ERP

Part 1 (10%)
 Introduction to Energy Commodities and Risk Management (Topic 1 – Ch1)
 Linking Physical and Financial Energy Markets (Topic 1 – Ch2, Ch3)
o Forward contracts and carry
o Market liquidity
 Risk Management Overview (Topic 2 – Ch4)
o The risk management process
o Basic types of risk

Part 2 (35%)
 Exploration, Production, and Project Development (Topic 3 – Ch3,4,5,6) (11)(15)
o Proved, possible and probable reserves
o Barrel of Oil Equivalent
o Contractual and concessionary systems
o Production sharing agreements
o Lease provisions including royalty payments
o Economic valuation of oil/gas projects
o Upstream economics, including: wellhead price, break-even price
o and tax allocations
o Partnership arrangements and the allocation of working interests
o Real Options valuation analysis
 Petroleum Refining (Topic 4 – Ch 12, Reading on Refining, Renewable)
o Refinery complexity
o Refining margins and price formation
o Crack spread
o Specifications and requirements
o Finished products and pricing
o Renewable Identification Numbers (RINs)
 Global Benchmarks and Price Formation (Ch 10) (17)
o Grades of crude oil
o Brent, WTI, Dubai-Oman
o Oil trading related to benchmark pricing
 Crude Oil Transportation and Storage (16)
o Pipeline, seaborne, and rail economics
o Worldscale and Incoterms
o Creating and regulating a safety culture
 Unconventional Oil (Topic 3 – Unconventional reading)
o Unconventional resources defined
o Conventional vs. unconventional project economics

Part 3 (25%)
 Physical Properties
o Types of gas
o Units of measurement and heat content
o Contractual terms contained in a gas sales agreement
 Transportation and Storage (Topic 9)
 o Pipeline and storage economics
 Global Natural Gas Markets and Price Dynamics (Topic 8)
o Hub pricing and basis markets
o LNG regasification, transportation, and market dynamics
o Oil indexation
o Impact of US shale gas revolution on global markets
o Natural Gas Liquids (NGLs) and Condensates (Topic 10)
 Global Coal Markets and Price Formation (Topic 9)
o Physical properties
o Global benchmarks, contract specifications and trading
o Fundamentals of global coal markets

Part 4 (30%)
 Economics of Electricity Markets
o Base load, mid-merit and peak generation
o Consumer demand – VOLL (value of lost load)
o Load Management
o Investing in Generation
 Global Market Design
o ISO’s RTO’s and power pools
o DA and RT markets
o Energy-only vs Capacity Markets
 T&D
o Mechanics
o Congestion, Losses and Pricing
 Analytical Tools
o Heat Rates, Spark Spreads
o Generation Stacks
o Ancillary services, Capacity payments
o FTRs
o Tolling Agreements
 Renewable Generation and Integration (Topic 14,15)
o Wind and Solar Economics
o Grid Integration
 Emissions (Topic 15)
o Emissions reduction programs and regulation

Topic 1: Introduction to Energy Commodities and Risk Management

Ch1

 Unique characteristics of energy that differentiates it from other asset classes

o Energy prices consistently exhibit higher levels of volatility compared with other asset
classes. Realized volatility is systematically higher than that of other comparables
(eg. Realized volatility of other commonly traded asset classes normalized by the
realized WTI volatility by calendar year)
S&P500 ETF Index, Eur Currency, Gold GC1, GT10 (treasury), WTI
Exception – gold reached 90% of WTI volatility. Avg. 21-55%
WTI -> deliverable at Cushing, Oklahama
 Volatility risk can be mitigated by options, but options cannot be easily used for
commercial operations of a business
Most sizeable transactions involve exposure to multiple year or commodity prices, so
calendar strip statistics are more pertinent
Stdev (6-7% is normal, 15% is also never unexpected) 10 day period (daily return as high
as 500%)
o Specialness
Trading at high premiums or discounts (energy markets can have storage and
transportation constraints arise suddenly and significant price variations)
Eenrgy markets lack stability offered by Fed/ECB. OPEC attempts but with less success
A single commodity delivered at two different times/locations can behave as two
entirely different assets.
Commodity prices at two different delivery times are related only insofar as the
commodity can be readily stored in the sense that an increase or decrease in inventory
at known cost can be readily effected
 Calendar strips (‘cal strip’) and seasonal strips and their practical application
o Average of future prices for a given calendar year (arithmetic avg. without discounting)
o Most sizeable transactions involve exposure to multiple year or commodity prices, so
calendar strip statistics are more pertinent
 Impact of volatility on collateral postings, credit exposures, and capital req. on energy
commodity trading operations
o Affects postings, increases exposures, resulting in higher capital Req.
o Hedging activities have collateral posting requirements
o Larger the swing in markets, larger the cash/LC or margins
o Inherent asymmetry (for REPs customers are not margined, REPs are short their
customers, so they have long hedges in forward markets. if price decrease is severe,
their long hedges collateral calls can be lethal)
o in 2009 (from mid 2008, prices fell by a factor of 3, cash flow distress)
 Benchmark NYMEX natural gas delivery location, why natural gas forward curves exhibit
seasonal variations in demand
o Heating demand in NorthAm results in far higher consumption in winter, seasonal
premia (specialness)
  Basis and primary drivers of basis differentials
 Global and North AM benchmark contracts across energy commodities
o NYMEX natural gas futures (apex of liquidity concentration)
o PJM power (Pennsylvanian, New Jersey, Maryland interconnection)
o NYMEX WTI futures
o ICE Brent futures
o Benchmarks – liquid/fastest avenues to reduce risk in a portfolio
 Relationship between locational spreads, benchmarks, hubs and liquidity
o Locational – changes in demand and constraints in transportation
o TETM3 vs Henry Hub (TETM in premium for demand and transp. Costs)
o TETM3 forward premium to NYMEX future prices
o Reasons:
 Change in supply or demand
 Time lags such as shipping times for crude oil, failure of infrastructure
 Demand – weather dependent, can be predicted
 Infra failure is hard to predict (poisson nature)
o Benchmarks -> Hubs (spread to benchmark) -> less liquid locations. ->
o Beyond this, most risk positions are inventoried

Ch2

 Variety of derivative instruments available for hedging and risk transfer activities
o Forwards, swaps and future – basic
o Underlying commodity, when and where/index, price, qty, settlement
 o NYMEX WTI (1 contract = 1000 barrels) Cushing, OK
 October 2012 contract, expired on September 20, 2012
o ICE WTI follows NYMEX WTI
o ICE Brent
 October 2012 contract, expired on Aug 31, 2012
o WTI Swaps
o NYMEX NG (1 contract = 10000MMBtus) Henry Hub, Louisiana
 3 days prior to last day of the month
o NG Penultimate swaps N(float – fixed) if long and –ve receive
o Gas Daily Swaps (Futures not, spot prices)
o WTI options
 3 days before futures expire
 On futures and swaps (2 types)
o Natural Gas Options
 Abbreviations/identifiers for commodities futures contracts for each calendar month
o F, G, H, J, K, M, N, Q, U, V, X, Z
 Compare characteristics of physically delivered vs financially settled transactions
 Define lot and open interest and explain dynamics of NYMEX WTI futures contract expiration
o 1 lot = 1000 barrels of crude oil
 Exchange for Physical (EFP) transaction
 Contango, backwardation and convenience yield
 Economics of park and loan deal structure
o Reverse repo cannot be effected easily

Ch3

 Seasonality in various energy commodity markets and factors that impact seasonality
o Heating oil – winters
o NG – winters and mild summers (AC)
o Oil - nil
 Gas storage facilities, injection and withdrawal factor into seasonality
o Injection in summer, withdrawal in winter
 Crack spread for refined products
o Spread between prices of RPs and costs of crude oil
o Traded ones are between single product and crude oil
 Deregulation and tech innovations (fracking) have evolved markets
 Market dynamics of natural gas spreads
 US ng prices relative to benchmark world spot prices
o Decoupled – NBP UK, Netherlands TTF, Belgium Zeebrugge hub

