Energy efficiency holds the key to meeting lofty greenhouse-gas (GHG) reduction goals. Rate design can help—specifically residential inclining block rates should be considered as part of the...
Resource Planning After the Crash
risk profile. Below are some examples of corporate risk objectives. Typical objectives might be, within a 97.5 percent confidence band, the following:
- Manage the volatility to constrain the potential for unfavorable rate outcomes to no worse than a ___ increase;
- Limit the credit exposure from any one supplier to ___;
- Limit hedge positions to assure that the aggregate cost of fuel and purchased power will not diverge unfavorably from market by more than ___ per kWh; and
- Limit forced outage exposure to ___ million for any cumulative short-term outages and ___ million for any 30-day or greater outage.
The next step guides the procurement and management decisions. The objectives will govern issues such as reliability, volatility, liquidity, and volume risks and will be related to, but managed separately from, the objectives defined for the operational risk management program. For example, the risk program typically is focused entirely on defensive risk management objectives. In addressing the overall objectives of the resource portfolio, tradeoffs between risk and other objectives are contemplated. Matching the long-range objectives to both the current and expected conditions over a longer time horizon in light of the prevailing market fundamentals will allow for the construction of the portfolio needs to be pursued in order to achieve its objectives.
Defining Resource Options
The next step is to institute a longer-term process that will build on the risk metrics and objectives developed above. Procurement options consist of a mix of a utility's own generation, plus forward contracts, gas tolling arrangements, unit contingent options, financial options, transmission services, congestion management, and capacity exchange options.
To address longer term contractual assessments, it is important to utilize market insights and procurement expertise to review the condition of the utility's existing physical energy portfolio and management strategy, identify gaps between the current and projected position condition and longer-term objectives, and structure initiatives and implementation steps to build a physical energy portfolio and management strategy that is consistent with the objectives and the risk parameters defined above.
This step includes a summary of historical transactions, and a description of term energy and capacity commitments. While reviewing the current condition, the approach would be to structure recommendations to the utility for analyzing and projecting market fundamentals relevant to the utility's physical procurement needs.
Once needs are assessed and objectives for the portfolio are clearly defined in the context of a longer-term risk profile, various supply options can be identified and analyzed. These supply options can consist of different mixes of plant builds, plant acquisitions, forwards and tolls, existing resources, options and financial hedges that can meet load and sales requirements as a function of market prices and their associated volatilities.
Market Volatility and Simulation
It is necessary to define different combinations of supply options and test them against a combination of load and sales configurations, and market and fuel price combinations with proper correlations of these conditions. The analytic approaches involve using both spreadsheet and Monte Carlo simulation tools in combination with dispatch algorithms as described below. Then we test our portfolios to determine whether there are significant