…" They think they can buy in that wholesale market cheaper than NV Energy can supply it on their own and so they're taking on that risk. They feel like they've made the decision that it's worth the risk to do that and so they've done it.
They're not alone. There's a couple of them there in Las Vegas, there's one up in Reno that's doing it. That's what those – the Community Choice Aggregators are doing in California as well. You've got these large blocks of load and consumers that are saying, "I think I'll go and buy it myself and just use your wires." So that trend is really caught on. It doesn't happen real fast, but it is happening.
James Jensen: Thanks Al. I did get something from the audience that maybe you can address. It says: "The WAPA remarketing date is 2028, once a decade. So the 2028 will actually start in 2030. Is that an accurate representation?"
Al Austin: It could be. It would depend on which, what the project is, yeah and that sounds reasonable. I don't know what project that is, because like I said we run, we operate a lot of different federal hydro projects so undoubtedly there's probably one that's up to be remarketed in 2030 and so they're starting in 2028 the process for going thorough that remarketing process, so that sounds right. But like I said it's very much a project specific process.
James Jensen: Okay. Another thing that just came in. It looks like we have a list of the remarketing dates for all projects. So if an individual is really interested just send the question and after the webinar we can forward you that list. You know we won't go through that list on the call today, but I can e-mail it to you if it's applicable. So just if you're interested in seeing that remarketing list timeline just submit a question and we'll make sure and get it to you if we have that information.
Another question: "FERC Order 841 changes the value from avoided costs to locational values. Who determines that number?" So you probably need to clarify that question Al if you can.
Al Austin: Yeah and I'm not familiar with that Order so I don't know that I can. Yeah I don't know that I could really respond authoritatively to that.
James Jensen: All right sounds good. Another question: "You mentioned about the AC, which is preferred, so could you explain why AC power was considered preferable to DC?" I think it's a little bit of a personal preference kind of thing but go ahead.
Al Austin: Well I mean DC has its application, but the big limitation with DC power is distance. It's very, very inefficient for transmitting that electricity over a long distance. That's really the main driver. Where the alternating current is much more robust and so you are able to pump up the voltage and take that voltage to push it down the line. So it really becomes an issue of if you're going to move – AC is able to be moved across longer distances significantly more efficiently than DC current and that's really it in a nutshell.
DC current is still has its place. I mean we use DC current in all of our substations and that sort of stuff. DC circuits are used on a lot of stuff, but for the transmission of electrical current over long distances it just doesn't lend itself; it's limited.
James Jensen: All right one more written question here and then I don't see any hands raised but feel free to raise your hand if you have one. It says, "Who pays for extending power lines onto tribal lands. Do public utilities have an obligation to provide service where there is none?"
Al Austin: That's a really, really good question. That's something that I think would – that's a really good question. It really comes down to a couple of things. I think who the utility is that serves your area and then and from a legal perspective I really can't speak to that. I don't know what law, how the law is stated. But I mean at the end of the day it really comes down to whose service territory covers the reservation. Because ultimately that's the first place that somebody would need to go is to say, "All right well whose service area am I located in?" All right, "What are their policies about new construction?" "What obligation do they have to build?"
It really depends. I don't know I could really answer that. What I do know is that that's part of what the Power Marketing Administration's really goal was is to kind of bring electricity out to these residential or excuse me to these remote areas. A lot of our transmission system goes out to fairly remote areas in an effort to electrify the west if you will. That was the intent years ago. But WAPA is not like I said we deliver kind of at a higher voltage, we don't have any end use loads that we serve. We drop off other utilities and co-ops and irrigation districts and the like. Those are the guys that would really be the ones to be able to answer that question in terms of what it would take to bring service into an area that's not served presently.
James Jensen: Gotcha, thanks Al. There are a couple raised hands so Leeann I'm going to unmute your line here and you can ask your question.
Okay you're live. Leeann do you have a question? You're live mic if you want to ask it. All right we can't hear you so I'm going to mute your line again. I'm going to go onto Frieda. Leeann if you want to ask your question again I guess type a written question. Rita unfortunately
Audience Member: Can you hear me?
James Jensen: Oh yep your line is now live, yep you're live.
Audience Member: Okay great. I am with the Childhood Administrator for Lumbee Tribe. We currently don't have a power project, but we are interested in looking at developing a project. Because we are state recognized just trying to understand if Department of Energy can work with us or do we need to work with just the organization WAPA? We have a potential for a solar project and a potential – we are currently doing, engaged in a dam repair project and there's some potential for a hydro power project.
Al Austin: Mm-hmm, where are you guys located?
Audience Member: In North Carolina, Southeastern North Carolina in Pembroke.
Al Austin: Okay. So I think you would be in SEPA, Southeastern Power Administration.
Audience Member: Okay.
Al Austin: So you're outside of – yeah and what we could do is that's what I would do is there's a – on my slide I showed you that there's four different power administrations and I think SEPA, yeah so SEPA I believe is the PMA that's over your geographic area, but don't hold me to that.
Audience Member: Okay.
Al Austin: I think SEPA though falls in there. So that's where I would start would be first of all find out if Southeastern Power Administration is if you fall into their geographic area. Then do they have any federal projects or federal hydro projects that they're currently operating and then what services do they provide?
Audience Member: Okay great.
