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Title: System Adequacy, Investment and Risk


1

CERTS, Cornell University, 10/8/06
  • System Adequacy, Investment and Risk
  • Tim Mount
  • Applied Economics and Management
  • Cornell University
  • tdm2_at_cornell.edu

2
OUTLINE
  • Conclusions from Testing Market Designs
  • Co-Optimization in Markets for Energy and
    Reserve Capacity.
  • Joint Markets for Energy and Reactive Power
    (VArs).
  • Power Transfers and the Cost of Meeting Native
    Load.
  • Paying for Reliability Theory and Practice
  • Energy-only Markets versus Energy plus Capacity
    Markets.
  • Locational Capacity Markets in New York State.
  • Forward Capacity Markets in New England.
  • Paying for Reliability Proposal for Future
    Research
  • Who should be Responsible for Investment
    Decisions?
  • Limitations of the Current Structure of the
    Electric Utility System.
  • Challenges for future research.

3
PART 1
Testing Market Designs
  • References on ltwww.e3rg.pserc.cornell.comgt
  • Mount, Timothy D. and Surin Maneevitjit
  • Paying for Reliability in Deregulated
    Electricity Markets
  • 25th Annual Eastern Conference, Rutgers CRRI,
    May, 2006
  • Mount, Timothy D., Steen Videbaek and Ray D.
    Zimmerman
  • Testing Alternative Market Designs for Energy
    and VArs in a Deregulated Electricity Market
  • 25th Annual Eastern Conference, Rutgers CRRI,
    May, 2006
  • Mount, Timothy D. and Robert J. Thomas
  • Testing the Effects of Power Transfers on
    Market Performance and the Implications for
    Transmission Planning,
  • Proceedings of the IEEE PES Conference, June
    2006.

4
Testing Markets for Energy and Reserves 1.
PowerWeb AC Network
Region A Competitive
Region B Load Pocket
Reserve req40MW
17
18
Total Reserve req 60 MW
5
Testing Markets for Energy and Reserves 2. The
Markets Tested
  • PowerWeb Network has two Regions
  • Region A Competitive
  • 4 firms --- marginal cost offers submitted by
    software agents
  • Region B Load Pocket caused by limited
    transmission capacity
  • 2 firms --- price/quantity offers submitted by
    students
  • Three markets were tested
  • Test I Joint Market with Fixed Locational
    Reserves (JMwFR),
  • The current market structure used in New York
    State Test II Joint Market with Responsive
    Reserves (JMwRR),
  • Co-Optimization for an explicit set of
    Contingencies
  • Test III Integrated Market with Responsive
    Reserves (IMwRR)
  • Co-Optimization and pay the Opportunity Cost
    for Reserves plus a Make-Whole Startup Cost

6
Testing Markets for Energy and Reserves 3.
Average Price Paid to Meet System Load
Test I (JMwFR), Test II (JMwRR) and Test III
(IMwRR)
7
Testing Markets for Energy and Reserves 4.
Analysis of Earnings/Firm
  • Average Earnings for Two Firms in the Load Pocket
  • Test I Joint Market with Fixed Locational
    Reserves
  • Inelastic demand for both energy and reserve
    capacity
  • More than 50 of earnings come from providing
    reserve capacity, particularly from peaking units
    --- reserve market is easy to exploit
  • Test II Joint Market with Responsive Reserves
  • Effects of market power are partially mitigated
    by substitution between energy and reserve
    capacity
  • More capacity withheld from the market due to the
    downward pressure on earnings/firm
  • Earnings from reserve capacity drop substantially
    to 15 for base load units and 45 for peaking
    units
  • Test III Integrated Market with Responsive
    Reserves
  • Opportunity cost payments for reserve capacity
    are zero, implying that reserve capacity is
    free
  • Startup costs are the dominant source of
    earnings, 80 for base load units and 95 for
    peaking units
  • Withholding capacity is no longer a major problem

