Transcript full requirements service

To Buy or To Build
Is it really one or the other?
APPA New Generation Workshop
Portland, Oregon
August 1, 2007
The Constellation Energy Group Companies
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Constellation Energy Group (NYSEG: CEG)
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Fortune 200 competitive energy company hq’d in Baltimore
Subsidiaries:
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Constellation Energy Resources
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Wholesale (Constellation Energy Commodities Group) and
Retail (Constellation NewEnergy) Marketing
44,000 MW of load served, including
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Constellation Generation Group
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Approximately 14,000 MW of “Provider of last resort” NE and
Mid-Atlantic and Municipal load (wholesale)
Approximately 16,000 MW of retail load (4,000 retail commercial
and industrial customers)
8800 MW of generation (predominantly nuclear and coal)
Strategic nuclear partnerships
Baltimore Gas & Electric
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Distribution and Transmission serving 1.1 million electric and
600,000 gas customers.
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“Buy vs. Build” Discussion Agenda
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The role and history of competition and the build
decision
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The role of competition and the buy decision
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Risk management and the buy vs. build decision
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Does it have to be one or the other?
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Role/History of competition in the build decision
Traditional Cost-of-Service:
•IRP Approach
Traditional PPA:
•Competition to Build
•Little (no) Risk management
thereafter
Merchant Investment Wholesale market price signals
incent investment
•Managed risks
•No regulatory guarantees
Relies on regulatory guarantees for
investment that leaves
customers exposed to risk
Marginally better than COS; but
still relies on regulatory guarantees,
and
provides little operational risk
management to consumers
Stable market structures create
predictable forward price signals
that incent investment;
suppliers manage construction
and operational risks, including
fuel price and customer attrition
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Results under the three forms of investment
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Traditional Cost of Service:
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PPA approach (70’s/early 80’s)
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IRP approach
Stranded cost recovery
Rate of return on rate-base creates incentive to spend.
Construction cost risks are transferred to developer
Competition secured lowest cost construction
Spurred significant technological advances through heat rate
improvements
Merchant Investment (late 80’s/90’s)
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Tightening market supply/demand fundamentals
Wholesale market restructuring
Markets would support and reward new investment
Thousands of new MWs built
Transfer of construction cost risks AND operating risks – fuel
and O&M
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What Happened to the Merchant Model?
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Price spikes led to new call for price mitigation.
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Market design changes devalued merchant investment.
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Wholesale markets not producing price signals for new
investment.
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Dramatic increases in fuel (coal, gas, uranium) coupled
with expiration of retail rate freezes
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Renewed calls for Long Term Contracts similar to PPA
paradigm and/or return to traditional cost of service.
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Development of capacity markets in organized markets.
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Role of Competition in the Buy Decision
• It depends on what you are buying:
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Want to Buy a Power Plant?
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Competition can be brought to bear through PPA
approach or turnkey construction contract.
Want to Buy load management service?
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Competition broadens to a much wider range of products,
including energy, capacity, ancillary services, renewable
requirements, emission reduction requirements – “full
requirements service”
Significantly higher level of required risk management
Can lead to significantly higher level of competition.
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Full Requirements Service Products
Benefits
• Transfer of risk from utility/ratepayers to supplier
• Stable, predictable price for consumers
System Admin Charges
Electrical Losses
Congestion Costs
Transmission Charges
Capacity
Ancillary Services
Energy
Scheduling, dispatch & administrative services
Losses associated with energy transmission
Costs associated with transmission congestion
(In some cases)
Or other resource adequacy products in matching quantities
Including energy reserves, voltage reduction & other system
operation charges
Quantities that match both changes in hourly electric demand & movement of
customers to & from retail competitive supply
Full Requirements Product
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Full Requirements Service and the Buy Decision
Connecting the Two
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Full Requirements Service represents structured
transactions that provides a wide array of service and
products: capacity, load following energy, and ancillary
services.
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Serving full requirements load requires extensive risk
management and hedging expertise found in the
competitive wholesale market, including portfolio
management.
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Competition to provide full requirements service
enhances and supports wholesale market liquidity,
transparency, and stability.
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Full Requirements Service and the Build Decision
Connecting the Two
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When wholesale market structures provide fair,
transparent price signals that reflect the fundamental
supply and demand realities, suppliers will identify ways
to minimize their costs and thus their ability to hedge
load serving obligations.
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Thus, wholesale market design stability and robust load
serving opportunities will create the “push” for
infrastructure when and where it is needed, and the
opportunity to serve wholesale and retail loads provides
the “pull.”
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Buy Versus Build
It does not need to be one or the other
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Buying full requirements service can be integrated
with new build.
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Allows optimization of plant value.
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Brings portfolio benefits and other risk
management services to load serving obligation.
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Reduces and/or eliminates stranded cost risk.
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