Al Austin: That would kind of a regional level. Obviously you're going to need to be in discussions with your local utility. Are you guys your own utility? Do you have like a co-op or utility that you currently take service from?
Audience Member: Well our tribal territory operates under two different utilities.
Al Austin: Two different utilities, okay, okay, all right. So obviously you know that relationship is super important. You know the more you understand about how they operate and how you fit into that you know the better off you're going to be.
Audience Member: Right.
Al Austin: Then the other thing is I know that DOE does have resources there and available to provide assistance both technical assistance in projects develop, those kinds of things, but yeah there's plenty and I would reach out to the DOE Tribal Energy Office to have a conversation with them.
Lizana Pierce: So Al?
Al Austin: Yeah?
Lizana Pierce: This is Lizana, hi how are you?
Audience Member: Good.
Lizana Pierce: Typically by statutes I mean our focus is federally recognized tribes, but you're welcomed to call me directly and we can see you know what resources are out there, there's quite a bit.
Audience Member: Thank you.
Lizana Pierce: So please feel free. I think James can probably get you my contact information.
Audience Member: Thank you very much.
Lizana Pierce: Okay, thank you, bye-bye.
James Jensen: Yeah I'll do that Frieda. I'll send you Lizana's information.
Audience Member: Wonderful, thank you.
James Jensen: All right so as far as raised hands Frieda I'm going to mute your line now, just FYI.
Audience Member: Thank you.
James Jensen: As far as other raised hands I don't see any. We do have a few more written questions that came in and let's see if they're in your wheelhouse or not Al, but if they aren't just let us know.
Al Austin: Okay.
James Jensen: "What regulator do you think is critical for future peer-to-peer transactions on blockchain?"
Al Austin: Wow. Boy I don't know that I can answer that. I'm not that familiar with that at all so I'm going to defer.
James Jensen: Okay.
Al Austin: I'm definitely not _____ [audio break] regulatory side at all.
James Jensen: Yeah I gotcha I think that's a pretty new area that I don't know anything about really, but yeah. Maybe a different webinar potentially in the future.
Al Austin: Blockchain stuff is pretty interesting.
James Jensen: Yeah.
Al Austin: Go ahead.
James Jensen: Another question: "What do you think of the trend of DC-enabled appliances and eventually we won't need transmission and rely on distributed energy sources?"
Al Austin: Well that's a good point and I think that's kind of one of the shifts that's going on now is they – right that's one of the things that's really pushing the energy industry right now is historically like I said you know a generation has always been located far away from the loads and that poses challenges operationally, because you've got long transmission lines that are expensive to build to operate those kinds of things.
What they're finding is one of the things that's being looked at is what they call "micro-grids," where the theory is, "Let's create sources of generation sources that are more modularized, more compact, are smaller and move them closer to the loads." You're seeing that you know rooftop solar if you will is really a trend in that way in that it allows a consumer to self-supply, okay? But they're also looking at other ways that, "Okay, yeah I put a solar panel on my roof, I can self-supply." I think they're also looking at ways that we can create other, provide other ways of generating electricity and moving it closer to the loads for reliability purposes. It's easier for if your generator supply is right there in your neighborhood well then you're not subject to a blackout if that large transmission line is damaged in a storm.
So those are the kinds of things that you know there's been a lot of activity and looking at how they can evolve and how they can modify their approach. But the challenging thing in the energy business is nothing happens quickly and as I said earlier these are capital intensive projects. Any type of change it can be very capitally intense. Then it's a matter of, "Well okay so who pays for the generator?" "All right who's responsible for operating it and maintain it?" "Who's responsible for making sure that it runs reliably?" "Where do we put them?" "What do we charge for them?" "Who pays for it and what rate?" So those are all things that it's where trying to get the technology to mesh in with the regulation and the regulatory side of stuff.
But I mean it's a really good observation. I think people acknowledge that the closer you bring the generation to the load that you're eliminating quite a bit of risk and it makes it operationally a little bit easier. But then you know so it's certainly something that's being looked at. I just don't know how fast. Things are moving though. The demand side, they call it "demand side management" technologies are picking up steam as well to where you could have the local utility kind of control the demand side of things for a reliability perspective.
But I'm going to actually get into reliability in a little bit here in just a couple of slides and we can talk about that some more.
James Jensen: Great. That's all the questions at this point Al so ______ [crosstalk].
Al Austin: Okay, awesome. So like I said what I wanted to talk about now is there's really there's two competing demands that affect the supply chain when we talk about electricity. One is reliability and that's the demand for that, reliable, safe, and constant supply of electricity all at the flip of switch. You know I want to be able to walk over there, I want to plug in my charger or I want to turn on the light and I want that power, I want light to go on and I want the electricity available to me 24-7, 365 days a year. I want a reliable, safe, and green supply of energy.
But then there's the economics and you say, "Okay but I want it to be affordable, least cost, and I want it to be affordable and the least cost. So those two drivers oftentimes are at odds with each other. There are certain costs. So the energy business is constantly trying to balance between the demand for that affordable and least cost and making sure that it's reliable, safe, and is constant. So those are two drivers that constantly rear their ugly heads if you will when you talk about electricity. Okay Next slide please.