Topic 2: Risk
Ch4

 Concept of risk and compare risk management with risk taking

o Risk lies in how variable our costs and revenues really are
o Volatility of returns leading to unexpected losses
o Factors – covariance, normal and stressful conditions
o Risk management – managing unexpected levels of variability
o Variability that can be quantified in terms of probabilities is risk, otherwise uncertainty
o Two sides of the same coin
 Risk Management process – problems and challenges
 Tools and Procedures to measure and manage risk – quantitative, qualitative and enterprise risk
management
 Key classes of risks
o Market
 Equity
 Interest Rate
 Trading
 Gap (different sensitivities of Assets/Liabilities to changes in interest
rates)
 Exchange Rate
 Commodity
o Credit
 Transaction
 Portfolio Concentration
o Operational
o Liquidity
 Funding (ability to raise cash)
 Trading
 Unable to fund by liquidating assets
o Legal and Regulatory
o Business (demand of products)
o Strategic (uncertainty of strategic decisions)
o Reputation

Topic 3: Crude Oil: Upstream Operations

Ch 3: Access, Leasing and Exploration

 Upstream oil and gas value chain

 Accessing new reserves and steps in developing a petroleum project
 Subsurface oil and gas geo structures and how they affect project development
 Owner of subsurface mineral and resource rights based on jurisdiction and market assumptions
o Typically held by the state
 Contract the fiscal regime of petro agreements
 o Concession
o PSC
o Risk Service
 Lease agreement and royalty payments
 Oil in place and resource classification framework for reserves
o OIP -> Recoverable % -> Economically feasible % (reserves)
 Features and factors with various categories of reserves
o Proved 90% +
 Developed (producing, developed nonproducing – nearby wells and non
producing – extra investment)
 Undeveloped (not drilled)
o Probable – evidence of HC, not tested 50%
o Possible – may exist (log interp and other evidence) < 10%
o Proved + Probable = 2P
o Proved + Probable + Possible = 3P
 Reserve replacement and reserve life

Ch 4: Developing Oil and Gas projects

 Concept of unitization in join development zones

 Viability, NPV IRR and other metrics
 WACC
 Pre-completion, post-completion and macro-economic risks
 Key challenges, failures or risks with various case studies

Ch 5: Production of Oil and Gas

 Categories of upstream costs

o Pre-production Costs (finding)
 Finding Costs - Acquisition of acreage, exploration costs, cost of acquired
reserves
 Developing Costs – Const. installation
o Production Costs (Lifting)
 Direct Lifting Costs – Prod. Costs minus prod. Taxes
 Prod. Taxes - royalties

 Prod costs vary by location how
 Economic performance of oil well – op profit, break even, working interest, tax allocations
 Costs and factors – enhancements and ongoing oil prod – primary secondary tertiary
o EOR is expensive and justified only when crude prices are trending high
 Terms of a partnership agreement – duties shared and disputes settled
o No single company wants to have full risk exposure
o Partner conflict one of the causes for cost overruns
 o JOA – joint operating agreement – participating interest and one becomes operator
 Relationships, incentives, and potential conflicts among various stakeholders
o Best interest to develop local suppliers…IOCs and Govts
 Political risks that impact crude oil prod decisions

Kern River, oldest fields northwest of LA

Unconventional Oil

 GTL – tight gas, shale gas, coal bed methane and methane hydrates
 CTL
 Syngas is an intermediate- liquefied to produce liquefied fuels
 More Carbon and more waste than Conventional oils
 Conventional
o Crude Oil
o Natural Gas Liquids
o Condensate
 Transitional (which may contain conventional oil)
o Heavy Oil
o Ultra-deep
o Tight Shale oil (fracking)
 Unconventional Oils
o Extra Heavy Oil (non-bitumen)
o Oil Sand (bitumen)
o Oil Shale (kerogen)
o GTL, CTL, Biofuels

Topic 4: Downstream

Ch 12
 Operational and economic differences (independent refiners and IOCs)
o 200,000 b/d (RIL 1.24mb/d)
o Not a straight forward hedge for IOCs – generally refine more than they produce
o But short term cyclical effects can be minimized
o Independent can operate more flexibly (fast response)
o IOC have negotiating position
 Refining Process and end products typically produced
o Separating into fractions
o Processing these fractions to finished
 Topping (crude distillation and other basic) – naphtha atmospheric
distillation
  Hydroskimming (+catalytic reforming, hydrotreating and blending)
gasoline
 Conversion (+catalytic or hydrocracking) - Vaccuum
 Deep Conversion (+coking)
o Typical end products
 LPG, Gasoline, Jet Fuel, Kerosene (lighting heating), Diesel, Petrochem
feedstocks, Lub oil and waxes, Home heating oil, Fuel Oil, Asphalt
 Various physical processes related to crude oil refining
o Desalting, Distillation (Atmospheric Distillation, Vacuum Distillation
o Thermal Cracking, Sweetening (H2S, mercaptan), Hydrogenation
o Catalytic Cracking
o Hydrocracking (more diesel than gasoline and costly), Residual Hydrocracking,
Slurry Hydrocracking
o Isomerisation, Polyemerisation, Alkylation (isobutene is mixed)
 Refinery’s complexity – choice of crude feedstock and optimal product mix, NCI
o NCI 2, 5, 9 throughput of each equipment in relation to distillation unit
o More complex can produce high value products and demand for crude will drop
and price differential will go down
 Reliance Jamnagar – 20% more gasoline/distillate
 Economics - cost of crude and RMs, Complexity and product mix and margin
o Gross Margin - (Revenue – Crude)
o Net Margin – (Gross – op costs)
 Crack spreads (crack spread calculations)
o Inc. product prices and dec. crude prices (Purchase Crack spread)
 Sell Crude futures and buy Product Futures
o Dec. product prices and Inc. crude prices (Sell Crack spread)
 Buy Crude futures and Sell Product Futures
o 3-2-1 US 6-2-3-1 NEW
o Normal situation (product prices fall – sell a crack spread)
o Refinery shutdown (obligations – purchase crack spread)
 Factors impacting Refinery economics
o Electricity, labor, chemicals and water
o Technology (various Refining processes)
o Environmental (instead of new, mandating addl investments in existing)
 More water for heavier crudes (treating of the water)
o Capacity Utilization (China worst Asia, Russia, EU, US)
 90-95% considered full
 Below 90 means some units shut and lose economies of scale
 Above 95 may also increase costs, due to process bottlenecks
 Scheduled maintenance is necessary to ensure refinery efficiency and
safety

Refining
 Crude Distillation
 o Front end
o Light gases, Naphtha, distillates, gas oil and residual oil
o Naphtha sent to upgrading and blending units for Gasoline prod.
 Cracking
o FCC, Coking (reduce Cs)
o Hydrocracking (increase Hs) low in aromatics good for engine
 Upgrading (catalytic reforming, alkylation, isomerization, poly.)
o Alkylation premium gasoline blend stock
 Treating
 Separation/extraction
 Blending
o Gasoline 6-10 blendstocks
o Diesel 4-6 blendstocks

Renewables
 Biofuels – corn and agri by products (corn, biodiesel, cellulosic ethanol)
 RVOs determined for every refiner
 Verification done using RINs (each gallon is given a RIN)
 RINs traded
 Mandate exceeded, RIN prices fall; mandate not met, RIN prices rise (bank on prev years’ RIN)
 Corn ethanol, biodiesel, cellulosic ethanol, advanced biofuels
 High volatility in RIN in 2013 (blend wall, mandate not being met)
 Blend wall (cars have only E10)

