The FERC SMD and the Midwest Electricity Markets

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The FERC SMD and the Midwest Electricity Markets

• IEEE PES Chicago Chapter
• Chicago, IL - January 8, 2003
• Roberto F. Paliza, Ph.D.

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Agenda

• FERC SMD
• Focus is in the RTM, DAM, and FTRs
• What is missing in the SMD?
• Inter-ITP coordination
• Midwest Markets Initiative
• MISO-SPP
• MISO-PJM-SPP joint and common market

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FERC SMD

• Sets the direction for the design and
  implementation of wholesale markets.
• Defines the desired end state for these markets.
• Does not provide solution for transitional issues
  although establishes principles to be followed.
• Provides flexibility in regards to timing of the
  implementation and in accommodating regional
  differences.

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Basic Elements of the SMD

• From an operational perspective
• Real-time market
• Day-ahead market
• Ancillary services market
• Congestion revenue rights market
• Market power monitoring mitigation
• Capacity requirement
• Markets administered by RTOs/ITPs

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ITP Market Operations
ITP Functions
Market Support
Market Inputs
Cover Imbalances
Generator Bids
Ensure Reliability
Real-Time Balancing
Bid based Security- Constrained Dispatch
Buy and Sell In Spot Market
Load Bids
Buy Through Congestion
Bilateral Schedules
Congestion Redispatch
Calculate Nodal Prices
Hedge Congestion
Self Schedules
Transmission Rights
RTO Market Settlements At Nodal Prices
Market-Driven Decisions

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The Real-time Market (RTM)

• RTOs will ensure that all market participants
  have equal access to the spot market.
• RTM main component is a bid-based security
  constrained dispatch (5 min cycle).
• RTM is a voluntary market.
• Market participants can submit
• Bilateral schedules,
• Self-schedule, or
• Bid into the real-time market

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Example1 Economic Dispatch
Least expensive generators are dispatched
I need MWs.
Sale goes to the
MW
lowest bidder with capacity.
300
MWs
_at_ 10
10
Going once....
Load
Capacity
499
MWs
300 MWs
199
MWs
_at_ 15
MW
15
Capacity
RTO
15
200 MWs
MW
LMP for all settlement nodes is 15
Not Dispatched
20
Capacity
200 MWs
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Example2 Economic Dispatch
Highest Cost Generator Sets Price
I need MWs.
MW
Sale goes to the
10
300
MWs
_at_ 10
lowest bidder with capacity.
Going once....
Capacity
Load
300 MWs
599
MWs
MW
15
200
MWs
_at_ 15
Capacity
200 MWs
RTO
20
MW
LMP for all settlement nodes is 20
20
99
MWs
_at_ 20
Capacity
200 MWs
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If There is Congestion

• Delivery limitations prevent use of next
  least-cost generator
• Higher cost generator closer to load must be used
  to meet demand
• Cost to operate more expensive generation are
  translated into transmission congestion costs in
  LMP calculation
• Nodal pricing results in cost causation for
  congestion pricing to market participants

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Real-time Market Settlements

• All real-time injections, withdrawals and
  transmission congestion will be settled at LMP
  prices determined by the real-time dispatch.
• The difference in LMP prices across the grid will
  reflect congestion and incremental cost of
  losses.
• Loads have the choice to settle at nodal or zonal
  prices.
• Generators may self-schedule but only accepted
  schedules will settle at LMP prices.

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LMP Definition
Cost of supplying next MW of load at a specific
location, considering generation marginal cost
of energy, cost of transmission congestion, and
losses
Marginal Congestion Component (MCC)
Marginal Energy Component (EC)
LMP
Marginal Loss Component (MLC)



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The Day-ahead Market (DAM)

• DAM main component is a bid-based security
  constrained unit commitment.
• It is a voluntary market and is financially
  binding.
• DAM main function is to provide certainty for
  Market Participants (MPs).
• In the DAM, participants will be able to
• Buy/sell energy and self-schedule generation.
• Submit bilateral transactions.
• Submit virtual bids.