So let's talk about reliability, the first one. You know and this really comes down to, "So who's operating the grid?" When I talk about the "grid" if you remember that slide of the energy supply chain, the grid is all of the generators connected to web of transmission lines that are further connected to all of these distribution wires delivering energy from generators all the way down to consumers. So that grid has to be operated. Like I said earlier electricity requires that there will be a constant balance between supply and demand or bad things can happen and it's really true.
So there are people who are monitoring the flow of electricity, that are constantly monitoring generating plants and how much they're producing, the flow of electricity on this web of transmission lines and then they're constantly monitoring these loads or the demand of how much is being consumed and they're constantly balancing and trying to keep the supply and the demand in balance on a second-by-second basis, because it's a constant dance this balancing act. There are people doing it right now somewhere on your systems and mine that are making sure that that balance is there so that when you flip a switch on the power is flowing and it's good.
In order to do that and that's a big deal, it's something that we really take for granted, but it's really something that's a complex process and there's a lot of energy figuratively speaking being putout to make that happen.
There was a big blackout in 1965 and so as a result of this massive blackout in the Northeast people said, "You know we really need to have, we need to take reliability a little bit to the next level. So what they formed was an organization called "The North American Reliability Corporation." It's a private entity that's funded by all the utilities and participants and its charge, its role or its charter was to establish criteria that anyone who was operating the grid had to follow so that they could maintain a standard of reliability, some standards.
So what they did is they developed a functional model that defines all the roles and tasks that have to be performed to ensure that the grid is operator reliably. What they do is they developed and maintain what we call "reliability standards." These reliability standards are the rules that people have to follow if you're going to operate and be a part of this, the grid. What they can do is NERC really makes the rules of the road. What they do is then they turn around and they can levy sanctions against anyone who operates the grid if you don’t follow the rules or if you're not in compliance with their standards then they can actually levy financial sanctions against you. I mean it's that important to them. It's really important just for the good of the common goal that the grid is maintained and operated reliably. Okay next slide please.
James Jensen: Hold on Al just before I move on. Clarifying question here from the audience: "So the grid operator is essentially the DSO plus the TSO? So the ISO doesn't operate the grid is that correct?
Al Austin: No they actually do. That's a really good question. So and I've actually got a slide here coming up that kind of talk about that. But in essence the people who are operating the grid – actually let's go ahead and I'll answer that question.
James Jensen: Okay.
Al Austin: So let me talk about NERC actually has some functional areas that they define. You've got generator owner/operators, transmission owner/operators and service providers, a distribution provider, and then a load serving entity. These are some of the main functional areas that NERC defines. These are functions that functional areas of people who actually interact or have something to do on the grid. Let's go to the next slide please.
One of the main functions when we talk about people who operate the grid is if you look down at the country there's just this web of transmission lines coast-to-coast right? We're interconnected with Mexico, we interconnect up into Canada. There's just this web of generators and transmission lines and then consumers and meters and people who are pulling energy off the grid.
In order to operate it in a cohesive, organized way what NERC did is they said, "Okay we've got to divide the grid up into logical pieces and then put people in charge of chunks of the grid and then set the standards that these people will need to adhere too so that you can operate your little subset of the grid and make sure that it stays in balance."
So what they did is they established what we call a "Balancing Authority." A Balancing Authority is just an entity that's responsible for running a specific portion of the power grid. What that Balancing Authority does is they maintain the balance between resources and loads or supply and demand. They manage the energy flows between their Balancing Authority area and all the Balancing Authority areas around them. So they manage all of the flows on the transmission system. They have to adhere to stringent reliability standards and then they have to assure that ancillary services are in place.
So who are the Balancing Authorities? Well the Balancing Authorities historically have been a lot of the utilities okay, the vertically integrated utilities. You know they have a specific geographic service territory and they've got all the wires, the distribution wires and the meters and then they have transmission and then they also build generators. Well historically those these utilities have been the Balancing Authorities because it just makes logical sense.
So if you go out west, if you advance the slide if you look at the west these are the Balancing Authorities in the west. So these are the guys that are actually operating the grid in the west. Now you'll notice on the left side of the slide there's the State of California is called the "CISO," that's the California Independent System Operator. So what happened out west and I'll explain what happened in California, because it's really indicative of what happened back east as well.
That is historically everyone, all the utilities up until the '80s all operated with their own little service territory. They would plan their generation, they would construct stuff, they'd build transmission lines and they operated their own geographic service territory. They had a discrete set of customers that they were – they had monopolies going, right? I have my service territory. I've got a couple million customers that I provide energy to and my responsibility is to serve those customers' load at a reasonable rate and remember they have struck this deal years ago. They are regulated by the Public Utility Commission who sets their rates to make sure that they're not overcharging. So these utilities also were Balancing Authorities. So they are charged with operating the grid.
Well in the '90s when whole energy markets began to take FERC we went through deregulations and they kind of split up the business and these markets started to form. California was one of the first markets to actually – was the first whole energy market to actually form back in 1997. The way it happened was the three large utilities in California, which was Pacific Gas & Electric, San Diego Gas & Electric, and Southern Cal Edison, three huge utilities all formed together and they went into the California Independent System Operator.
So what they did is those utilities sold off their generators and then they became wires only customers. They basically said, "You know what we're going to operate the wires, the distribution side of stuff, but we're going to handover our high voltage transmission and we're going to selloff our generators and we're going to let the California Independent System Operator now takeover all of the operational duties of running the high voltage transmission system" and they also run a market that they overlaid on top of that. So it's a socialization of the high voltage transmission and generation piece and the Independent System Operator then became the Balancing Authority. So what was three Balancing Authorities became one.