Topic 5: Downstream II

US Gasoline Prices
 Crude export relaxation effects
 US gasoline and benchmark crude
 Brent/WTI spread
 Global spot markets for gasoline
o NYH, USGC, Chicago, LA
o ARA, Mediterranean, Singapore
o LA, Singapore Pacific Basin Market
o ARA – NYH has been stable
o Power shifted from NYH to Singapore
o USGC became the lowest of all after 2011, surplus reasons
 Price movements and correlation global gasoline hubs
 Observations
o Brent prices more important than WTI
o Gasoline demand outpacing production in Asia, Middle East, LatAm
o Gasoline demand declining in US, production increasing
o Demand declining in EU, oversupply competes with imported Gasoline from US
  Relationship Gasoline and Crude oil
o 2/3rd of gasoline price (crude price factored)
o 1:1 price change per barrel in crude to gasoline (price change passed in 2 weeks), other
factors equal
o I) Crude price II) Refining costs III) marketing costs IV) taxes

Ch6: Fiscal

 Various fiscal regimes used in HC production contracts, ownership of subsurface minerals

o Royalty, PSA, Service
o Service Fee – flat
o Risk Service fee – annual service fee (% of profit) + Interest return on Investment costs
(that have not been reimbursed)
o ROR – sliding scale to put boundaries on IOC’s takes as project life and profitability
increase
 Cash flow for a petro co under a royalty/tax fin sys and a PSC
o Royalty
 Royalty on gross revenues, taxes on Op profit
o PSA
 Royalty + Profit share + Tax
 Secondary contractual features – signature bonuses
o Signature bonuses ??
o Domestic Market Obligations (redistributing profit oil back to NOC at discounted prices)
o Investment Uplifts (10 + 10%)
 Viability of HC project based on prod volumes and petro prices
 Sub-saharan case study
o Half year convention
o NOCs kill all upside potential for IOCs
o Except for high prices, in all other sensitivity analysis, NOCs to reap benefits
o Government Takes (Service Agreement, PSC, Royalty)

Ch10: Crude Oil Market

 Evolution of crude oil pricing

o East Texas -> Opec
o Crude oil futures 1983
 Properties of oil and impact on pricing
o 160 grades
o Viscosity and Sulfur
 Benchmark prices
o WTI BRENT TAPIS FATEH (Dubai) Bonnie Light Maya
 Spot, Futures and Contract transactions
o Spot reflect the supply/demand
 o Futures for price discovery, for securing obligations
 What future spot will be
o Contract – actual transactions prices taken from spot/fut
 Factors that affect valuation of Futures contract; perform

Topic 6: Project Development

Accounting
 Characteristics of various fiscal systems
o Costs likely to be higher, govt. stability, currency, labor pool and materials, local laws
o Costs, revenues, and reserves to be shared between IOC and State
o Concessionary Systems
 Sole risk with Contractor
 Royalty and Taxes to the State
 Gross Revenue
 (minus) Royalty
 (minus) Prod Tax
 Net Revenue (minus) Op Costs (minus) Depreciation
 Taxable Income (minus) Income Tax – Net to IOC
 Royalty + Prod Tax + Income Tax – Net to Govt
 One variation – govt. participation
o Contractual Systems
 Joint Management Group (Contractor, Govt, NOC)
 Signature Bonuses, Production Bonuses
 Royalties 0 – 15% (Sliding scale royalties)
 Exploration (full), Development and Production (51-49)
o Service Contracts
 Risk Service
 Nonrisk Service (flat fee and rare)
 Economic revenue generated
 Profit Oil impacts Project economics
 Joint Operating Agreement and circumstances when it is used
 Accounting Regulations that can affect Petro contracts
o Exploration, production and development costs as oil and gas producing activities
o Contractor share of revenues reported as revenues and not as cost recovery
o Entitlement Reserves
 Cost recovery terms, Profit oil sharing terms, costs spent, price assumptions
 Reserves that are titled to State, can be reported for accounting by IOC using
 Working interest method (% * proved reserves (minus) royalty)
 Economic interest method (cost + profit oil / year end oil price)

Real Options
  Different types of Real Options
o Option like opportunities (underlying are real assets)
o Reserves have the real option value
o Right to buy/sell at a predetermined price and date
o Option to Expand
 Tertiary recovery techniques (expand)
 Payoff current price, premium depends on cost of extraction methods
o Option to Wait
 PUDs
o Option to vary I/O or processes
 Spark Spread (in the money / out the money) Call option
o Option to Abandon
 Valuation of a real option
o Modelling of prices, energy demand, relnship between forward and forecast prices
 Black Scholes, binomial trees, and MC sims are used to value options, challenges with each
o Trees (finite future states)
o MC
o BS (modelling volatility)
o NPV + Real option value

Oil Pricing (Ch 17)

 Royalty and tax payments
 Brent Oil, Dated Brent, Brent complex, CFDs
o Posted prices (bulletin prices determined by majors)
o Dated Brent (once a tanker with a specific date is assigned)
o Brent Complex (physical/financial)
 Dated Brent – daily price of 10-25 D time window (consummated transactions)
 25-day BFOE – 3 monthly
o BFOE producers take possession of their oil share at the terminal
o They can deliver them directly to their refineries or sell to third parties
 BFOE producer can sell the cargo ahead of time
 If this sale is ahead of parcel delivery date being known then (25 day BFOE
paper contract) , i.e., transactions can occur as far ahead as 3 months ahead of
the delivery month
 or if the sale is done after the parcel delivery date is known, the transaction is
part of ‘Dated Brent’
o CFDs
 Dated Brent – 25 BFOE (-ve if contango, +ve if backwardation)
  WTI
 Pipeline constraints on WTI
o Impairment of WTI credibility nymex
 WTI/Brent WTI/LLS
 Dubai-Oman and issues

Topic 7: Transportation and Storage

Ch16 Transportation and Storage

 Different classes of Tankers, limitations

o Dirty, Clean
o North Atlantic arbitrage between US and NWE refined products markets
o First transatlantic in 1861 – 1329 bbl of oil shipped from Phil to London
o Tankers – size and cargo type
o LR2, LR1, MR2, MR1 (Handysize)
o ULCC, VLCC, Suezmax, Aframax, Panamax, Handymax
o Port constraints – LR2, VLCC
o Regional -
 Common charter contracts for oil shipments
o Bareboat, TC, SC, CoA
o Bareboat – full op. control – full costs except capital (financial lease) no freight charge
o TC – timed op. control, voyage costs by charterer (currency units/day) rental
o SC – ship owner for op. costs, voyage costs – charterer one trip (units/ton) taxi
 Voyage - taxi to airport (all expenses – ship owner)
 Trip - rent a car with driver currency units/day op costs driver
o CoA – regular basis (all costs by Ship owner) units/ton
 Charterer – uninterrupted supply and fixed cost of transp.
 Ship owner – steady and predictable revenue stream
  Cost of transporting an oil shipment
o AFRA (Worldscale) WS100, WS90
 Various MOTs economics
o Trunk PL, Delivering PL, PADDs
o Petroleum Administration Defense Districts
o Batch/fungible } Cycle PL (one product at a time, no transmix)
o High viscosity products (like bitumen, heavy fuel oil) by rail (not suited for PL)
o PLs lowest unit costs, but high initial, limit flexibility with choice of load/discharge
o PLs for low viscosity
 How pipeline shipment times and disruptions affect traders
 Different crude oil storage facilities
o I) Buffer between production and consumption II) supply shocks III) financial players in
case of Contango decommissioned tankers
o Technological constraints of the industry infrastructure
o Seasonality of demand, supply shocks, speculation
o Cushion gas and Working gas (tank bottoms), pipeline fill
o Difference between oil and NG – SPRs (geopolitical risk more for oil) 75 days of import
protection
 Primary Inventory Storage Reports used in US and internationally, JODI
o EIA, API (weekly Tuesday)
o EIA captures refineries, tank farms, PLs, bulk terminals, oil in SPR
o Days of supply
o OECD storage data
o Saudi and few other JODI
o Chinese apparent or implied demand – refinery throughput as proxy