8
Testing Markets for Energy and Reserves 5.
Conclusions
  • Using Responsive Reserves (Co-Optimization) is an
    effective way to make the market more competitive
    and reduce the average price paid to meet system
    load compared to Fixed Locational Reserves.
  • Paying the the Opportunity Cost for reserves
    using co-optimization is even more effective
    because speculating in the energy auction is
    punished by lower opportunity costs for
    reserves.
  • BUT there is an underlying incompatibility
    between getting low prices and maintaining system
    reliability because capacity is withheld in
    competitive auctions (generating units with high
    operating costs are dispatched at minimum levels
    most of the time because they are only needed as
    reserves to cover specific contingencies, and as
    a result, expected profits are generally low for
    these units).
  • In competitive markets,supplementary payments are
    needed to ensure that all generating units
    required to maintain system reliability are
    financially viable. Using Make-Whole Payments is
    an effective way to allocate money where it is
    needed and reduce withholding (similar to the
    Forward Capacity Market proposed for New England)

9
Pilot Tests of Markets for Energy and VArs 1.
The Markets Tested
  • PowerWeb Network is relatively uncongested
  • 6 firms represented by students
  • Three markets were tested
  • Test I Pay nodal prices for real energy with a
    contract for VArs.
  • Firms submit price/quantity offers for energy
    only
  • 30 periods normal and 30 periods with limited
    VAr capability
  • Test II Pay nodal prices for real energy and
    nodal prices for VArs
  • Same offers as Test 1 plus price offers for
    VArs
  • 30 periods normal and 30 periods with limited
    VAr capability
  • Test III Pay nodal prices for real energy and
    nodal prices for VArs
  • 1) 30 periods with Interruptible Load
  • 2) 30 periods with Local Dispatchable VAr
    Capacity
  • Same offers as Test 2
  • All periods with limited VAr capability

10
Pilot Tests of Markets for Energy and VArs 2.
Nodal Prices for VArs in Tests 1 and 2
TEST 1 Energy-Only Auction
TEST 2 Offers for VArs
Periods 1-30 normal VAr capability Periods
31-60 limited VAr capability
11
Pilot Tests of Markets for Energy and VArs 3.
Nodal Prices for VArs in Test 3
TEST 3 Offers for VArs (2 sessions) Periods
1-30 Interruptible Load Periods 31-60 Local
Dispatchable VAr Capacity
Periods 1-60 limited VAr capability
12
Pilot Tests of Markets for Energy and VArs 4.
Conclusions
  • The nodal prices of VArs are close to zero most
    of the time (capacitors etc. are used to
    compensate under normal conditions), but nodal
    VAr prices can be very high when contingencies
    occur (need dynamic VArs).
  • The production cost of dynamic VArs for
    generators is zero unless the dispatch is on the
    capability curve (less real energy generated).
  • In a VAr market, firms find that it pays to
    speculate for both units. (unlikely that
    short-run competitive prices will ever be
    realized).
  • Since VArs dont travel, distributed sources of
    VArs provide an effective way to mitigate
    speculative behavior by generators to a limited
    extent.
  • It is unlikely that market signals can be trusted
    to determine optimum levels of investment in VAr
    capacity needed to maintain system reliability.

13
Power Transfers and Market Performance 1. The
Rationale for the Tests
  • Merchant Transactions on the TVA system have
    grown over 1,000 since 1996
  • Many of these transactions occur when system
    resources are stressed --- e.g. voltage limits
    are reached on some lines

Source Tennessee Valley Authority
14
Power Transfers and Market Performance 2. The
Markets Tested
  • PowerWeb Network is relatively uncongested
  • 6 firms represented by students
  • System load varies from period to period
  • Three markets were tested
  • Test I No transfers.
  • Firms submit price offers for energy for five
    blocks of capacity
  • Periods 1-25
  • Test II Fixed 40 MW transfer from bus 28 to
    bus 14 (NW to SE).
  • Firms submit price offers for energy for five
    blocks of capacity
  • Periods 26-50
  • Test III Fixed 40 MW transfer from bus 14 to
    bus 28 (SE to NW).
  • Firms submit price offers for energy for five
    blocks of capacity
  • Periods 51-75

15
Power Transfers and Market Performance 3.
Conclusions
  • Even though the quantity of real energy flowing
    though the network stayed the same for a number
    of periods in the experiments, the flows on
    individual lines were quite erratic. Identifying
    fixed accounting pathways for physical bilateral
    contracts defies the laws of physics and may be
    highly misleading on a congested network.
  • Although maintaining reliability is a socially
    efficient decision, the cost of supporting
    generating units with low capacity factors is
    very high. Increasing the capacity of
    transmission, and lowering the spot prices in a
    congested region, like New York City, may
    undermine the financial viability of generators
    needed to maintain system reliability.
  • The pipeline analogy for paying transmission
    owners is appropriate for a DC intertie but not
    for an AC network. The AC transmission system
    should be fully regulated using performance-based
    rates of return that penalize unscheduled outages
    and losses and reward low operating costs (e.g.
    like the UK).
  • The speculative behavior of generators in a
    deregulated market is affected by the level of
    congestion on a network. Planning models for
    system expansion should take into account how
    this behavior is likely to change in order to
    estimate the net benefits of making a
    transmission upgrade.

