Ancillary Services Market, Day-Ahead Load Response and Special Case Nodal Pricing

Implementation

Vamsi ChadalavadaFERC Technical Conference

March 4, 2005

2

Primary considerations in delivering market enhancements

– To implement identified market enhancements as

early as possible

– To balance the urgent and competing stakeholder

priorities

– To minimize overall implementation costs

– To maximize the compelling synergies across multiple

market enhancements

3

Primary considerations in delivering market enhancements

– To minimize further delays downstream in various

other important initiatives identified by the ISO and

stakeholders

– This presentation focuses on Ancillary Services

Market, Day-Ahead Load Response and Special Case

Nodal Pricing

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Ancillary Services Market high level scope

– Regulation market redesign

– External transactions setting price

– Day-ahead re-offer period changes

– Reserve markets

• Forward reserve market

• Real-time joint optimization of energy and reserves

– Direct demand participation in reserve and real-time

energy markets

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Day-ahead Load Response high level scope

– Designed for demand resources that can offer load

reductions concurrent with the day-ahead wholesale

electricity market

– The Day-Ahead Load Response Program contributes

to greater market efficiency by allowing the demand

resource to specify the wholesale electricity price at

which it is willing to curtail load

– The demand resource has greater control over its

load reduction because it knows a day in advance

when and for how long its load reduction will be

scheduled

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Special Case Nodal Pricing high level scope

– Permit qualifying customers to settle at nodal prices

– Allows for either a dispatchable or non-dispatchable

option

– Special Case Nodal Pricing will better integrate

demand response directly into wholesale markets

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Original planned implementation sequence

– ISO proposed Day-Ahead Load Response (‘sequential’

methodology) scheduled for implementation in June 2005

– Ancillary Services Market scheduled for implementation in

October 2005

– Special Case Nodal Pricing scheduled for implementation

in October 2005

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Rationale for original planned implementation sequence

– Implement market enhancements as early as

possible

– Comply with commission directives

– Leverage the significant synergies across multiple

elements such as the Reserve market design, direct

demand participation in the reserve and real-time

energy markets, dispatchable special case nodal

pricing

– Address the dependencies for certain market

enhancements

– Recognize the benefits of a ‘system release’

methodology

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Identified synergies that result in efficiency gains

– Many of the elements of the proposed enhancements

primarily involve modifications in exactly the same

software systems and business processes

• Scheduling, Pricing and Dispatch Functions

• Unit Dispatch System

• Settlements and Financial Systems

• Security Constrained Reliability Assessment

• Electronic Dispatch

• Data Modeling

• User Interface and Web Publishing Systems

• Archiving, Performance Monitoring and Analysis

Systems

10

Infrastructure dependency

– A fundamental improvement is the introduction of a generic

asset class called ‘asset related demand (ARD)’ that is

integrated in a similar manner as supply across all

• Software systems

• Databases

• Markets and

• Business processes

– Field improvements required in the area of modeling and

metering

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Requirement for certain market enhancements

– Asset Related Demand is needed for the implementation of

• Direct demand participation in reserves and real-time

energy market

• Dispatchable Special Case Nodal Pricing

• ‘Integrated’ Day-Ahead Load Response

– This infrastructure improvement is part of the Ancillary

Services Market project

– Therefore, it is not feasible to implement these market

enhancements until the infrastructure improvement is in

place

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Benefits of a software system release methodology

– Package functionality into a single software system

release

• Significant efficiency gains in terms of software

development, testing and training

• Significant savings in development costs

– Multiple releases (or a ‘release for each market

enhancement’) create the need for additional system

infrastructure and human resources thereby driving

costs and more importantly, delaying the delivery of

market enhancements

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An illustration of the benefits of ‘release methodology’

Ancillary Services

Market* as one release

Ancillary Services

Market* as three releases

Schedule Fall 2005 Fall 2007

Budget $15M $27-$31M

* Identical Functionality

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Why do most market enhancements take so long?

Large Projects Medium Projects

Stakeholder process and

Regulatory approval12-15 months 5-9 months

Project Implementation 15-18 months 9 months

Total Duration 27-33 months 14-18 months

• Examples of large projects include Ancillary Services Market,

Hourly bidding; Examples of medium projects include

Regulation market design; Pricing for external nodes

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Why is the project Implementation phase so long?

Large Projects Medium Projects

Functional Design 10 weeks 6 weeks

Development 24 weeks 10 weeks

Internal Controls, Audits 8 weeks 4 weeks

Testing* 16 weeks 10 weeks

Training** 10 weeks 6 weeks

Total 68 weeks 36 weeks

* unit test, integration test and business end-user test

** 6 shifts of control operators, forecast office and market

administration, business owners and support personnel;

assumes 6 weeks of overlap with testing

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Stakeholder Feedback

– Stakeholder feedback regarding original proposal and

schedule

• Correlation between Ancillary Services Market and

LICAP; Complexity of the Ancillary Services

Market design

• Heavy demand on time due to LICAP and RTO

• Detailed market impact analysis

• High pace of market design enhancements

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Stakeholder Process Improvements

– Based on stakeholder feedback, the ISO will

• Work with NEPOOL in implementing a ‘design

sheet’ (decision tree) approach

• Publish a series of white papers and examples

during the conceptual design

• Provide a market impact analysis as part of the

market design proposal

• Vote on the conceptual design, prior to voting on

the detailed design

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Stakeholder Process Improvements

– The ISO and NEPOOL have adopted this revised

format for further discussion on the Ancillary Services

Market

– The ISO believes that this revised format has resulted

in significant progress being made

– The ISO believes that this experience will help build a

strong foundation for discussions on future market

enhancements

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Revised Implementation Sequence

– The ISO evaluated and presented alternate proposals

for the implementation of Ancillary Services Market,

Special Case Nodal Pricing and Day-ahead Load

Response

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Revised Implementation Sequence

– Approved by ~96% at the February NEPOOL Participants

committee

• Implement Ancillary Services Market as two phases

• Phase 1 scheduled for implementation in October 2005 (filing

by March 2005 and approval by May 2005) will include

Regulation market redesign, Day-ahead re-offer period

changes and External transactions setting price

• Phase 2 scheduled for implementation no earlier than June

2006 (filing by Sept. 2005 and approval by Nov. 2005) will

include the Reserve market design, Direct demand

participation in reserve and real-time energy markets and

Special Case Nodal Pricing

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Revised Implementation Sequence

– Approved by ~77% at the February NEPOOL

Participants committee

• Implement the ISO proposed ‘Sequential’ Day-

Ahead Load response program for June 1 2005

and replace it with the ‘Integrated’ Day-Ahead load

Response program following the implementation of

Ancillary Services Market

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Revised implementation sequence considerations

• FERC decisions on market design proposals and revised

implementation sequence

• Outcome of the LICAP hearings

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Conclusion

• The ISO is striving to achieve the optimal balance between

responsiveness and efficiency (human resource

allocations and monetary expenditures)

• It is the ISO’s twin mission to ensure reliability and fair and

efficient wholesale markets

• The ISO looks forward to working with its stakeholders in

implementing these identified market enhancements