INCOTERMS

 EXW (Seller’s premises or any destined place but doesn’t need loading to vehicle) (Domestic)
 FCA (Carrier or person nominated by buyer at Seller’s premises or any destined name) export
clearance by seller; loading (Intl)
 CPT (Carriage costs paid by Seller)
 CIP (Carriage costs and Insurance)
 DAT (Seller bears all risks to unloading at terminal) import clearance by buyer
 DAP ( import by buyer, further deep inside the importer country)
 DDP (pay export and import duties)
 Port to Port (Export clearances and duties)
 FAS freight costs by importer
 FOB (FCA any MOT) freight costs by importer
 CFR (CPT)
 CIF (CIP)
RAIL CANADA

 2012/13 constrained pipeline network saw a surge in transport by rail

o Speed to market, Scalability (manifest, unit trains), product integrity (no mix)
o Loading time, weather
o Loop track, Ladder track
o PADD1, 3
o Classification, Packing groups, flashpoint, contents like sulfur
o Class 3, PG1,2,3 DOT111
o Liability models from Marine and PL
o 1MB/d

TRANSP. SAFETY CANADA

 NorthAm’s changing landscape – Canada oil and gas, Shale fracturing

 Interactive maps indicating spill information
 Audit of company’s SMS (Safety Mgmt System)
 Pipelines – Liquid (pumps) Gas (compressors, turbines)
 Federally regulated 1.2 BB/year
 Climate considerations of North Arctic
 Call before you dig, for buried infrastructures
 Tanker Safety Expert Panel
o Double hulled
o Funding to pay for clean up
 Rail
Topic 8: NG Global Pricing and Dynamic Markets

NG Trading Hub in Asia

 Pricing NG
o Market based / regulated
o Market based – oil/product indexation; gas-gas; netback from final product
 3 Market Based gas Pricing Mechanisms
o Oil indexation (Price of gas linked to Oil (in Asia Pacific and Europe)
o Gas-Gas competition
o Netback <1%
 Govt regulation Regulation limits true economic development
o RCS (cost of service) investment and fair return basis for price
o SPR – govt. revenue needs
o RBC (below cost) subsidies more likely when gas is associated with oil
o BM (govt. of two countries)
o No Price
 JCC and S-Curve (Asian efforts to Pricing Mechanisms)
o LT contracts with oil-linked prices
o JCC (emerged in late 1980s) to reflect regional market supply/demand
o JCC introduced after Saudi moved to netback in 80s which wasn’t a great way to
determine price for something that will be delivered in Asia
 Current Asian dynamics
o Not interconnected with PLs, Growing dependence on LNG supply chain
o 2009, US and UK; Europe and Asia gap emerged
o Mature – Japan Korea, Taipei; Emerging Giants – India, China; Malay, Indo, producers
 Market and Regulatory factors for efficient operation of NG Hub
 How financial only transactions affect physical delivery prices
o Long term price signals, cover risks
 Potential risk in developing NG hub in Asia
o Regulatory
o Destination-flexible LNG and Hub
 Singapore best suited for NG market and trading hub
o Has PL interconnection – Malay, Thai
 Asia Pacific becoming an LNG Market
o LNG/NG needs to be competitive against Coal
o Chinese LNG imports have become less competitive than coal since 2011
o Earlier, they made favorable contracts with Aus at beginning of century
 Europe – NBP, TTF, NCG
 Pipeline traded NG – oil indexation; LNG has started gas-gas but mostly oil indexation
 Spot LNGs have been premium to oil-indexed cargos supply contracts
 Long term contracts capped (min max + indexed with oil) So when oil prices rocketed high in
2000s the long term NG prices remained much lower, however spot prices were higher than oil
 Oil indexed LNG Contracts
 Oil indexation was a replacement value
  For mature NG markets, an alternative NG price is needed
o Japan and Chinese Taipei (LNG) – cost plus
o Qatar swing supplier to Asia and Atlantic Basin
o Nations look increasingly at LNG to supply (many nations building regasification
terminals)
o Pressure on short term tankers (tanker rates) for spot LNG
 Coal indexation
o Chinese coal producers have considerable sway over intl. coal prices (threat to market
based pricing) NG in competition with coal in China (the energy one replaces)
o But this is unacceptable to a supplier (as oil indexed > coal indexed)
 Creating a NG Trading Hub
o Structural – available capacity with unbiased access, competitive participants and link
with financials
o Institutional – hands-off govt approach, separating commercial and transport, wholesale
price dereg.

Wholesale Gas Price Formation: Price Drivers and Regional Trends

 Wellhead price, border price, hub price (wholesale), citygate price, enduser price and netback
price
o Wholesale price key (hub/border)
o Citygate, enduser influenced by taxes, local conditions, market segments
 How imports/exports affect a previously closed market
 8 key mechanics for pricing NG (which mechanic is key in which geography)
o Gas-Gas (US)
o Oil price escalation (generally Europe, Asia)
o Bilateral (Soviet countries)
o Netback
o Cost of service RCS (Korea)
o Social/Political basis SPR
o Below cost regulation (Saudi/ Iran Associated Gas) RBC
 To prevent oil consumption growth outpace production growth, associated gas
provided at below cost
o No price
 Gas supply and demand curves
 Relationship – local gas pricing mechanism, observed market price and hypo. Market clearing
price
 Volatility impacts ng prices and how oil linked prices help mitigate the impact of volatility

US Shale revolution and impact on Qatar’s position in Gas markets

 Highlights
 Qatar’s positioning in NG and LNG market place
o Largest non-associated gas field in 1971 Qatar
o Foremost manufacturer of GTL products
 o Moratorium on North field
o Discriminating Monopolist
o Growth in gas consumption in Qatar – power, water desalination, GTL, Petrochem
 Key drivers influencing Ng and LNG market post Shale and impact on Qatar
 Fukushima on Asian LNG market dynamics
 Long and short term investment decisions to export LNG
 Rationale for production increases at below BE prices in an oversupplied NG market
 Tight, Balanced and Loose market
 Singapore well suited
 Macro and Micro affecting LNG Qatari sales
o LT contracts at JCC to Asian buyers
o Others with Europe (spain) prices linked to oil
o Redirect Spot towards Asia – strategy to keep spot high
 Which countries have most LNG capacity and their collective impact on Qatar’s revenues pricing
power and investment choices
 Key factors driving forecast uncertainty of future supply-demand balance

Topic 9: Storage and Coal Market Dynamics

Coal Arbitrage

 India is structurally short coal (demand has outstripped supply)

 Chinese coal market – domestic reserves to domestic demand
o Net Exporter of coal (in 2009, inversion of trend)
o Reserves concentrated in North and West -> East and South (Rail and Boat / Rail and
trucks)
o Cost of moving can be 50% of delivered coal price (so imports can compete with
domestic)
 Arbitrage opportunities available and impact on global coal prices
o China’s behavior is that of a ‘cost minimizer’
o Domestic freight prices > international freight prices
o Relative strength of China post fin-crisis
o
 Role of freight costs in setting coal market prices
o FOB + Freight rates = CIF
 Buy domestic or import decision; Indonesian coal exports
o Indonesia is closer than other countries like Australia/Russia
 Assumptions in arbitrage model – technical and operational limitations
o No difference in thermal and coking coal
o Energy content and price have linear relationship
o Power plants used to specific coal types
o Import port capacity
Gas Storage