16
Power Transfers in New York State 1. New York
Control Area (NYCA)
Zones Analyzed (NYMEx trading) A - Niagara G -
Hudson Valley J - New York City K - Long Island
17
Power Transfers in New York State 2. Ranked Nodal
Prices in NYCA for 2000
18
Power Transfers in New York State 3. Ranked Nodal
Prices in NYCA for 2005
19
Power Transfers in New York State 4. Zonal Price
Differences in NYCA
G - A
J - G
K - J
2 0 0 0
2 0 0 5
20
Power Transfers in New York State 5. Sub-Zonal
Price Differences within NYC
G - J1
J2 - J1
J3 - J2
2 0 0 0
2 0 0 5
21
PART 2
Paying for Reliability Theory and Practice
22
Textbook Analysis of Generation Adequacy 1. Total
Cost of Generation/Year
Specified Costs Variable Capital (/MWh)
(k/MW/Year) Peak 60 80 Shoulder
30 159 Baseload 15 238
Capacity Factors for Least-Cost Choices Peak
lt 30 Shoulder 30-60
Baseload gt 60
23
Textbook Analysis of Generation Adequacy 2.
Net-Revenue by Type of Generator
Specified Costs Variable Capital (/MWh)
(k/MW/Year) Peak 60 80 Shoulder
30 159 Baseload 15 238
Additional Revenue Needed to Cover the Capital
Costs (k/MW/Year) Peak
80 Shoulder 80 159 - 79 Baseload 80
238 - 158
24
Textbook Analysis of Generation Adequacy 3. The
Solution --- Allow Scarcity Pricing
Specified Costs Variable Capital (/MWh)
(k/MW/Year) Peak 60 80 Shoulder
30 159 Baseload 15 238
Capacity Factors for Least-Cost Choices Shed Load
lt10 Peak 10-30 Shoulder
30-60 Baseload gt60
Shed Load (10 36.5 Days/Year)
152/MWh NERC Reliability Standard (2.4
Hours/Year) 33,393/MWh
25
Textbook Analysis of Generation Adequacy 4.
Net-Revenue with Scarcity Pricing
Specified Costs Variable Capital (/MWh)
(k/MW/Year) Peak 60 80 Shoulder
30 159 Baseload 15 238
Additional Revenue Needed to Cover the Capital
Costs (k/MW/Year) Peak 0 80 -
80 Shoulder 0 159 - 159 Baseload 0
238 - 238 Problem Solved!
26
Generation Adequacy in Reality 1. Net-Additions
to U.S. Generating Capacity
Source 2005 NERC Long-Term Reliability
Assessment, Fig. 4
27
Generation Adequacy in Reality 3. Spot Price
Behavior in New York City (NYC)
Price /MWh
Regulatory response to the Californian Energy
Crisis ---gt Automatic Mitigation Procedures and
regulatory threat have suppressed high prices
28
Generation Adequacy in Reality 3. Average Price
Duration Curves for NYC
Average Price /MWh
lt--- 2000/01
2002/03 2004/05 ---gt
Hours/Year (1000 Hours 11.4 Capacity Factor)
29
Generation Adequacy in Reality 4. Average Prices
in NYC versus LRAC
Av. Price gt Long-Run Average Cost (LRAC) is
RED Max. value for each row is BOLD
30
Generation Adequacy in Reality 5. Annual
Earnings/Generator in NYC
The Capacity Market is the dominant source of
income for peaking units in NYC and LI BUT this
income is still not enough to attract
new merchant generators
Capital is the upper Hudson valley, and LI is
Long Island Source Figure 16 on p. 23 of the
NYISO 2004 State of the Market Report
ltwww.nyiso.comgt
31
Generation Adequacy in Reality 6. Projected
Reserve Margins for New York
NYISO standard --- A reserve margin of 18 is
needed to meet the proposed NERC reliability
standard (Fail lt1 day in 10 years) Reserve
Margin is the amount of Installed Capacity above
the Forecasted PEAK Load ()
Source NYISO PowerTrends
32
Generation Adequacy in Reality 7. Australia, New
York and New England
  • Generation Adequacy is a minimal requirement for
    maintaining the operating reliability because
    blackouts are very expensive. Since the electric
    supply system is unforgiving, policies for
    maintaining Generation Adequacy must be
    sufficient.
  • The Australian energy market works because
    allowing price spikes results in an average price
    duration curve that approximates the long-run
    average costs of different types of capacity.
    However, it is financially risky for operations
    and investment and is NOT sufficient.
  • The Capacity Market in New York is expensive
    (1billion/year in NYC) but there is no
    obligation to invest this money in new generating
    capacity. This market is NOT sufficient. The
    Demand Curve clears only one month before real
    time --- too little, too late for merchant
    generators.
  • The proposed Forward Capacity Market in New
    England clears 3 years ahead, and merchant
    generators can lock in a price for up to 5 years.
    There are alternative procedures if insufficient
    capacity is entered into the auction, and this
    market is likely to be sufficient. Regulators
    take the primary responsibility for ensuring that
    generation adequacy is maintained far enough in
    advance to correct deficiencies.