And that model also occurred out east and so you've got organized markets out east, which typically are also regional transmission organizations or RTOs or ISO and they also run as Balancing Authorities, so they do all that reliability responsibilities as well.
So it's a great question. Okay next slide.
So let's talk about just some common utility functions and responsibilities. You know what are these – like I said you know we've gotten to a place where historically everything has been in this at the utility basis, but like in California these markets and regional transmission organization have kind of formed.
Well what are the functions? What functions does a utility whether it's a co-op or an investor-owned utility or a public power entity what are some of their major functions and responsibilities? Well number one they maintain an adequate supply of resources to serve their demand obligations, okay? So that's what they do. They're there to assure that there's an adequate supply of energy to serve all of their customers. They construct and maintain transmission and distribution networks, so the wires. They meet all NERC reliability standards. So these utilities can't just pump energy out into the grid and run willy-nilly they have to adhere. And like I said most of those utilities are also Balancing Authorities and they're also subject to those same reliability standards that NERC sets.
They have to plan for future growth and that's not only from a supply side, but they also have to go, "Okay well do I need to expand my transmission system because my demand or my load is going up?" So they have to plan ahead to construct more transmission, more wires, and more sources of electricity in terms of generation and then work those into their plans. They provide transmission service under a FERC filed tariff. Then these utilities typically they have to establish rates through some sort of regulated process.
So there's just a lot of moving parts you know to what these utilities have to do, okay? So let's go onto the next slide.
So how do the utilities secure a reliable low cost supple of energy? Well what they end up having to do is they've got to do some sort of a – they do forecasts. They have to forecast their demand. You know how energy are they going to consume? What I mean by "they have to forecast," they have to forecast not only what they're going to consume, but they may have also made some commitments to ship some energy to somebody else on a whole market. So they have to – that's all demand or an obligation that they have so they have to forecast their demand.
Then they develop a day ahead plan to meet the energy and ancillary requirements. So then they identify the resources that they have available to meet the demand, which is if I'm a utility, "What's my consumer demand going to be tomorrow and have I sold anything to anybody else?" "Do I have any obligation to export energy outside of my service territory?" "What's my plan to meet my energy and service requirements?" "All right well what resources do I have available to me?"
And the resources that I have available to me as a utility is I may have a fleet of generators that I own and operate that I can then call on to satisfy that demand for tomorrow. So what I do is I have to decide on an hour-to-hour basis what resources I'm going to use to generate the electricity that I anticipate I'm going to consume during tomorrow's, the day tomorrow. So I have to put together a plan and I'm going to economically dispatch all of my generators and I'm going to have to put together a plan to say, "Okay I'm going to use this generator. I'm going to start this generator up at this hour and I'm going to let it run all day and I'm going to start this one up during the morning peak as my load is really picking up." Then I went out and made some purchases because I could actually buy energy on the wholesale market cheaper than what I could actually produce on some of my more expensive resources.
So I have to put together a plan that keeps my costs to serve load as low as possible. Then I've got to be able to make adjustments in real time to account for changes to demand and resources. Some of those changes that I have to be nimble enough to address are I may have a generator that develops a mechanical problem that I have to take offline in the middle of the day. Well I have to balance my loads and resources. So if that unit, if that generator trips offline I have to go ahead and replace that power in real time.
So I have to build all of that into my plan for the next day because I've got to make sure that I'm balanced and that I maintain a constant supply of energy. So that's what I do as a utility and that's kind of a generic thing. But I can either do that as a single utility with my own service territory or I'm an independent system operator like the California ISO or a market and I'm using the market to actually economically dispatch my generators and stuff like that. Anyway let's go onto the next slide.
So what the utilities typically do and what they've done historically is there are two kinds of markets. There's what we call a "Bilateral Market" and that's where if you think back to the slide that I showed you where we had all those Balancing Authorities in the west, each one of those is their own utility and each one of them is putting together their plan for the next day. They're coming up with a plan to how they're going to meet their consumer loads.
Part of that plan says, "You know what I'm looking at the wholesale prices and I think the prices for tomorrow are going to be less expensive than it would be for me to run certain units so I'm going to go out and make a purchase and make arrangements for some other utility to supply me with that energy." And so you put together your plan. Well all of these utilities go out into this what we call "Bilateral Market" and there's a market that run every day for the next day. It's like the stock market.
There's like an hour opening in the morning where the market starts trading starts and then people buy and sell and they make arrangements for the next day. They make these day ahead purchases and sells. So you've got sellers and buyers that are making these transactions so that they can procure energy for the next day's supply.
There's different time horizons. These bilateral markets they're some of them are forward. Like we have people that go out and look at – they'll buy three months at a time and they'll buy for next year. You know there's people out – there's a market that trades for the next year. I can go out there and look at summer '19. You know I can buy an April-May-June product in the forward market for next summer out on the whole energy market. You can go out and commit yourself long-term as a hedge to say, "I'm going to go out…" and so people do that.
There's people that look at just the supply side of things and they're coming up with supply strategies and that's what those casino guys are doing. They're hiring someone to go out there in the forward market and say, "You know what you be our procuring agent. You go out there in the market, the bilateral market and you secure for us a long-term supply." And so they'll go out and make energy purchases for next year depending on whatever strategy works for them.