 Cushion Gas, Working Gas, deliverability (withdrawal rate), injection rate

o Injection rate varies inversely with stored gas
 Storage for uninterrupted supply and to maintain balance
o Depleted Reservoirs (least expensive to develop, operate and maintain) 50%
o Aquifers expensive most, least desirable 90%
o Salt Caverns – domes and beds (faster injection and withdrawal)
 12 annual cycles 20-30% of working gas
 Suitable for peak load, not for base load
 Drivers that influence value of a gas storage facility
o Interest Rate – low rates – low cost of gas storage
 Embedded optionality in storage capacity
o Inject gas at low price and remove at high

Ch10: NG Transportation and Storage

 Transport NG to a specific destination via a PL network

o Firm service – demand charge + commodity charge
o Interruptible service – commodity charge
o No-notice service – premium or platinum firm transp. contract
o Other primary firm (second in preference to primary firm service)
o Authorised overrun
 Calculate PL shipping costs
o Fixed costs (demand)
o Variable costs (commodity)
 Pumping station fuel requirements are fulfilled
 Fixed and Variable costs with NG PL charges
o Demand Fixed
o Variable – Commodity + ACA surcharge + compressor fuel
 How a PL may be used temporarily store NG
 Nomination process, balancing mechanisms
 Factors that impact cost structures of the LNG supply chain; LNG transp. and prod. Trends
o High capital intensity and high initial cost - JV
 NG storage inventories reporting
o Weekly and Monthly by EIA (survey/census)

Ch26: Coal

 Anthracite, bituminous, sub-bituminous and lignite coal

o Maturity -> Anthracite (>85%), Bituminous (45-85%), Sub-Bit. (more moist. And 35-45%),
Lignite (25-35%) also known as brown coal and high moisture
o HQ Bituminous is used for the production of coke (fuel used in iron smelters)
o Coal Rank (moisture + CV) transp. of high rank coal is less expensive
o Sulphur content, mercury
 o Ash Content (high for anthracite and lower for sub- lignite); fly ash, bottom ash. Some
ash used in cement production
o Powder River Basin
o Thousand short tons??
 Coal contracts, ETC and OTC
o API 2 index (coal imported to Western Europe)
o API 4 index (coal exported from SA)
o Difference is implied freight
o API 5, API 6 Australia
o API 8 import to South China
o OTC Broker Index
o Global Coal Newcastle Index
o ICI (indonesian)
o CME –
o ICE –
o OTC – MCPSA (2000)
 Volume overages/underages are dealt with in these contracts
o QVA (drought like situation) or spot price > contract prices
o +ve buyer pays, -ve seller reduces from invoice
o QVA = (basis – actual) * (price – (spot + diff.))
 Economics of coal-fired and NG-fired power plants, motivation for fuel switching decisions

Topic 10: NG By products NGL and Condensate

US NGLs production and Steam Cracker substitution

 Types of NGLs and end use

o Ethane (plastics) -> Ethylene (only PET industries the consumers) (no export)
 Plastics, detergent
o LPGs (Butane, Propane) -> heating (res. Comm.), cooking, PET
 Pro- Home heating, LPG, small stoves
 But – gasoline, Industrial only, rubber for tires
o Isobutane – refinery feedstock, PET
 Aerosols, refrigerant
o P, P+ - Natural Gasoline, blowing agent (transport, commercial)
 P+ diluent for heavy
o Liquid Condensates
 NGL v/s Naphtha
o Or Naphtha (benchmark PET feedstock) -> Ethylene, Propylene and Butadiene
o Naphtha has 20-30% yield of Ethylene
o Ethane and folks have 80%
 NGL economics with surge in Shale prod. and implications for NGL as feedstock for Pet
o Cheap plant feedstock of Ethane
o Shale plays, significant NGLs recovered
 o US now net exporter of LPG
o NGLs uncompetitive with oil-derived Naphtha
o Changed – low NGLs and oil-linked ethylene have rendered NGLs competitive more
 NGL export implications on global trade patterns
o More optionality… So we have ample of feedstock options for petrochems
o Afford more optionality and opportunities to global petrochem plants
o LPG and Naphtha optionality
 Crazied focus on Ethylene (cuts on propylene and benzene) in US
 Amplified by Middle East condensate exports
 Increased LPG exports, and condensates too (with decline in gasoline demand, now through
splits, but in future with crude export ban out, more so directly) multi-feed steam crackers
 Naphtha cracking, here to stay
 Condensate, naphtha and LPG exports

Condensates

 Condensates, major shale regions in US driving Condensate prod.

o Ultralight 50 API
o Used as diluent for transporting heavy crudes, and sent back from the stream back to
producers and cycle repeats
 Typical API of condensates vs WTI
 Primary use of Condensates as a diluent, importance for producers, refiners and drive of
international demand
o Goes into diesel and jet fuel, gasoline, solvents for ind. apps
 Local and global impact of shale revolution on Condensate market dynamics
 Splitters, recent investment surge in Splitter projects
o May need to rethink splitter strategy after US relaxed norms
 Pentane Plus (plant condensate – from heavier parts of NG)

Contracts and Project Development

 Contractual terms in gas sales agreement (take or pay, nominations and force majeure)
o Concession – North Am, Argentina, Australia, countries bordering North Sea and
occasionally in Middle East
o PSC – Asia, Africa, parts of South Am and Middle East
o Service
o Buyback contracts – company gets expenses back and a set RR (no claim to reserves or
prod)
o Service and Buyback expose contracts to excessive risk
o Gas Sales and Transportation Contracts
 Netback
 LDC Tariff and Long distance transmission tariff (distance or postage stamp) GTA
 Set capacity charge + Commodity charge
 Gas is sold by unit of Energy, Transportation tariff by unit of Volume
 GSPA
 Term
  Qty (Depletion contracts, Supply contracts) ACQ, DCQ
o Depletion contract – annual delivery qty based on production
performance
o Annual Contract Qty, Daily Contract Qty
 MDQ DCQ+Swing
 Pricing
 Fixed, Fixed with escalators (periodic change – inflation, index,
substitute fuel) – so don’t have to renegotiate contracts, and ensures
price competitiveness Floating – revalued every month or week
 Ceiling or Floor price; combination of fixed and floating
 Delivery
o Firm / Flexible – flexible may have cheaper prices – interruptible
 TOP
 Make up gas volumes (over and above ACQ obligations for subsequent
period)
 Gas Quality – Off spec gas, get a discount
 Nominations
 Force Majeure
 Financial and operational considerations related to sale and transport of LNG
o LNG SPA (like GSPA)
o LNG SPA chain (exporting co, joint venture, plant operator, or sales agent) and
importing facility or buyer
o LNG plant operators charge Tolling service basis for converting gas to LNG – 3 entities
sign the SPA
o Japanese Model
o LNG pricing - MMBTU, Volumes – MTA
o Features of LNG SPA
 Buyer – credit worthy entities
 Term – long term
 Price – linked to price of oil JCC
 Why LNG prices linked to oil prices (JCC); calc. LNG price using a sample crude oil index
o Fixed + variable component (linked to JCC)
o JCC – delivered price of oils imported to japan over a defined period plus an inflation
factor
o Utilities in Japan had to pay in $

Ch 9: LNG

 Business structure and contractual arrangements used in LNG prod. and transp.
o Integrated Projects – ownership of upstream dev. And liquefaction
o Transfer Pricing Agreements – different ownership of gas reserves and LNG
o Throughput Agreements – owner pays toll and has rights to post liquefaction sale
 Basic operation of an LNG train, steps in LNG liquefaction process
o Removal of condensates and impurities
o -161 degrees Celsius cooling
 o MCR and Philips Cascade process
o Stored in insulated tanks
 Fundamentals of LNG regional markets in Asia-Pacific and Atlantic Basin
o Asia Pacific – Japan, Korea, Taiwan
o Atlantic – Europe
 Gorgon project example – factors associated with local geography and reserves affect project
development process
o Chevron (50), Exxon, Shell
o CO2 geo sequesteration

