Navigating the complex waters of competitive power markets
September 9, 2020
by Peter Maloney
September 8, 2020
The complexity of wholesale power markets can seem daunting, especially for smaller players without a deep bench of analysts and traders. But public power utilities looking to navigate those markets can find help in the form of partners such as The Energy Authority (TEA).
Wholesale power markets operated by Regional Transmission Organizations and Independent System Operators use auctions to sell power and other services at the lowest cost, but over time the variety of auctions needed for the various attributes of electric power and its delivery have evolved, creating a bewildering array of rules and regulations.
In addition to day-ahead and real-time spot energy markets, wholesale power markets also often have auctions for products such as capacity and financial transmission rights (FTRs).
The risks of trading in some of those markets were underscored in 2018 when GreenHat Energy defaulted on $150 million of FTRs in the PJM Interconnection market.
GreenHat’s default highlighted some of the complex issues involved in trading in wholesale power markets.
TEA, which is headquartered in Jacksonville, Fla., provides public power utilities with access to resources and technology that enables them to respond competitively in the changing energy markets.
First and foremost, TEA listens to the goals of the utility, and seeks to understand their focus and goals, Joanie Teofilo, CEO of TEA, said. “We look holistically at their portfolio whether it is solar, gas – whatever those assets are – and how best to optimize their assets and manage risk.”
TEA was founded 23 years ago when it executed its first trade on behalf of its founding members, JEA of Florida, Santee Cooper of South Carolina, and Municipal Electric Authority of Georgia (MEAG Power).
The company was formed in the wake of two landmark orders from the Federal Energy Regulatory Commission, 888 and 889, that were designed to create a competitive market for trading electricity.
Recognizing the “existential threat and unique opportunity” those orders created for public power, the founders came up with a business model that uses economies of scale to give community-owned utilities access to the financial expertise, advanced technology, and operational experience needed to compete in the new environment, according to TEA.
Any one of the founding partners could have done their electricity trading in house, but they realized the economies of scale that belonging to a much larger organization would confer, Jamie Mahne, TEA’s chief client officer, said.
Since its founding, TEA has evolved from a bilateral power trading firm to a company offering public power utilities a range of products and services that include wholesale market management and trading, portfolio management, power supply management, natural gas management, and advisory services.
TEA’s ownership has also expanded, from its three founding member-owners in the Southeast to seven member-owners in locations throughout the country, including American Municipal Power, City Utilities of Springfield, Missouri, Gainesville Regional Utilities, and the Nebraska Public Power District.
TEA now serves about 60 public power utilities and represents over 30,000 megawatts (MW) of generation across all fuel types. The company also consistently ranks as the top power trader by volume among community-owned utilities with approximately 200,000 transactions per year.
While it started in the Southeast, TEA now operates in the wholesale markets of the PJM Interconnection, the Midcontinent Independent System Operator, the Southwest Power Pool, the Electric Reliability Council of Texas, and the California ISO, as well as in bilateral power markets in the Southeast, Northwest and West.
Despite its broad reach, TEA is “agnostic” when it comes to the relative benefits of different regional power markets, Teofilo says. For the most part a utility’s market participation is guided by their geographic location, though some utilities have load and/or generation in multiple markets, she said. “We help utilities derive the most value from whatever market they are in.”
In addition to expanding its geographic scope, TEA has also moved beyond trading for its partners. TEA does portfolio management for some clients, advising them on issues such as when to run their gas-fired generation and when to buy power in the wholesale market or how to hedge their exposure to natural gas price volatility.
The underlying idea is, “What’s the most cost-effective way to deliver lowest cost electric power with minimal risk?” Mahne says. He compares it to “meeting with your financial advisor.”
TEA was built to capture economies of scale, Mahne says, but “now we have this analytical engine that we can point at new problems that have nothing to do with wholesale markets.”
“We are seeing tremendous disruption” in the utility industry, even before COVID-19, in the form of decentralization, digitization and decarbonization, Teofilo says. “Our focus is working together with utilities to take advantage of those opportunities.”
As examples, she noted that TEA has worked with clients to help them decipher and act on the oceans of data generated from Advanced Metering Infrastructure (AMI) and to help clients streamline their requests for proposals (RFPs) process to be able to “see across the board what different developers are quoting.”
TEA can also help clients navigate the more arcane corners of the wholesale markets, for example, virtual products such as FTRs. The use of those products has attracted new players and ignited controversy about the appropriate role, if any, of financial players in wholesale power markets.
Despite failures like the GreenHat default, financial products can be valuable tool in competitive markets, Teofilo says. “They support a well functioning market,” Mahne adds. “It comes down to a liquidity discussion. The more buyers and sellers there are, the more efficient those markets are going to be,” he says.
One of those financial players is TPC Energy Fund, a privately funded power trading firm based in Washington, D.C., that focuses on FTRs.
TPC began trading FTRs in PJM in 2016 and now also trades similar products in the New York ISO and ERCOT.
By providing market liquidity and price discovery, TPC Energy and similar firms allow companies like TEA “to more effectively and efficiently transact in these markets to benefit their clients,” Noha Sidhom, TPC’s CEO, says. “We are the creditworthy counterparties.”
While the GreenHat default has shed a negative light on financial players in the FTR market, “The discussion we should be having is, ‘Do we have rules in place to protect market participants from any type of default?’” Sidhom said.
“PJM has made significant improvements, and we continue to work with them to refine the rules and set up a more secure infrastructure,” Sidhom says. “It’s important for them to have proper collateral requirements and to know their customers’ practices.”