The transactions are priced at a dollar per megawatt hour, so energy is delivered – when you're buying energy you're buying a megawatt at a time, there's a dollar per megawatt rate and then the energy is delivered to you for one hour. So you by an hour's worth of energy delivered at a particular point.
We have limited sub-hourly volumes, typically it's on the hour, but we're getting into a point where now energy can be delivered in the bilateral market on a half-hour and 15-minute basis.
Contracts are settled directly with the counterparties. So it's just a matter of if you go out on the wholesale market and you offer to sell, I offer to buy, we agree on a price, then that becomes a transaction between us as two individuals and there's a contract that we sign and we're able to get that done.
Now the problem is liquidity can be limited depending on the location. What I mean by that is you may have a certain amount of supply. There may be less sellers than there are buyers at a particular location, meaning supply not in great – you know there's not enough supply to satisfy the demand and so that drives the prices up, but that's the free market. You know that's the economics of the market if you will, it's supply and demand. But there are Bilateral markets who operate daily, hourly, and very much ahead, okay way out there. So it just kind of demands on what your needs are.
But those markets are probably 40 percent of the country operates in bilateral markets and about 60 percent of the country actually of the energy served in the country flows through what we call an "Organized Market." So let's go to the next slide.
So this is just a graphic thing. You know I've got like a demand curve and it's pretty atypical. So you've got your purple line. You know you would plot out, "What my hourly consumption" or my demand and then you would lay in, you would put together a plan to figure out how you're going to serve or how you're going to meet that demand. That can be made up of various generators. You can go out and make purchases to supplement. You can even make long-term purchases that you would call on or you can just buy hourly to kind of on a more refined basis or you can self-supply if you have the resources. So anyway there's a lot of planning going on. Okay next slide please.
So what's the difference between the Bilateral Market and these Centralized Markets, because I think that's like I said 60 percent of the country or 60 percent of the energy produced in the country flows through Centralized Markets and about 40 percent flows through the Bilateral Markets and that's according to the Energy Information Administration.
So as I said bilateral markets you have one party sells to another. It's kind of like buying a car. You know two of us agree, you agree to sell, I agree to buy, we agree to terms, we sign a contract and we make it happen. There are hourly transactions but they're typically poorly matched to increasing amounts of renewable generation. So there's some challenges in the bilateral market when it comes to renewable generation because sometimes that renewable generation isn't there all the time. It's intermittent because of the clouds come over and so it's hard to commit your solar plant – you know there's a disjoint between making a commitment to deliver and then actually delivering and so it gets challenging.
Under a bilateral market you really have fragmented operating footprints and they result in – there's a lot of inefficiencies built in – there's a lot of inefficiencies that result that are in the bilateral market and that is you know typically we're only buying and selling in hourly increments. So each of the utilities then are left to themselves to have to balance from hour-to-hour. So if there's variations in load within the hour and if a unit, if a generator trips offline 15 minutes into the hour then the next hour doesn’t start for 45 minutes, right? And so you may have made a purchase and that energy isn't scheduled to come in until the start of the hour. Well the Balancing Authority or the utility then has to make that up on their own. So they're on the hook to balance their own loads and resources within their own area.
So there's some inefficiencies and challenges there because they're very balkanized and fragmented, okay? But that's the way it's operated and they usually have a broad fluidity and they're able to do that. It's just oftentimes may not be at the most economical fashion.
Then there's limited visibility to conditions on a neighboring systems and that can create some reliability issues. So if all I'm looking at is my Balancing Authority area or my area of the grid oftentimes I don't see what's going on around me, right? So there may be reliability conditions that I need to be privy to which would help me actually contribute to reliability and to make it more reliable.
So bilateral markets can have a certain degree of limiting visibility when it comes to reliability and that sort of thing. Whereas under the RTO Centralized Markets electricity products are really cleared by centralized market operator, it's kind of like the stock market. Transactions are usually the market, what the market does is it does like a forecast. Just like I said the utility has to plan and decide a forecast what they're going to need for the next hour or the next day. Then they have to come up with a plan where they say, "Well what resources am I going to use" and then they're going to economically they're going to use the cheapest first generally and then go to the most expensive and then supplement that with purchases if they can purchase in the market at a price that cheaper than they're next most expensive generator.
Well that's what the central market actually does is it provides a mechanism whereby generators and suppliers can offer all of their generators into the marketplace and the market actually picks and it processes and it facilitates all of those generator resources so that ultimately all the consumers then what the market does is it satisfies the supply demands. It satisfies the demands with the supplies that are offered into the market and it picks the least expensive resource and then compensates the generators.
It does that and it issues dispatches to the generators to say, "Okay you got, I picked you for the next five minutes and I need you to move your unit up a couple of megawatts" and then it also establishes a price based on bids and offers. It's this huge machine that just churns along every five minutes it's creating a new solution to that problem of how am I going to most economically serve that load? How am I going to most economically serve that load? It does the forecast, it comes up with a solution and then it issues the dispatch and moves the units around.
It's automated. It operates on a larger operating footprint, it has diversity, and typically these RTOs and ISOs are also the Balancing Authority. So not only are they using the market to access the most economical supply of generators or energy, they are also using the market to supply them all of the resources that they need to satisfy their reliability requirements of operating a Balancing Authority and that's the key piece. So they're kind of taking care of both of those features at once, all right?