Topic 11: Electricity Economics and Market Design I

Ch3: Markets for Electrical Energy

 Understand the role of Spot market in the ops of an electric grid

o Open (bilateral - long term, otc (bilateral), electronic) – no official price | Pool
o Managed (balance residual load and generation, by adjusting flexible generation and
curtailing demand of willing customers)
 Strategy behind bids and offers on an open electricity market how the wholesale price sets
o SMP (System Marginal Price) for Pool markets
 SMP in an electricity pool
o Market clearing price (intersection of supply and vertical demand line)
 Settlement of electricity contracts, imbalances
o Bilateral between parties
o Exchange on exchange
o Spot voluntary (managed spot) and compulsory with SO

Ch4: Participants in Markets for Electrical Energy

 Methods used in determining the amount a customer is willing to pay for electricity VOLL
o Value of Lost Load
 Economic factors a power retailer considers, demand forecasting
o Buy variable, sell fixed
o Requires accurate forecasting of consumer demand (understand patterns)
 Relationship between Marginal cost of generation and market prices
o If one is a price taker, marginal revenue = price
 Profitability of a generating unit (MR = MC)
o No-load cost, start up cost

Ch6: Transmission

 Constraints and network losses affect trading and how they are hedged
 2-bus and 3-bus power system
  Difficulties with physical transmission rights
o PTR is used to check which Is in the money and out the money (from G of another bus or
from G of the same bus)
o Problem 1 –not easy practicality of flows
o Problem 2 – other participants can influence hoarding transmission capacity
 Price of electricity when line losses or congestion
 Components of transmission system that must be taken out for maintenance and how
constrained transmission affects capacity and arbitrage opportunities
 Locational marginal pricing and nodal pricing
o LMP result of congestion (two separate markets)
o LMP higher in areas that import, lower in areas that export
o Economic Dispatch / Constrained Dispatch
o Cost of making system secure = cost of constrained (minus) cost of economic dispatch
o NMP cost of supplying additional MW of load at the node (by cheapest possible means)
o Economically counter-intuitive flows (due to practicality of law of physics)
o Nodal prices at buses with Marginal generator has price = marginal cost
o Nodal prices at buses w/o Marginal generator has price dependent on other Marginal
generators at other buses
 Implications of linking two grid networks
o Improved competition
o Total payment to Gens. Decreases with increased flow
 Types of losses incurred in power systems, marginal cost of losses
o Variable Losses (load losses, copper losses, transport losses) quadratic dependence on
power flows
o Fixed Losses (iron core of transformers eddy current, corona effect in lines) no load
losses, shunt losses
o Non-technical losses (stolen)
o Marginal cost of losses –
 Similar to congestion (but quadratic dependence on power flows)
 Financial Transmission Rights for managing congestion and how are they valued
o For hedging congestion in transmission network

Ch7: Investing in Generation

 Apply IRR and MARR to assess viability of a plant. How plant ops affects IRR
o As long as long run marginal cost exceeds forecasted price of selling
o IRR (DCF)
o If incremental rate of return is above MARR then it makes sense to go for the
incremental investment of say Coal fired over Gas fired
 Plant’s utilization factor affect its IRR (renewable installations)
o Yes, dip in UF can result in declining IRR and switch between options
 Plant upgrade or retirement decisions
 Interpret a load duration curve to decide to invest in addl. Power gen. capacity
 Marginal gen. unit sets electricity prices
 Auction bid for peaker plant
  3-stage piecewise linear curve for electricity market
o Price peaks happen because of bids of infrequent plants that come on board
 Result from a CE calculation will incentivize constr. Of addl. Power gen. capacity
o Capacity payments (small amounts regularly over and above)
o Socialisation of the cost of peaking energy
o Opportunity for manipulation (so abandoned in NETA)

Topic 12: Electricity Economics and Market Design II

FERC: Operator initiated commitments in RTO and ISO markets

 Define an operator initiated commitment and understand the challenges posed by physical and
operational constraints in the day-ahead and real-time market processes in influencing price
formation
o SCUC least cost operation
o Inputs – transmission network parameters, resource supply offers and a requirement
forecast
o Commitment costs – costs to start-up and keep it running min level
o Incremental costs – variable costs of producing electricity and opportunity costs of
foregoing opportunity at other levels
o
 RTOs, ISOs, LMP, DA market, RT market
 Processes RTOs and ISOs use to commit and dispatch resources in DA and RT, incl. market design
challenges associated with physical and operational constraints
o DA
 Out of market commitments made by RTOs and ISOs affect price formation and ancillary
services market
o DA reliability commitments, do not impact setting of market clearing prices
 Distinguish objectives of RTOs and ISOs
 Steps involved in developing a system resource schedule, and understand the indirect effect
that an un-modeled reliability requirements may have on energy and ancillary services prices
o DA market
o RUC – amends DA schedule, solves any reliability issues
o RUC & D (RT) based on actual system conditions
 Components constrained in most resource supply offers as well as typical transmission
parameters included in network models
 DA and RT markets operate how? Example of a cleared DA resource commitment
 Key features of DA markets: CAISO, ISO-NE, , MISO, NYISO, PJM, SPP
o CAISO – minimum online constraints
o NYISO – commitments requested by transmission owners (RUC is integrated)
o PJM – Operator initiated reliability commitments
o ISO NE – commitments requested by transmission owners or dist. Providers, minimum
commitment constraints
o MISO – certain commitments, transmission owners may request too
 How RTOs and ISOs resolve the reliability issues that are not resolved in the day-ahead schedule
 o RUC and RT
 Need for real time markets, explain how real time markets operate, how real time load forecasts
influence RTO and ISO decisions to satisfy future load growth
 Determine the LMP given a set of market assumptions

Market evolution: Wholesale electricity market design for 21st century Power systems

 Identify challenges associated with modern electricity markets and explain actions that can help
resolve these challenges
o Continuing evolution of policy objectives and emergence of new technologies
o Policy objectives – reduce health and environmental impacts and underserved
customers
o Variable renewable energy sources – being addressed by new tech – smart grids, comm
and tech advancements
o Vertically integrated utility model (1)
o Unbundled (G, T & D)
o Energy – only markets (2)
o Energy plus Capacity markets (3)
o 3 main domains
o #1 Integrating variable renewable energy sources
o Complexity
o Encouraging investment where there are zero dispatch resources
o Long term market signals how?
 Understand the market mechanics available that can improve the adequacy, generating
capacity, and ancillary services of markets that contain a large proportion of variable renewable
energy
o Adequacy – fixed % of peak load or LOLP
o Nord Pool – scarcity planning
o Capacity markets
 Benefits and weaknesses of energy-only markets and capacity markets; identify global examples
of their implementation
o LMP price paid to generators (set by marginal cost to serve in a location)
o DA and RT in US (LMP), DA and intraday in Europe, zonal in Nord Pool (intraday upto 1
hour before delivery)
 How –ve electricity prices can arise and their practical impact on power markets
o Lack of flexibility in the system
o Minimum generation periods during which resources cannot be shutdown
o Feed in tariff (pg 30 >>)
o Reactive voltage ?? co-optimization ? pg 36
 Challenges related to implementation of demand response programs and the market rules that
can be adopted to incorporate demand response
o

