Adding power to power marketing
One thousand percent increase in gross revenue. Profits to parent company near $120 million US annually. Staff growth from 20 to 100. Third round of office design. And all over five years. Does this sound like a company from the high flying worlds of e-commerce or computer technology?
Well, this is a small story from the brave new world of free trade in electricity. Situated on the west coast of Canada, nestled between the Rocky Mountains and the Pacific Ocean, the province of British Columbia benefits from a hydroelectric system that covers two river basins, and that can generate 10,000 MW of clean renewable water fuelled electricity.
The utility responsible for this system is BC Hydro. The system is electrically connected to the west coast of the United States to the south, and to the Canadian province of Alberta to the east. These natural advantages and an enterprising spirit have combined to provide an opportunity to play a significant role in international electricity trade.
In 1988, BC Hydro formed a subsidiary, Powerex, to assist in establishing new electricity generation in Canada that could be sold in the higher priced markets in the U.S. Initially, Powerex’s main role was in negotiating with a large number of transmission owners for transmission paths within the U.S. Negotiations were hard nosed, and Powerex often had to share a large portion of any trade profits with the monopolistic transmission owners.
OPEN MARKETS BRING ABOUT CHANGES
Almost over night this environment was turned upside down. Alberta went to a government imposed open market system in a remarkably short period of time – and on January 1 1996 Powerex was one of the first traders when that hourly electricity market opened. In the same year the US Federal Energy Regulatory Commission (FERC) began to open the electricity market in the same way it had earlier opened the natural gas market.
Suddenly electric transmission could no longer be used to collect ‘ransom’. Monopoly access was replaced by open access. Wholesale customers could shop for electricity supplies in the same way they could shop for other purchases. Powerex was one of the first power marketers to successfully negotiate a deal to supply a large industrial customer in the US.
While the market is ‘open’ it is not unregulated. Powerex has worked very hard to get the necessary permits and authorisations to trade into, out of, and within the US. A triumphant milestone for this strategy was reached in 1997 when Powerex became a supplier to Mexico, involving all three countries in the North American Free Trade area.
Probably the single most significant event for Powerex was the granting of a power marketing authorisation by FERC in October 1998. Suddenly we could sell and deliver power directly to customers’ facilities, where previously we had to make deliveries at the international boundary, leaving the customer nominally responsible for collecting it from there. Direct delivery put us on a level playing field with our US competitors.
Another important event on the US west coast was the decision by California to open its electric supply to competition. There is now a vigorous hourly market in California, with prices often changing dramatically from one hour to the next. Many generators can do little to respond to these rapid price changes, since nuclear, coal and some older oil and gas plants can only change their production slowly. Backed by a fast response hydro-electric system, Powerex has developed a profitable niche in this market.
The timing in electricity trade has gone from multi-year contracts, often with fixed prices for years at a time, to trading that can be concluded as close as 20 minutes before deliveries are made. And even this timing is likely to become tighter over the next year.
THE TRADE FLOOR
If you walk into our office, the feature that most dramatically shows these changes is the trade floor. Already covering a third of a downtown office floor, it is an open area with huge screens showing various prices and even temperatures at key cities in our trade area. Gone are the cubicles and offices that were an institution in the industry for years. Communication has to be fast and comprehensive, and the open floor allows this to happen, as well as being symbolic of the barriers that have had to be swept away. Every desk has at least two large computer screens, and in some areas it seems all the visible space is taken up with more screens, capable of showing many millions of pieces of vital information. We have had to start a training programme just to make sure people know how to use the screens available.
Deals are nearly all either electronic or verbal. All telephones on the trade floor are recorded; in the case of any misunderstanding, these recordings can be used to settle the outcome. Transmission is usually booked using an Open Access Sometime Information System required by FERC, and known as OASIS. The ability to catch important transmission booking deadlines has led to a new science (or perhaps it’s really an art) in Internet access programs. The information technology support group has grown from 1 to 8 people over the past four years, showing just how important computers and the Internet have become.
The big benefit from this open trade is the economic improvements it is producing every hour. Using the fast response of the hydro generators, Powerex bought and sold a combined total of 43,000 GWh (million kWh) during the last year. The comparable number five years ago was 8,000 GWh. This represents a huge improvement in the way generators have been used to full advantage. Since the demand is growing much faster than supply in this part of the world, customers have not seen a dramatic improvement in the price they pay, but prices are probably less than they would have been without an open market.
While generators have been quick to respond to such real time price signals, customers have been slower. However, there are some signs of things to come. A grocery store chain in California is looking to control the total electric load at all its outlets to respond to price signals. It plans to do this using the computer network it has already installed, to provide consolidated inventory, ordering and credit functions, to control refrigerators and other electricity uses in the stores. Locally, BC Hydro came to an arrangement with some large customers that they would cut their consumption during very high price periods, and then shared the savings with the customers. Imagine being paid not to use electricity!
HOW METERING FITS IN
Metering at the wholesale level is done by transmission entities, and billing is largely the result of breaking one gross metered amount into specific contract amounts using detailed ‘schedules’. However, as the competitive market filters its way down to the end users, metering becomes an opportunity as well as a challenge. For example, the cases of user responses to fast-changing prices mentioned above need real time metering at a minimum. Being able to group customers in one service area, let alone group customers in different regions, so they can be billed as a single user is going to challenge a number of traditional ideas about supplying and metering electricity. Even serving a single customer in another service area has been a challenge, even after the contract was signed and deliveries were taking place.
We in Powerex don’t have any particular insight as to how things will change in the next year or two. We do know, however, that most of the business we are doing today did not exist three years ago, so we are sure that tomorrow will not be the same as today. As a long time member of the electric industry, I marvel at the speed of the changes blowing through our staid old electric business, and admire the equally swift responses of those now at the front of these changes.