So there's a lot more efficiency involved or there's efficiencies that can be gleaned and realized by centralizing and socializing you know the generation, the transmission; at least that's the idea. Okay next slide please.
James Jensen: Al we have a couple of questions that are applicable here.
Al Austin: Okay.
James Jensen: So is an RTO the same as an ISO or what's the distinction?
Al Austin: They are the same. Those terms are really synonymous. The key to remember is if I'm a Regional Transmission Organization or an RTO or an Independent System Operator it's pretty much synonymous like said. What's happened is when the electrical industry was deregulated back in '97, '98 FERC issued orders that said, "Okay I'm going to try and breakup the monopolies." What they said was – what happened up to that point was there was a lot of the utilities were kind of hoarding their transmission and they weren't allowing third parties to have access to their transmission lines to wheel stuff across their system.
So FERC said, "No that's not good." So they split off the generation side and said, "Okay you've got to separate and the generation side of things, the supply side has to be separate from the transmission side." And that's what they did is they split the two groups and they said, "Okay generation is just supply and that's going to be…" That's what was deregulated and that's what feeds into the wholesale energy market is all these generators, the suppliers, the people that produce.
The wire side is the side of the business, taking it from the generator down to the load. The wire side of the business is definitely regulated. That has been regulated and it continues to be regulated. The reason behind that is they want to provide, FERC's intent is that people, anyone can – that utilities don't hoard transmission capacity. They don't hoard and gobble up all this transmission capacity on their wires for their own use, but they make it available for others. So they're allowed to use enough that they need to serve their own needs, but if they have access capacity they have to make it available for other people to purchase. Then the rates that they charge have to be rates that FERC approves. So there's a whole process for that. So the transmission side is very regulated.
What the RTOs do and the ISOs is they take that transmission system and the transmission owners have really handed the keys over to the RTO and said, "Here's our transmission system you drive it, you operate it, we'll collect the money," okay? They still maintain ownership of it, they still have to maintain it, but the independent system operator, the RTO, operates it and uses that network to run their market on. So the market actually says, "Okay here's my demand side, my loads, I've got this transmission system, all my generators are going to be putting in offered to sell. What are the prices? What's my load?" Then they utilize all that data and they say, "Okay well we can satisfy that requirement." They use the market to actually satisfy the load demands at the lowest cost.
James Jensen: Gotcha. Another related question on bilateral markets, "Who organizes them, maintains them, facilitates that bilateral market?"
Al Austin: Well there's a couple of things. They run I know out west there are trading hubs. There really is no like – it's not like the New York Stock Exchange where there's an organization that operates it. What there is is there's a couple of trading platforms. There's one in particular that's commonly used called "Intercontinental Exchange." It's just a computer trading platform that people join and then you have to kind of get cleared and you get setup.
It's kind of an industry facilitated market. People just have kind of gotten together and they've got enabled with each other and said, "Okay well this is when we're going to run the market" between this time and that time and then people simply they've agreed on, "Well here's certain places that we're going to trade at." They are typically large switch yards and play common receipt and delivery points on the transmission grid.
Out west they operate – they trade day ahead every morning, Monday through Friday. Then in real time there's different people – so there's really a day ahead market is facilitated with an online trading platform. The forward market is a little bit different in that some of it happens on that platform, but a lot of times people will go out on the forward market and what they'll do is just issue like an RFP and they have a list of potential suppliers and a potential buyer will distribute, they'll issue a request for information or they'll go out and put out a request for a proposal if you will and they formalize that request saying, "I'm interested. I am company X, Y, Z I am interested in procure and buying so many megawatts of energy for this period of time, this product at this delivery point for…"
Then they publish that. They'll put out an e-mail and send it to all these suppliers. Then it will say, "Okay please submit your offers by this date," you know it will be usually like the next day or two. So there's an RFP process that you go through. Then some people – so there's a lot of different ways that deals get done. But it just happens and there's a lot of that bilateral activity is happening out there.
James Jensen: Great. All right well let's move on we're getting close to the end of the hour or the end of the two hours I should say. Although Al if you do have time we can probably run a little bit late if you're able too.
Al Austin: Okay. All right next slide.
Well here are the RTOs in North America and like I said these are the regional transmission organizations that are in North America, all right? Anything that's colored is an RTO and they've been around since like I said the California was from 1997-on and then the other ones have kind of come along thereafter. Anything that's in white, which is predominately the majority of the west and the southeast those actually operate in the bilateral market, so those are utilities that are just standalone utilities and they're not under an organized energy market or an RTO, okay? Next slide.
How is a centralized market different than what we have now? Well this is kind of a repeat of kind of what I told you before I got ahead of myself. So on the left this is how things occur without a market. As I said each BA has got to balance their own loads and resources within its borders. So you're very autonomous. You're focusing on balancing your own loads and resources.
Whereas on the left or on the right in a market the market dispatches resources across the BA boundaries or within the market footprint to balance the energy. So it really gives you enhanced situational awareness, more flexibility, it allows you to do stuff on a more refined basis, on a five-minute dispatch than on an hourly dispatch. It kind of decreases your integration costs and it's economically from a supply standpoint gives the consumer access to – it gives the consumer or the utility, the market participant access to potentially cheaper energy than they would have access to otherwise. Next slide.