Capacity Markets – Lessons Learned from the Last Decade

  Basics
o Introduced in 1990s as part of liberalization
o Resource adequacy – planning reserve margin or LOLP
o Reducing investment risk, enabling supplier competition, avoid customer curtailment
o Installed supply = load + PRM
o Net CONE (gap between margins and cost) long run marginal cost of capacity
o CAISO, MISO (bilateral), NYISO, PJM, ISO-NE (centralized)
 Compare energy markets to capacity markets and describe advantages and disadvantages
o Energy only – disadvantages – price spikes public backlash
o Capacity – at 15.25% suppliers would earn significantly less
 How these 2 address issue of resource adequacy, including incentives for incremental
generators
 Elements of capacity market designs across different capacity markets
o Administrative Demand Curve (reflects total system needs)
o Forward Period (by when LSEs must meet their resource adequacy requirement)
o Delivery Period (duration of the obligation) (CAISO and NYISO) others annual
o Definition of Peak Load
o Bilateral and Auction-based Procurement
o LSE deficiency payments in Bilateral
o Rec-configuration Auctions
 Supply and demand curves in capacity markets
o
 Challenges faced by capacity markets
o Capacity prices volatile
 Rule changes, administrative parameters – cone value
o MORP (minimum offer price rules)

Topic 13: Electricity Analytic Tools and Structured Solutions

Heat Rates, Spark Spreads, Tolling Agreements

 Rationale for tolling agreements and risks associated

o No price risks of fuel or power
 Heat rates and spark spreads and how they are applied in tolling
o NG and Power Quantities and prices compared
o BTU/KWH or mBTU/MWH
o Spark spread tied to market prices (not cost of fuel)
 Operating , economic and market implied heat rates
o Gas -> generator -> Power (operating)
o Economic other costs than fuel (contractual)
o Spark spreads expressed in terms of MIHR (for operators of tolling agreements)
 Breakeven fuel cost for a given power-purchase price
  Typical components of a tolling fee and market dynamics inherent in a reverse toll
o Positive spark spread – forward tolling
o Negative spark spread – reverse toll
o Tolling fee – fixed monthly capacity payment and a variable tolling charge for every
MWH produced
 Key components of a tolling agreement term sheet
o Term, Capacity, Capacity Payment, Toll Fee, Dispatch, Heat Rate, Fuel, Start/Shutdown
costs, Penalty, Excess Energy, Ops

Ch 22: Analytical Tools

 Compare capacity factor, availability factor, load factor, demand factor

o Capacity Factor = actual output / potential output [doesn’t tell if it was up all time]
o Availability Factor = operation hours + standby hours / total hours
o Load Factor = average load / peak load
o Demand factor = maximum demand / connected load (all possible connections at homes
 Relationship between thermal efficiency and heat rate; heat rate to calculate cost of electricity
o Efficiency = produced /input (energy) coal 30-50 cc 60
o Efficiency = produced 1kwh worth btu1/heat rate (btu2 required to produce 1kwh)
o Market heat rate = electricity price/fuel price
 Calculate a spark spread, clean and dark spreads, how they are applied
o Difference of power price and fuel price
o [Power price – fuel price * heat rate]
o Like an option – strike price if non-fuel variable costs. Payout is spark spread
o Dark spread – thermal coal; Quark spread – nuclear, Clean – gas
o Clean also includes purchase of carbon credits against the CO2 emissions
o Climate spread = clean dark – clean spread (used to price emission credits too)
 Challenges with Spark Spread modelling
o Correlation was delinked, when linked valuations went for a toss
o Simplistic models (no op. characteristics taken into account)
o Constraints (fuel sourcing, pipeline supply tech wise)
 Interpret Supply Stack and its limitations
o Tool used to come up with electricity prices in a region
o Marginal cost = fuel price * heat rate + VOM (VOM is ignored)
o Least efficient unit from the stack is used to price
o Ignores the intraregion congestions
o Dispatch models are not binary decisions
o Ignores Strategic power pool bid decisions
o Water is assumed free (opportunity costs ignored)
 Source of data for electricity generation and how emission estimates can be derived from
published data
o FERC, EIA (outside FERC’s jurisdiction), DoE (across states), EPA, NERC (reliability)
o State Agencies, power websites of companies, Filings with SEC
 o 2nd – ISO/RTOs
o Analyst Companies
o Types of information
 Generation Units
 Emission Estimates – Qty Fuel consumed x Emission Factor (x Sulphur content)
 CEMS database
 Many plants have control equipment in pace for reduced emissions
 Data about electricity forward curve, cash market transactions, power/fuel price spreads, and
power outages is collected and reported by price reporting agencies
o Forward Curve -
o CE – 5x16 | 5x8 plus 2x24 (M, M+1, M+2, balance year by M, 2 years by M, 4 years)
o W – 6x16 | 6x8 plus 1x24 (M, M+1, M+2, balance by Qtr, 2 years by Qtr, 4 years)
o Platts-ICE (48) and as above, M2M (42) upto 3 years, Argus (28) upto 7 years
o Argus offers heat rates, correlation curves (electricity/gas) for 26 hubs
o Cash Markets – Argus
o Power/Fuel price spreads
o GADS, GAR report

Ch 23: Electricity Market Transactions

 Examples of ancillary services

o Reserves
o Reactive Power and Voltage control
o Loss compensation
o Scheduling and dispatch
o Load following (flexibility to react to varying load) (spinning reserves)
o System protection
o Energy imbalance
o Frequency matching (load generation imbalance)
 Reactive power and voltage support
o Static reactive power by capacitors, dynamic by generators
o Voltage support for transmission lines
 Rationale and criticism of capacity payments
o Stable electricity prices (energy only has price spikes)
o Price signals transmitted to both producers and consumers, but in electricity treated as
public good (consumers want reliable and price shield)
o Criticism – generators may perpetuate the scarcity to maximize the economic rent in
form of capacity payments
 Challenges and considerations for implementation of capacity payment system
 FTR and its payout
o Redistribution of congestion (price difference between source and sink)
o Prevent congestion charges for LSEs
o FTR (Sink – Source)
  ARR and FTR auction system differences
o Allocation and auction
o Allocation based on historical transmissions
 Drawbacks in FTR and how credit risk is created
o Hedge funds siphoning off what belongs to participants
o Credit Risk a function of FTR cost and estimate of congestion
o Credit risk when the FTRs reverses
o Revenue adequacy (between congestion fees collections and FTR payouts that are to be
made)
 Mechanics of power pool transactions in US; frequently used block types and time buckets
o Blocks – on-peak, off-peak
o Time buckets - Wraps
 Role of power marketers in electricity market; use of full req. contracts by power marketers and
risks
o Form of outsourcing (fuel supply contracts, manage generation, power purchase
contracts) RFP and auctions way to select the provider of Full Req. Contracts
o Price and Volumetric uncertainty
o Market structure risk
 Rationale of tolling transaction and its settlement mechanism
o Remove price risk at both ends
o Buyer receives the difference between the Spread (long electricity and short gas)
o Tolling fee is the premium

Topic 14: Electricity - Renewable Generation

MIT Ch1

 Role of Solar in achieving balance between emission reduction initiatives and providing energy
services for global economic growth
o Solar for electricity and electricity for heating and transportation
o Solar-to-fuel technologies
 Describe potential obstacles in development and growth of solar energy market
o Cost, Scaling and Intermittency
 Intermittency and how it factors into the integration of large scale solar generation into the
electric power system
o Variability not associated with time and season
 o
 Key advantages of PV technology over fossil fueled generation
o Modularity: unaffected by scale cost per unit uniform
o Modules inverters (1/3 for residences, ½ for utilities) cost
o Rest of costs – wires, brackets (BOS, balance of system costs)
o LCOE – PV of lifetime costs / PV of lifetime production
o Glass, concrete and steel

