CEP Energy Market Fundamentals 5 — Questions and Answers
Question 1: In deregulated electricity markets, what is the role of the 'load-serving entity' (LSE)?
- To build and operate transmission lines within the ISO footprint
- To procure adequate electricity supply to meet its customers' load obligations (Correct answer)
- To set retail electricity rates approved by state regulators
- To dispatch generating units on behalf of the ISO
Correct answer: To procure adequate electricity supply to meet its customers' load obligations
An LSE (utility, co-op, or retail supplier) is responsible for securing sufficient generation resources to serve its retail or wholesale load obligations.
Question 2: What is a 'financial transmission right' (FTR) used for in electricity markets?
- Granting physical access priority on congested transmission corridors
- Hedging congestion cost exposure between two grid locations (Correct answer)
- Certifying that a generator met its capacity commitment
- Allocating renewable energy attributes to load-serving entities
Correct answer: Hedging congestion cost exposure between two grid locations
FTRs pay holders the congestion revenue between two nodes, hedging the LMP spread risk for parties with physical positions on congested paths.
Question 3: Which natural gas market index is most commonly used as the North American benchmark for long-term pricing?
- Transco Zone 6 New York
- NYMEX Henry Hub (Correct answer)
- Chicago Citygate
- SoCal Gas Citygate
Correct answer: NYMEX Henry Hub
Henry Hub in Louisiana is the delivery point for NYMEX natural gas futures and serves as the primary North American price benchmark for gas contracts.
Question 4: A supplier offering a 'green tariff' program allows a large commercial customer to:
- Avoid all electricity transmission charges
- Procure utility-delivered renewable energy with associated RECs through a regulated rate schedule (Correct answer)
- Install on-site solar panels at the utility's expense
- Bypass the ISO capacity market obligations
Correct answer: Procure utility-delivered renewable energy with associated RECs through a regulated rate schedule
Green tariffs let large customers source renewable power from the grid through a special utility rate, often bundled with RECs, without constructing their own generation.
Question 5: What does 'demand response' allow electricity customers to do in wholesale markets?
- Generate their own power and sell it at retail rates
- Reduce or curtail consumption during grid stress in exchange for payments or bill credits (Correct answer)
- Lock in a fixed price for electricity for the next five years
- Avoid paying transmission and distribution charges during peak periods
Correct answer: Reduce or curtail consumption during grid stress in exchange for payments or bill credits
Demand response programs compensate customers for voluntarily reducing load during peak or emergency conditions, functioning like a virtual generation resource.
Question 6: A natural gas 'basis swap' is typically used to manage which type of risk?
- Credit risk from a counterparty defaulting on a forward contract
- Price differential risk between a regional delivery point and the Henry Hub benchmark (Correct answer)
- Volume risk from uncertain customer consumption patterns
- Regulatory risk from pipeline rate case proceedings
Correct answer: Price differential risk between a regional delivery point and the Henry Hub benchmark
A basis swap exchanges the floating spread between a regional hub and Henry Hub, isolating geographic price risk from absolute price-level risk.
Question 7: Which electricity market product is specifically designed to ensure generator availability during peak demand periods rather than compensating for actual energy delivered?
- Ancillary services (regulation and spinning reserve)
- Capacity obligations or installed capacity (ICAP) products (Correct answer)
- Real-time energy market settlements
- Renewable portfolio standard (RPS) compliance credits
Correct answer: Capacity obligations or installed capacity (ICAP) products
Capacity products (ICAP, capacity obligations) compensate generators for being available and committed to the grid, separate from compensation for actual MWh generated.
CEP Energy Market Fundamentals 5
In deregulated electricity markets, what is the role of the 'load-serving entity' (LSE)?