So what's an RTO? They're an independent operator of the transmission system and generation resources, but they don't own them. So like I said somebody hands over the keys and say, "You operate it and we'll go ahead and retain ownership and we'll continue to maintain it."
They maintain a wide-area overview of the entire footprint. They operate and oversee a centralized market for energy and ancillary services. They're typically a Reliability Coordinator. Then what they do is they facilitate transmission planning. That's part of that planning process to look at potential transmission expansion. So they're constantly looking out ahead to see where the growth is to see where they need to build new transmission lines to keep ahead of growth and so they kind of facilitate that. Then they also perform market monitoring to assure that people are behaving as they should under the market. Okay next slide.
So what's happening out in California? I said they stood up what we call an "Energy Imbalance Market." They actually have a full two-day market and an RTO going on. But what's happened in the west is there were a lot of companies, there's 37 Balancing Authorities out in the west and a lot of them have tried to – this idea about they've tried to glean the benefits of operating under a common footprint, but getting there has been very challenging, right?
So as an interim step what California did was okay rather than expand the RTO what they said was, "All right well why don't – we will offer real time energy only. That means we will offer that five-minute dispatch and let people offer their generators into the market and we're going to run a special market hourly just for balancing energy within the hour." They're not going to do anything day ahead and it only is there to balance.
It's therefore as you recall in the bilateral market you buy and sell and you buy and sell at the by hour-to-hour and so what I said was that the Balancing Authorities are on their own beginning of the hour and the end of the hour they have to balance their system within that hour using their own resources, okay? And that can be challenging, it can be more expensive, and it can be inefficient, because they can't do anything else, right, they're left with what they have.
CALISO is so recognized that said, they stood up a market that said, "All right we're going to offer a place where you as utilities and Balancing Authorities can offer in any excess generation capacity that you have to make available to others who may need it during the hour within the hour on a five-minute basis and we will facilitate putting buyers and seller together within the hour." That's what the Energy Imbalance Market does, is that they stood it up and it's really taken off to where they've got a bunch of people who have joined in because they're reaping the benefits of balancing their system within the hour with energy from the market as opposed to energy that they have to self-supply. It's been a real success in terms of growth out west. So next slide, I think I've got pictures of it.
Because there are a couple different initiatives going on out in the west. Because what I really wanted and we're kind of getting close to wrapping up so what I've done is kind of introduced this idea of I've tried to contrast what it's like to operate alone as a standalone utility and a BA and reliability wise and economically. Historically everyone's kind of been balkanized, but what's happened is you know over time since the late-'90s, early-2000s you know about 60 percent of the country has kind of migrated towards these RTOs and organized markets and they've moved that direction, okay?
Well out west everything has been a lot slower and so a lot of the utilities out west have really struggled with trying – they've recognized that there's some value in potentially operating more efficiently. So they've wanted to avail themselves of that benefit, but it's a very complex process. So the CALISO like I said stood up their Energy Imbalance Market, which is one of the initiatives that's really going on out here in the west.
You can see on this map that the California Independent System Operators in yellow, kind of the yellow mustardy color and then all of those other entities that are in orange and a couple in blue are utilities in the west who have joined or have committed to join the California Energy Imbalance Hourly Market. So they've really kind of taken hold and that's really picked up a lot of steam.
Now related though there's some other initiatives that have been going on. We've got some utilities in the southwest, the Southwest Markets Alternative Group which is SMAG and they're looking at potentially you know to see, "Is there a way that we can – do we want to stand up our own market?" "Do we want to form an RTO or that sort of thing?" We've got the Mountain West Transmission Group, which is a bunch of utilities on the Front Range up in Colorado. They've done a lot of work to come up with a common tariff; so they're looking at markets.
Then you've got also Peak Reliability is an entity does all the reliability coordination services for the western interconnection. They've joined up with PJM Connext and PJM is one of the markets from back east. What they've done is joined up together and said they're offering to be, to stand up a market for folks out in the west.
So right now you're in a situation where you've got utilities out west that are very balkanized, they're trying to kind of do stuff together and there's a lot of different initiatives out there trying to satisfy that need and demand so things are constantly changing. So it's really interesting to see where things are at, but there's a lot of changes going on out west. Next slide.
So that said what are some of the opportunities for tribes? I mean after all of that said and done what does it mean to you guys? Well I'm going to go right back to the core what I said really, really early on is if you don't have an energy plan I really, really would encourage you to develop one. Because if you don't have a goal, if you don't know what you're shooting for then you're not going to get anything and you're just going to be – you know you're going to be a price taker. You'll just end up paying whatever they charge.
But at the end of the day you know there's a lot of resources out there to help you develop an energy plan. Another thing is one of the options you can do is explore partnership opportunities with your host utility. Because at the end of the day you're connected to somebody and like it or not you know you're connected. So it's in the tribe's interest to get to know who your utility is. What services they're providing you. Where _____ [audio break]. Do they provide them? Do they procure themselves and then provide them to you?
Then understand where do you fit in that supply chain along with the utility? What role does the utility play and where do you fit? Because you may have things that your utility may want. So when it comes to looking for opportunities to do business it's critical that you understand do you have something that they may want or need and conversely where are their interests and can you come together on those?
