--> Abstract: Power Pricing - Variations And Volatility, by D. A. Miller and F. James; #90928 (1999).

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MILLER, DAVID A., and FRED JAMES, C.C.

Pace Resources, Inc., Fairfax, VA

Abstract: Power Pricing - Variations and Volatility

Under conditions of traditional regulation, the wholesale cost of electricity is generally identified with utility lambda - the marginal cost of generation. It is the most expensive unit dispatched to meet demand in any hour, that sets the system price for that hour. Therefore, the highest power cost regions are usually those where older oil and gas fired plants spend a lot of time on the margin.

One can develop expectations for future prices by compete a the portfolio of generating plants to forecasts of demand. But in the still developing competitive wholesale market, electricity prices can reach levels not predictable by these fundamental factors. In the summer of 1998, hot weather, transmission congestion, and intense speculation led to prices in the Midwestern United States of over $3,000 per MWh, more than 100 times typical prices. As retail electricity markets around the country restructure, this trend to increased volatility will continue. It will be driven by the need of generators to recover their capital and fixed costs from the competitive market instead of ratepayers. In comparison, the natural gas market, at its most volatile, may reach peak prices of only two to four times average.

The relationship between gas and electricity prices - also known as the spark spread - is therefore important to resource managers and power plant operators both on an average and seasonal basis. Clearly, there is opportunity, but also risk, in playing both markets simultaneously.

AAPG Search and Discovery Article #90928©1999 AAPG Annual Convention, San Antonio, Texas