Changing the System TMOR Reserve Constraint Penalty Factor

Changing the System TMOR Reserve Constraint Penalty Factor

Aleks MitreskiMarkets CommitteeOctober 13, 2011

Presentation Overview• Problem statement• Definitions• Background on energy and reserve co-optimization • Inefficiencies during Reserve Constraint Penalty Factor

(RCPF) activation• RCPF analysis

– Part 1 - Determining new RCPF value– Part 2 - Re-running UDS cases with new RCPF value

• Recommendation• Proposed timeline• Appendix 1 – Scenario 1 & 2 calculations

System TMOR RCPF Change

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Problem Statement

• The ISO has observed operational and economic inefficiencies when the system real-time Thirty Minute Operating Reserve (“TMOR”) price reaches its ceiling value (i.e., the RCPF) of $100

• Consequences– Failure to follow incentive is created when resources with re-

dispatch costs above the RCPF are not compensated according to their lost opportunity cost

– The ISO must manually (in most cases inefficiently) re-dispatch resources to supply reserves

– Lack of market transparency and understatement of system TMOR price


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ENERGY AND RESERVE CO-OPTIMIZATION

Background on general market design principles, incentives and price formation of the real-time TMOR price


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Definitions


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UDS = Matrix

Energy and Reserve Co-Optimization

• UDS uses an energy/reserve co-optimizationalgorithm to dispatch all available resources for least cost to meet energy and reserve requirements

• Resources are dispatched to provide energy or reserves based on their energy offers

• There are no real-time reserve offers. UDS determines the resources’ cost for providing reserves in real-time based on their energy offers

• However, UDS stops co-optimizing resources once the RCPF cap is reached


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• In general, real-time reserve prices are predominantly $0 because of surplus of reserves available to meet the requirement

• Non-zero real-time reserve prices occur:– When instead of being dispatched up due to the economics of its

energy offer, a (fast ramping) online resource is held back for reserves while a more expensive resource is dispatched up for energy (with slower ramping capability); or

– When instead of being dispatched online due to the economics of its energy offer, a fast start offline resource is held offline for reserves while a more expensive resource is dispatched up for energy


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Key principles that must be adhered for efficient operation of the energy and reserve co-optimization:

– Resources dispatched for reserves must be compensated for their lost opportunity cost for not providing energy.

• Otherwise, there are financial incentives to not follow dispatch – The UDS should be allowed to perform it co-optimization

algorithm• Otherwise, operators are forced to perform manual re-dispatch

actions which are not transparent to the marketplace– Price formation must be transparent and efficient

• Otherwise, inefficient price determination fails to attract resources with desirable characteristics to provide reserves


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ENERGY AND RESERVE CO-OPTIMIZATION

An example how the energy and reserve co-optimization functions


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A CB

$70

Energy (MW/h)

-Energy demand is met with the last marginal resource which sets the LMP at $70

-There is surplus of reserves so the reserve price is $0

Energy Offers

LMP

($)

Energy and Reserve Co-Optimization – Scenario 1 cont.


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A C DB

Energy Offers

$70

Energy (MW/h)

$80

-As energy demand increases the next economic offer is D ($80), a fast start off-line resource that has been counted for reserves so far

-Assume that by dispatching D we will cause a shortage of reserves

LMP

($)



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A C D FB

Energy Offers

$100

$70

Energy (MW/h)

-To avoid the reserve shortage, we want to keep D off-line for reserves and obtain energy from the next available lowest priced offer F ($100)

-Assume resource F has no reserve capability so dispatching it would not cause a reserve deficiency

LMP

($)



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A C FB

$100

$70

Energy Load (MW)

D

- When F is dispatched, it becomes the marginal resource which sets the LMP to $100

- Reserve price becomes $20 because of the opportunity cost of D which was kept off-line to provide reserves

While economic to provide energy, D is kept off-line to provide reserves. If D is providing energy it would make $20 profit per MW [($100LMP – D’s energy offer $80). If off-line, it makes $20 profit per MW due to the reserve price being $20.

Dispatched Energy Offers

LMP

($)

Energy and Reserve Co-Optimization – Scenario 1 cont.• In Scenario 1, offer D is the marginal reserve provider

• Its lost opportunity cost to provide energy instead of reserves is $20– If reserve price = $20, seller D is indifferent between providing

energy and reserves – If reserve price <$20, seller D has the financial incentive to

produce energy and NOT supply reserves (failure to follow dispatch)

• Implication: to incent the appropriate resource behavior, the reserve price cannot be set inefficiently low


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INEFFICIENT ENERGY AND RESERVE CO-OPTIMIZATION WHEN RCPF IS ACTIVATED

An example how the energy and reserve co-optimization functions when the RCPF price cap is activated


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Inefficiencies during RCPF Activation

