ArrowHead Models – Power and Environment

The ArrowHead Regional Power and Environment Model Represents the Way the North American Power Market Works

The Nine Dimensions of the North American Electricity Market

In every region of North America, wholesale electricity has nine constituent dimensions as illustrated in Figure 1 below including:

1. Fuels and fuel substitution. Which fuels are available in each region, at what prices, and at what quantities?
2. Generation
   1. Existing fleet. How will the existing fleet operate?
   2. New generation capacity additions. What type of new generation will be added, in what magnitude, and how will it run?
   3. Retirements and decommissionings. When and where will generation be idled or decommissioned?
3. Renewables. How many MW and MWh of renewables? What is the RPS, and what is the fundamental value of a REC?
4. Emissions. (Tax, cap and trade, or command and control regulation for SO2, NOx, mercury, CO2, and/or particulates)
5. Price-based competition at the busbar.
6. Net energy for load and ancillary services at the busbar. The level of locational reserves (spinning, standby, regulation)
7. Inbound transmission. (The transmission entering each region)
   1. Existing transmission. How will existing facilities operate?
   2. New transmission capacity additions. How much new transmission will be added, in what magnitude, and how will it operate?
   3. Retirements and decommissionings. When and where will transmission be idled or decommissioned?
8. Outbound transmission. (The transmission leaving each region.)
   1. Existing transmission. How will existing facilities operate?
   2. New transmission capacity additions. How much new transmission will be added, in what magnitude, and how will it operate?
   3. Retirements and decommissionings. When and where will transmission be idled or decommissioned?
9. Energy Storage (i.e. electricity storage). Any of the various storage technologies in a region, including batteries; capacitors; pumped hydro; thermal energy storage (TES), such as ice storage; heat engine powered generators; fuel cells; and high technology methods such as molten salt.

Figure 1: Nine Dimensions of the North American Electricity Market

The Arrowhead North American Power and Environment Model Accurately Represents the North American Market

The ArrowHead North Power and Environment Model not only includes and integrates the foregoing elements, it does so in every region and interconnects multiple regions that comprise a larger area. Capacity additions, and thus price and basis differentials, are entirely endogenous in the ArrowHead model and so are environmental emissions prices. The model does not require “guessing” about capacity entry and exit; the model determines this as part of its calculation of prices and quantities. The model enables users to calculate power price relative to fuel price (i.e., “spark spreads” or “market heat rates”) to support capacity addition of all types, as well as trading, demand response, mergers and acquisitions, and other decisions.

The ArrowHead North Power and Environment Model represents not only wholesale but also end use (sometimes termed retail), distributed generation, and bypass as shown in Figure 2 below. Notice that in the model representation in the upper left, central station generation is distributed to the residential sector. There are a number of distributed generation techniques in the residential sector at the upper left that generate or store power and dispatch it in the residential sector. Some of it is consumed there, but some is uploaded back to the transmission system to be distributed to other customer classes. The same is true of the industrial sector at the upper right, which represents its own local generation and storage together with the prospect of behind the fence generation, either or both being used within the industrial sector or uploaded back to the wholesale power market for use by other customer classes in the “Int Elec LEC” triangles. The two figures paint a complete picture of distributed generation as it interacts with central station generation and transmission. Every load and every node in the diagram has an hourly or equivalent time schedule.

Figure 2: Power End-Use Structural Network Representation

Comprehensive Model of North American Electricity and Emissions

The ArrowHead North American Power and Environmental Model is deterministic or probabilistic (client choice) for all regional markets. It calculates the full forward price schedule of power and emissions at every located region in North America either deterministically or probabilistically (client choice), and it gives the basis differential to every other region either deterministically and probabilistically (client choice). Rather than having to guess and exogenously input fuel prices or emissions prices, The North American Power and Environment Model is integrated with our Global Gas, Global Oil and Global Coal Models so that fuel prices themselves can be endogenous. Thus, for example, the model represents the interdependence of gas and power price and demand. Additionally, emissions models are integrated so that emissions (SO2, NOx, mercury, CO2, and/or particulates) as well as energy credits (such as RECs or RINs) are treated as commodities in the integrated model and the models produce quantities (for emissions) and prices endogenously.

Model Transparency and Adjustability Based on Client Needs

As with all of our models, the data used and the network structure are transparent and easily viewable by clients. All data, network structure, and assumptions can be reviewed and fully adjusted to include clients’ point of view, whether for a client base case or for any scenario.

This, coupled with our time-tested, validated methodology, is why the ArrowHead North American Power and Environmental Model (and earlier versions) have helped clients clearly understand future gas markets and make correct, profitable decisions.