33
PART 3
Paying for Reliability A Proposal for Future
Research
34
Current Reliability Standards 1. Two Different
NERC Criteria
  • DEFINITIONS OF RELIABILITY
  • North-American Electric Reliability Council
    (NERC), 2005
  • System Adequacy The ability of the electric
    system to supply the aggregate electrical demand
    and energy requirements of customers at all
    times, taking into account scheduled and
    reasonably expected unscheduled outages of system
    elements.
  • Ensuring there is enough generation and
    transmission capacity --- the investors problem
  • Operating Reliability The ability of the
    electric system to withstand sudden disturbances
    such as electric short circuits or unanticipated
    failure of system elements.
  • Determining the dispatch of installed capacity
    and levels of reserves --- the system
    operators problem
  • NERC has little expertise on markets???

35
Current Reliability Standards 2. FERC is now
Responsible for Reliability
The Energy Policy Act of 2005 (EPAct05) was
signed into law in August 2005, and it gives
greater authority to the Federal Energy
Regulatory Commission (FERC) to enforce
reliability standards by imposing penalties on
end-users if the standards are violated. In
addition, a new organization, the Electric
Reliability Organization (ERO), will be given the
authority to establish these reliability
standards. Prior to EPAct05, FERC was primarily
an economic regulator of the wholesale
transactions and tariffs on the bulk power
system. At this time, it is not clear exactly
how FERC will implement the new responsibilities
for enforcing reliability. FERC will enforce
standards for Operating Reliability
but not for System Adequacy???
36
Proposed Structure for a Deregulated Electric
Utility Industry
Operating Reliability O M Payment System Adequacy Ownership
GENCO Energy ISO Owner Spot Market Central Authority Private or Public
GENCO Reserves ISO Owner Spot Market Co-Optimization Central Authority Private or Public
GENCO VArs ISO Owner Contingent Claim Market Central Authority Private or Public
TRANSCO ISO Owner Performance Based Regulation Central Authority Private or Public
DISCO DERALCO ??? Owner Performance Based Regulation DERALCO ??? Private or Public
Micro Grid DERALCO ??? Owner Spot Market DERALCO ??? Private or Public
Load Response DERALCO ??? Owner Spot Market DERALCO ??? Private or Public
Distributed Energy Resources and Active Load
Company (DERALCO)
37
Current Challenges for the Electric Utility
Industry
  • Tension between Federal and State regulators
  • FERC is responsible for Operating Reliability
    only
  • Fragmented control of a single AC Network
  • Markets are expected by many to deliver too much
  • Efficient pricing for a reliable system is very
    risky
  • Inadequate investment for System Adequacy and
    Security
  • Little innovation, particularly for load response
    and DER
  • Environmental and Energy Security
  • Fuel diversity
  • Clean coal and carbon sequestration
  • New nuclear plants
  • Renewables
  • Transmission upgrades and NIMBY
  • Efficiency such as Combined Heat and Power
  • Load response and DER
  • Weather extremes
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