MIT Ch4: Solar PV installations

 Features, business models, cost breakdowns of utility scale, commercial and residential Solar PV
installations
o Rooftop residential to large utility-scale plants
o Price per peak watt
o Residential, commercial, utility
o 2 key PV components – module and inverter
o Business Models –
o RFP, or own proposals and approach utilities
o Residential – direct sales or lease mode
o Installed cost and reported price
 Cost trends for PV solar systems over 2008-14
o 18 GWs of PV connected to grid (California vanguard)
o p/watt fell by 50% for res and 70% for utility
o as a result, role of BOS has gone up..
o 50%, 40% to 85%, 65%
 Impact of subsidies, tax credits, and PPA on dev. and financing of solar PV projects
o RPS (renewable portfolio standards) % of sales to be generated from renewable sources
o Federal subsidies (investment): 30% investment tax credit and Accelerated dep. MACRS
(over 5 years)
o Sales and local – financial subsidies – property and sales tax abatement
o Tax credits to go down 30-0 and 30-10 for income and corporate income respectively
o 0.30+0.08 = 0.38C
 Financial structures and mechanisms to finance a solar PV project
o Developer equity, tax equity and project debt (high costs)
o Public capital – ABS, yield-cos
 Compare income, market and cost methods to value solar PV projects and value a project using
o Cost method – no more but the cost of replacing it
o Market method – data from recent sales of comparable systems
o Income method – based on cashflows generated
o CB ITC = PV / 0.62

Ch6: Wind farms

 Assess steps and challenges with development of wind farm, including site selection, turbine
selection, grid interconnection, modelling and initial design, the spacing and siting of turbines,
energy sales agreements, contracting and financing
o Wind farms – 20-200MW dozen to hundreds of turbines in one farm (each 1MW)
o Texas, China (1100MW)
o Offsore (6MW and larger turbines than onshore)
o Turbines separated by a distance (connected by a collection system), utility substation
for step up and high voltage transmission
o Site selection – proximity to transmission lines, wind resource
o Steps
 Site selection
 Wind speed (6-7m/s 13mph) (12-14m/s 27-31mph)
 Power density (W/m2)
 Vertical wind shear (different winds at different heights)
 Ridgelines are best
 (2) should start parallel
 Wind assessment (1)
 Meteorological tower to assess (speed power direction)
 Sodar and lidar technologies
 Year’s worth of wind measurements
 Turbine selection
 Lead time
 Common cause of curtailment – transmission constraints
 Site suitability assessments
 Machine’s projected availability, power curve
 65-90%
 Modeling and initial design
 Financial model
o Output projections
o Cost of turbine, blade, tower
o Balance of plant costs (foundation, cables, erection, substation)
 Farm output, accessibility, ease of permitting and financial practicality
 FEED study
 Power capacity in Megawatts, energy produced in MWH
 Capacity factor = actual produced / potential
 33-35% average capacity factor
 Interconnection design (2)
 Interconnection queue
 Grid stability study
 Low V ride through
 Final design
 Electrical design, turbine foundation design, road maps
  Wake effect – downwind low speed but turbulent (so distance enough
that one turbine’s wake doesn’t affect the other)
 3-5 side by side 5-10
 Permitting
 complex
 Energy sales agreement
 PPA 20 year
 Utility players ( 65%), merchant power (25%), other power marketers
(10%)
 Contracting
 Turnkey – EPC (engineering procurement and construction)
 Financing
 Feedin tariffs, cash grants, loan guarantees, production tax credits,
investment tax credits, and renewable energy credits, accelerated
depreciation
 Feed-in make wind farms easier to finance
 Turbine procurement
 Construction and commissioning
 Factors that influence power production from a wind installation, including design class,
availability, and the capacity factor
 Assess economic impact on wind projects created by govt. incentives, including production tax
credits, renewable energy credits, and feed-in tariffs
 Economic and operational risks associated with development of a wind farm
o
 How performance of wind installations is monitored, and understand how unplanned
maintenance and operating shutdowns can be minimized
o SCADA – supervisory control and data acquisition
o Condition monitoring
o Reactive, preventive, predictive maintenance

Topic 15: Electricity – Integration of Renewable Capacity and Global Emissions

Integrating Renewable into the Grid

 Identify trends in renewable energy capacity and integration in the US, describe the measures
an ISO (ERCOT) and vertically integrated utility (Xcel Energy) have taken to facilitate the
integration of renewable energy into the grid
o Improved forecasts, better management of balances and smart technologies as a
demand side participation to alleviate variability concerns
o ERCOT and Xcel (generally)
 Fast ramping gas fired generation, demand response and storage
 Improved forecasting of wind
  Evolving capabilities of renewable generation
 Transmission infra expansion
 Large scale storage, demand response
 Short term can be addressed with modest operational changes
 Long term may need infra changes
 ERCOT able to achieve this even though it is isolated and cannot lean on other
sources
 Nodal Pricing Market (5 minute dispatch resolution from 15)
 CREZ lines to lower curtailment
 Resource adequacy – improved calculation of wind capacity (ELCC)
 8.7% ELCC for wind
 Wind forecasting
 Tech improvements of renewable sources
 Redesign of ancillary services
 DR
 Xcel
 Changes in ancillary service requirements
 Advanced wind forecasts
 Advanced ops
 How an electric system characterized by a rising share of renewable energy could impact system
operations, reliability, and existing T & D infrastructure
 Describe operational, technological and analytical tools that ISOs have at their disposal to
integrate large and growing share of renewable generation while maintaining high levels of
reliability
 Describe ancillary services and how renewable integration has influences ERCOT’s redesign of
ancillary markets
 Primary concerns and obligations of electric system operators when dealing with renewable
power sources
 Explain the evolution of metrics to assess variable renewable energy’s contribution to meet
peak demand within a system with increasing share of renewable generation
 How advances in wind forecasting impact system operators’ resource commitment decisions
 Define Demand Response (DR) and explain its role in maintaining system reliability

MIT Ch8: Integration of Solar Generation in Wholesale Electricity

 Characteristics of solar energy output and factors affecting the output levels: angle of sun,
placement of panels, etc
o
 Impact of increase in solar penetration on electricity power market, including load
characteristics, prices, cost profiles, and impact on other generations in the merit order
o Curtailment to prevent costly cycling of thermal plants
 Potential role of concentrating Solar Power (CSP) plants and energy storage in a power grid
o
Handbook of Multi-Commodity Markets and Products: Emission Markets and Products

 Key elements of initiatives designed to limit the impact of climate change, including the UN
framework convention and the Kyoto Protocol
o Emissions cannot be stored, no marginal price
o Fossil fuel and deforestation, CO2
o CH4 N20 agri expansion
o 350-400ppm stabilization
o Rules or Prices to put a check
o Sell permits and generate profits, markets incentivize technology changes and
competitiveness towards clean activities
o UNFCC 1990, no targets or time limit set
o COP once a year
o 1997 first protocol
o Annex 1 AAU assigned amount units
o Emssion Trading, JI
o AAUs, ERU, CERs
 European ETS system, including covered industries, market participants, and criteria for
allocating, auctioning and trading allowances
o Combustion, metal, cement, glass-ceramics and paper-board
o EU ETS eu wide target
o Emission Unit Allowance (1 ton of CO2 per period)
o CITL (Brussels)
o Allocation
 Input Based: doesn’t reward efficiency of the installation
 Emission Based: doesn’t take into account changes after a base year
 Allocated permits = emission in base year / total emissions in base * total permit
 Production based: output * emission factor
 Auctioning and Grandfathering
o Trading – 2005
 ECX (euro climate exchange)
 Nord Pool (CERs)
 EEX
 Regional and voluntary initiatives to reduce carbon emissions
o
 Factors that can impact the price of carbon permits (allowances) and assess models of price
formation for ETS carbon allowances
o Macroeconomic – growth, weather, energy prices and abatement
o Statistical methods
o Stochastic models
o High volatility, less liquidity
 Dynamics that influence the fuel-switching decision for generators in a market with carbon
allowances
o If cheaper than purchasing permits
o Permit price = marginal cost of abatement