Category Archives: Economic

Ancillary markets

Image courtesy: Argonne National Laboratory a general term for markets that facilitate the provision of specialty services and functions beyond generation and transmission. These services generally maintain grid stability (e.g. frequency control), ensure that supply meets demand (e.g. spinning reserves) and support grid security (operating reserves). Pros Provides access to energy revenues that can fund…
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Capacity transaction

Image courtesy: Delft University of Technology the acquisition of a specified quantity of generating capacity from another utility for a specified period of time. Measured in megawatts (MW). Pros Allows for proper allocation of resources and fees Cons Poor capacity planning/controls can result in expensive capacity fees. Real Talk A practical tool for transmission owners to collect fees…
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Day-ahead energy markets

"Earth" by Yuri Samoilov is licensed under CC BY 2.0 a financial market that lets market participants commit to purchasing or selling wholesale electricity one day before the operating day, to help avoid price volatility. Pros Provides a great alignment of the technical and financial operations related to delivering electricity; allows for better resource planning…
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Escalator value

Image licensed under CC0 1.0 A percentage value that can either increase or decrease a contracted value over time or for a given market condition. Pros Reflects future changes to market conditions Cons They can be contractually mandated into effect even if the market conditions don't call for it. For example, a solar PV power…
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Horizontal integration

"Integration in English" by Andrew c is licensed under CC BY-SA 3.0 the process of a company increasing production of goods or services at the same level of the supply chain. A company may do this via internal expansion, acquisition or merger. Pros Can be a sign of progress, e.g. many of the same type of small, struggling companies consolidate into…
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Internal Rate of Return (IRR)

Image licensed under CC0 1.0 a metric used in capital budgeting to estimate the profitability of potential investments. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects on a relatively…
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Net Present Value (NPV)

Image licensed under CC0 1.0 used in capital budgeting and investment planning to analyze the profitability of an investment or project. It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss.  Pros Universally meaningful to any party reviewing an energy investment…
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Non‐synchronized reserves

"Diesel generator" by Guangjian Duan is licensed under CC BY 2.0 additional generation capacity above the expected load scheduled which can be available within 10 minutes to protect the power system against the uncertain occurrence of future operating events, including the loss of generation or load forecasting error Pros Allows for more efficient market operation.…
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Power Purchase Agreement (PPA)

Image licensed under CC0 1.0 a legal contract between an electricity generator (provider) and purchaser (buyer, typically a commercial or industrial business, government entity, utility, or other large power buyer/trader). Pros PPA contracts are widely available and understood. Cons It's easy for undereducated consumers to sign a non-beneficial agreement with long-term impacts of 25+ years. Real Talk PPAs have been…
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Property Assessed Clean Energy (PACE)

"As solar firmengebaude" by ChristofferRiemer is licensed under CC BY 3.0 a financing mechanism in which energy efficiency and renewable energy improvements on private residential (R-PACE) and commercial property (C-PACE) are attached to the property and repaid through the property tax bill. Pros Expands access to clean energy by allowing for long-term project financing with…
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Rates

Image licensed under CC0 1.0 the amount of money the utility charges per unit of energy consumed (usually defined in terms of kilowatt hours) or per unit of demand (usually defined in Kilowatts) according to the tariff. Pros A simple element that can be easily shaped to send signals to the market to invest. Cons Rates may not fully…
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Real-time energy markets

"Lights template Electricity Transport Network Tech Background Energy lights" by tOrange.biz is licensed under CC BY 4.0 non-discriminatory transaction platforms for providing necessary grid-balancing services, where the nodal (or zonal, depending on the market) market clearing prices are very close to real-time operations of power systems.  Pros Matching real-time demand with resources is a highly…
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Regulation markets

Image Courtesy: PJM Interconnection markets that provide compensation to resources that have the ability to adjust output or consumption in response to an automated signal to correct for short-term changes in electricity use that might affect the stability of the power system. Assets are said to "play" in the markets. In technical terms, the main…
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Return on Investment (ROI)

Image licensed under CC0 1.0 the benefit (or return) of an investment divided by its cost. The result is expressed as a percentage or a ratio. ROI = (Current Value of Investment - Cost of Investment) / Cost of Investment Pros Common and simple to understand Cons Often too simple of an explanation for banks…
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Spark spread

Image licensed under CC0 1.0 a common metric for estimating the profitability of natural gas-fired electric generators. The spark spread is the difference between the price received by a generator for electricity produced and the cost of the natural gas needed to produce that electricity. It is typically calculated using daily spot prices for natural…
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Spinning reserve (synchronized reserve)

Image Courtesy: Nuclear Regulatory Commission generation capacity that is online but unloaded and that can respond within 10 minutes to compensate for generation or transmission outages. “Frequency-responsive” spinning reserve responds within 10 seconds to maintain system frequency. Spinning reserves are the first type of reserves used when shortfalls occur. Pros Provides grid operators options to…
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Stranded cost

"Demolition of the ECVB power plant" by Stephane Gaudry is licensed under CC BY 2.0 existing infrastructure investments owned by a public utility, which may become redundant due to substantial changes in regulatory or market conditions. An incumbent electric power utility will have made substantial investments over the years and will carry debt, payments on which are included in…
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Tax credit

Image licensed under CC0 1.0 an amount of money that can be offset against a tax liability dollar-for-dollar. In RE development, federal tax credits have come in two basic flavors: Investment Tax Credit (ITC, based on investment amount) or Production Tax Credit (PTC, given per unit of energy produced). Pros Increases the return on investment…
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Tax deduction

Image licensed under CC0 1.0 lowers a person's tax liability by lowering his or her taxable income. Pros Improves the return from an investment Cons You need taxable income to take advantage of this, i.e. a municipality can't use it. Real Talk Aligns asset investments with others like homes or medical expenses.
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Tax depreciation

Image licensed under CC0 1.0 can be listed as an expense on a tax return for a given reporting period under the applicable tax laws, used to reduce the amount of taxable income reported by a business. Depreciation is the gradual charging to expense of a fixed asset's cost over its useful life. Pros Accounts for the true value of a…
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