• The real-time reserve price is supposed to reflect the lost opportunity cost and make the marginal resource indifferent to provide energy or reserves during the energy/reserve co-optimization process

• However, when the system TMOR price reaches its RCPF cap of $100 then two problems occur:– The reserve price no longer fully reflects the actual lost

opportunity cost for providing reserves instead of energy– UDS cannot automatically re-dispatch resources, so the ISO

operators must manually re-dispatch resources for energy and reserves


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RCPF Activation - Scenario 2


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LMP

A C EB

$100

$70

Energy (MW/h)

D

- If the next available offer is E priced at $400 and is dispatched, it becomes the marginal resource which sets the LMP to $400

- Reserve price reaches the RCPF cap of $100

While economic to provide energy D is kept off-line to provide reserves. If D is providing energy it would make $320 profit per MW [(LMP – D’s energy offer). If off-line, it makes $100 profit per MW due to the reserve price being $100.

$400

Dispatched Energy Offers

LMP

($)

RCPF Activation - Scenario 2

• In Scenario 2, offer D is the marginal reserve provider

• Its lost opportunity cost to provide energy instead of reserves is $320– If reserve price = $320, seller D is indifferent between providing

energy and reserves – If reserve price <$320, seller D has financial incentive to produce

energy and NOT supply reserves (failure to follow dispatch)– Today the RCPF limits the system TMOR price to $100

• Implication: to incent the appropriate resource behavior, the reserve price cannot be set inefficiently low


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RCPF Activation-Economic & Operational Inefficiencies


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SYSTEM TMOR RCPF ANALYSIS

Determining what the RCPF value should be?


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RCPF Analysis - Part I

Questions asked during our analysis:

– How frequently does the system TMOR price reach the $100 RCPF cap?

– How severe is the lost opportunity cost compensation problem?– Does it have negative reliability implications?– Can it be fixed by increasing the RCPF?– What would be the appropriate new RCPF value?


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RCPF Analysis - Part I • Since 2008, there have been 252 approved Unit Dispatch

System (UDS) cases where: – The real-time system TMOR price reached the RCPF value of $100 – The lost opportunity cost of a resource that provided reserves

instead of energy exceeded $100

• In each UDS case, the ISO calculated the marginal opportunity cost for providing reserves instead of energy (nodal LMP – offer block in which a resource was dispatched), as system was actually run

• The maximum observed lost opportunity cost in our analysis was $386

• Pricing TMOR at $100 is inefficient when the actual lost opportunity cost for providing the product was much higher


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RCPF Analysis - Part I


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RCPF Analysis - Part II

• If the RCPF (price cap) value was increased in order to correct the incentive problem, could it:– Reduce the frequency of actual Operating Reserve shortages?– Reduce the severity (magnitude) of Operating Reserve

shortages?– Is that a positive outcome?

• The answer to all three questions is: Yes. • Let’s look at the data


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• We increased the RCPF value to $1000 and re-ran the 27 UDS cases on July 22nd 2011– UDS was able to re-dispatch the system and cure the reserve

deficiency in only one case– 26 UDS cases remained reserve deficient even with RCPF value

of $1,000

• We observed that sometimes the reserve deficiency is not a pricing issue but a physical limitation of reserve availability (i.e., reserves are not available at any price)


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Recommendation

• To address the observed inefficiencies, the ISO recommends increasing the System TMOR RCPF value to $500

• This higher RCPF value should significantly decrease the frequency when the RCPF is activated in “tight conditions”

• Minimizing RCPF activation provides the following benefits:

1. Allows UDS to co-optimize the system for reserves and energy2. Reduces the frequency and severity of reserve shortages3. Makes resources indifferent to providing energy or reserves4. Enables efficient and transparent pricing of the cost of providing

reserves5. Decreases the amount of manual actions by operators


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Tentative Timeline

• Initial stakeholder discussion – October MC

• Stakeholder action – December MC/January PC

• Regulatory filing – Q1 of 2012

• Implementation – Q2 of 2012


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Appendix 1 – Scenario 1 and Scenario 2

• In Scenario 1, the resource is indifferent whether it provides reserves or energy

• In Scenario 2 when the RCPF is activated the resource has an economic incentive to provide energy instead of reserves


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Row Parameter Scenario 1RCPF not Activated

Scenario 2RCPF Activated

A Energy Price (LMP) $100/MW $400/MW

B Reserve Price $20/MW $100/MW

C Energy Offer Price $80/MW $80/MW

D Energy/Reserve Capability 10MW 10MW

E Profit providing energy (A - C) * D

$200 $3200

F Profit providing reserves(B * D)

$200 $1000

G Forgone profits for providing reserves instead of energy (E - F)

$0 $2200

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Changing the System TMOR Reserve Constraint Penalty Factor