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Overview of LMP Markets
Features of ISOs / RTOs
David WithrowSenior Market Economist
Fall 2007 Meeting of the
NARUC Staff Subcommittee on Accounting and Finance
Jackson Hole, Wyoming
October 8, 2007
2Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Independent System Operators / Regional Transmission Organizations in North America
(see www.isorto.org)
3Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Typical Reliability and Market Components of ISOs / RTOs
Day Ahead Market Schedules for injections and withdrawals Market Power Mitigation Optimized Network Model for all Schedules Locational Marginal Pricing Commitment of generation for reliability reasons Financial Transmission Rights Existing Transmission Contracts
Real Time Imbalance Market Ancillary Services
Resource Adequacy
4Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Background on the California ISO
Began Operations March 31, 1998 Not-for-profit California corporation Five-member Governing Board appointed by the Governor Serves peak load in excess of 50,000 MW Operates over 25,000 circuit miles of transmission, covering over
125,000 sq.miles. Oversees the dispatch of over 700 generating units Market re-design to begin March 31, 2008
Mission
Operate the grid reliably and efficiently
Provide fair and open transmission access
Facilitate effective markets and promote infrastructure development
5Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Core Functions of the California ISO
24 x 7 Grid Operations for Reliable and Non-discriminatory Transmission Service
CAISO Operates Markets:-- Transmission (Day Ahead and Hour Ahead)-- Real-time Imbalance Energy Market-- Ancillary Services
CAISO performs:-- Day-ahead scheduling-- Congestion management-- Market Oversight / Market Monitoring -- Coordinated Transmission Planning
6Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Key Market Players in the California ISO
Transmission Owners Pacific Gas &Electric Southern California Edison San Diego Gas & Electric Other entities owning transmission assets operated by
the California ISO
Generators
Load-Serving Entities Municipally-owned Electric Systems State Department of Water Resources
7Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
California ISO’s New Day Ahead Process
Market Power Mitigation analysis Analyzes each generator bid to determine market power
Integrated Forward Market” – transmission model that optimizes Energy schedules (bids), manages transmission congestion, Procures ancillary services Procurement Produces:
• feasible schedules for Real Time • LMP prices at each node
Residual Unit Commitment Commits additional capacity, if needed, based on Demand forecast
Congestion Revenue Rights (CRRs) Point-to-point rights to revenues from transmission congestion
8Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
What is LMP?
The marginal cost of serving the next increment of Demand at that node consistent with transmission constraints.
9Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Locational Marginal Pricing
LMP determines transparent prices at all price locations on the grid.
LMP prices generally consist of three components: Energy Congestion Losses
In California, generators are paid the LMP; load pays the averaged LMP in an area These Load Aggregation Points (LAPs) align with the three major
IOUs’ service areas.
10Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
(A) How LMP makes congestion costs transparent
11Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
(B) How LMP makes congestion costs transparent
12Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Why LMP?
LMP manages ALL congestion in the Day Ahead to create physically feasible schedules prior to real-time operations.
Locational price patterns indicate areas where additional generation and transmission upgrades are needed.
Within the CAISO: Generation is paid the LMP at the generator node. Demand pays the average price within each IOU service area.
13Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Understanding Financial Transmission Rights
Different terminology: PJM/ ISO-NE/ MISO: “Financial Transmission Rights” (FTRs) NYISO: “Transmission Congestion Contracts” (TCCs) California ISO: “Congestion Revenue Rights” (CRRs)
Definition: Rights to the hourly congestion revenue between two points – a
Source and a Sink. • Does not require scheduling energy between any two points• Allows hedging of congestion risk under LMP• Within CAISO, allocation / auction for terms of one month, one
season (four per year) and 10-years.
14Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Financial Transmission Rights
A financial instrument (similar to a forward contract) that entitles the holder to a revenue stream (positive or negative) Most CRRs are obligations, not options
Revenues are based on the difference between the marginal congestion component of the Day-Ahead LMPs at the Source location and Sink location. The revenue stream is not based on the marginal loss component of
the LMP.
Provide a hedging mechanism that can be traded separately from transmission service. FTRs are not necessarily linked to scheduling practices. FTR markets encompass several hundred million dollars.
15Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Convergence (Virtual) Bidding:
What is it?What is it?
Allows market participants to make financial sales (or purchases) for energy in the Day Ahead market, with the explicit requirement to buy back (or sell) that energy in the Real Time market.
Possibly profit from the differences between Day Ahead and Real Time prices.
Virtual bids pressure DA and RT prices to move closer together.
Requires careful credit standards for virtual bidders.
16Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
How is it done?How is it done?
Example:Virtual Demand Bid in the Day Ahead Market
0
10
20
30
40
50
60
10 20 30MW
$/M
Wh
0
10
20
30
40
50
60
Bid_Price
Actual_DA_Price
17Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
How is it done?How is it done?
Example:Virtual Bids are Liquidated as price takers in Real
Time
0
10
20
30
40
50
60
10MW
$/M
Wh
0
10
20
30
40
50
60
Cleared Bid Price Profit
Actual_DA_Price Actual_RT_Price
Actual RT Price ($55)
Actual DA Price ($34)
18Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Stable prices upon which parties can base contracts -- based on convergence of Day Ahead and Real Time prices.
Minimizes incentives to under-schedule in the Day Ahead.
Provides mechanism for generators to hedge risk of outages or be guaranteed the Real Time price.
Common feature in many ISOs and RTOs. CAISO will introduce convergence bidding no later than
April, 2009.
Convergence (virtual) bidding: Potential Benefits
19Monday, October 8, 2007 -- Fall 2007 Meeting of NARUC Staff Subcommittee on Accounting and Finance
Summary
Overview of LMP markets, FTRs, virtual bidding and other financial mechanisms.
Organized markets permit financial practices within the scheduling and settlement of physical energy.
ISOs and RTOs work closely with state regulators in the design and monitoring of markets.
CAISO training modules on market processes, CRRs and other features are located at:
http://www.caiso.com/docs/2005/10/07/200510071157559066.html