But having a plan will help to at least define what your goals are. Then determine well if one of your goals is to reduce your overall cost to consume well then that's something that you could potentially partner with the utility to say, "Well I'd like to negotiate some new rates" or "I did a rate study and I'd like to…" You can be proactive. They may have some _____ [audio break] your goals depending on what those goals are.
Is one of your goals to self-supply? Do you want to be your own supplier of energy? Do you want to form a tribal utility? We've had tribes out west that have formed tribal utilities and have been pretty successful at it and brought a lot of benefit in terms of securing long-term energy supplies, as well as creating jobs. Get to know where you fit into the supply chain and what that means.
Then I think at the end of the day too there's a lot of value in engaging with other tribes. There are a lot of tribes who have done some really, really cool stuff. I mean there's tribes out there that have partnered with developers and built large utility scale solar projects and other tribes who have just put in like community scale solar projects to secure – you know to reduce their overall costs and other tribes that are really at the outset just trying to bring electricity to all their tribal members.
I mean there's a broad spectrum of experience out there. But I would say you know engage with the other tribes, engage with the Indian Tribal Office. There are a lot of resources available to you to help you even develop a plan and then to help you execute on that plan. ______ [audio break].
The opportunity to present to you guys. I appreciate you letting me go on for the last couple of hours. I am passionate about this. My hope is that hopefully things have gotten a little clearer. I don't want to muddy the water, I want to bring clarity. Any of you that have questions that you feel that weren't resolved or answered feel free to contact me directly. I've got my contact information there.
I've also included some resource here with some links of things that you can kind of go to that would give you hopefully some things that will kind of help you educate, you know get a little bit more knowledge and education about energy markets and what they mean.
By all means contact me directly if you have questions. I'd be more than happy to get you connected with somebody who can answer your questions if I can't. With that I turn the floor back over to James.
James Jensen: Hey Al if you do have a little bit more time we do have a couple of questions? If you don't then we can wrap it up.
Al Austin: Sure absolutely.
James Jensen: There's a question here, it says: "If a tribe is generating power on the reservation for tribal use but has excess power to sell back to the grid how do they find a buyer for that excess power if the local utility is not interested or not working with them?"
Al Austin: That's a good question. What you can do is if the local utility is not interested in or first of all it would depend on – if you want to get into the wholesale market, okay, one of the big things is you need to know where is the energy? Where is it being produced? Then where can you deliver it to? Because the wholesale energy market trades at specific hubs you know and these are generally physical locations. You know like at a switching yard or a substation, it's kind of a common delivery point that's used by people who move energy around.
So you'd have to really find out. You'd have to get a hold of someone in your area who's got some expertise relative to what the market does and how it operates there in your area. First thing is I would want to know are you in a Bilateral Market area or do you fall under an Organized Market? If the utility is not interested in buying the power because they don't think it's worth what you think it is or what the obstacle is. Is it because it's being produced in hours that they don't need it? I'd be curious to know why they're not interested in it and maybe they just don't have the load for it, but it may be that, "Wow when it's available I really can't use it. But if I could have it during these hours then it might be useful to me." So I'd really be looking at better understanding why the lack of appetite.
But if you want to get into the wholesale market you've got to look at where is it going to be traded? Then how am I going to move it from where it's being generated to where it would need to be sold?
You'd have to do the economic analysis to say, "Can I sell it at a price that would allow me to cover all of my delivery costs in order to do that?" Yeah so I would try to figure out you know where you're at and reach out to some – one of your power marketing administrations or there's companies out here that have that expertise that you can kind of tap into. But there are resources out there, but it's a complicated thing and it's not insignificant.
James Jensen: So Al one more question here and it's related to this slide, it says: "So for regions that are white on this slide there is no market mechanism and they will fall without a market." So basically they're just saying there's no market whatsoever in the white areas is that right?
Al Austin: No there is a market, it's the Bilateral Market. So like in the west – the differentiation here is that anything that's colored is what we call a "Regional Transmission Organized Market." So the organized market like in California remember I said it was made up of three big utilities that formed the market? Well in the rest of the country that's white those utilities still exist and those utilities are still operating in the bilateral world. Those utilities still are buying and selling among themselves to meet – there's a wholesale market that operates in all of those. It's just that it's a bilateral market, it's utility-to-utility, rather than clearing under a centralized market, okay?
James Jensen: Gotcha.
Al Austin: So yeah, yeah there is a market, it's just a bilateral one-on-one instead of being cleared under a common centralized market, that's the distinction.
James Jensen: Great. Well thanks so much Al. This was a wonderful presentation, a lot of really good information. I appreciate all your time and effort in putting it together.
For the audience just remember these slides and the recording will be available for your viewing online at a later date. I think by doing that you can you know glean some of the _____ information that maybe be hard to pickup in the first time through. So here's a link for where you can go to get those past presentations including this one. It won't be up for about a week, but you know in a week or so you should be able to get the whole audio, as well as the slides from this and previous webinars. You know we already went through the questions.
Now the upcoming webinars in the 2018 series are listed here. The next one is the last Wednesday in June and it's Evaluating Tribal Utility Authority Opportunities. We look forward to having you participate in that webinar as well.
So thanks for everyone's time today and thank you Al so much for all your contributions today's webinar.
Al Austin: Oh you bet and thank you guys for all the attendees I appreciate it.
James Jensen: All right, until next time, thanks, bye-bye.
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