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Day-ahead Market Settlements

• Process is very similar to RTM settlement for
  energy, congestion, and losses.
• RTM settles deviations with respect to DAM
  schedules.
• FTRs are settled based on the DAM hourly prices.

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Day-ahead Reliability Check

• Check is performed after DAM closes and it
  focuses on
• Evaluating overall resource adequacy.
• Evaluating reserve adequacy.
• Evaluating transmission reliability.
• Reliability Commitment Units are
  committed/de-committed to satisfy reliability
  criteria.

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Financial Transmission Rights
FTR is a financial instrument that entitles
holder to a stream of revenues (or charges) based
on the DA hourly energy price differences across
the path or shadow price of a flowgate.
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FTR Characteristics

• MPs will be able to acquire point-to-point (PTP)
  and flowgate (FGR) transmission rights to hedge
  congestion charges.
• PTPs and FGRs will be financial.
• PTP is a full hedge between source and sink while
  FGR is a full hedge for a specific constraint
  only.
• PTPs will be available in the form of obligations
  and options and FGRs will be available as
  options.
• Awarded PTPs and FGRs will be simultaneously
  feasible.

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Example Delivery with FTR
LMP 20
LMP 15
Congestion Charge 100 MWh (20-15)
500 FTR Credit 100 MW (20-15) 500
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PTP Rights Characteristics

• Obligations can have a zero, positive, or
  negative value.
• Options can only have a zero or positive value.
• It is a perfect hedge against congestion costs as
  long as
• Schedule is between specified source and sink.
• Schedule is equal or less than the FTR amount.

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FGR Rights Characteristics

• FGR owner gets paid the constraint shadow price
  of that flowgate.
• FGRs are proposed as options and only hedge the
  specified flowgate.
• Available as PTDF (monitored element) and OTDF
  (monitored/contingency pair) flowgates.
• Place responsibility for assessment of shift
  factors and the number of FGRs required to hedge
  a transaction on the market participant.

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Priorities and FTRs

• SMD proposes when transmission is tight,
  participants with FTRs have scheduling priority.
• How about curtailment priorities?
• Current LMP markets do not have this physical
  characteristic.
• Many comments have been submitted on this subject.

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Acquiring FTRs

• Allocation
• Is based on existing contracts.
• Is a conversion process from physical to
  financial.
• FTR Auction -- administered by the ITP
• MPs can purchase left over capability.
• It may be used as the primary way to assign FTRs.
• MPs can reconfigure FTRs.
• Secondary market -- bilateral trading
• ITPs will facilitate the secondary market.
• FTRs that exist are bought or sold.

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What Is Missing in the SMD?

• From an operations perspective
• SMD embraces the goal of seamless markets but no
  approach is suggested.
• FERC has taken a significant step forward in
  developing the SMD but the next step
  coordination of these markets - is also a very
  important one.

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Inter-ITP Coordination

• Types of ITP coordination under SMD
• LMP market and non-market coordination
• LMP market and other LMP markets
• Reliability backstop process
• One stop shopping desired features
• Common business practices
• Common user interface
• Availability of CRRs that expand several ITPs

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Transitional Issues

• SMD calls for conversion of all transmission
  service to SMD. However, if grandfather contracts
  do not convert to the SMD tariff, another level
  of complexity will be created
• Will require that ITPs support physical service
  in all of their markets (RTM, DAM, FTR).
• Certain special provisions of these grandfather
  contracts may be difficult to honor/administer by
  the ITP under LMP.

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Transitional Issues

• Initial allocation of CRRs
• May prove to be very contentious specially in
  places where the system is oversold.
• Availability of FTR options will add another
  layer of complexity.
• Modeling of FTRs in the allocation process needs
  to be consistent with settlements of these rights.

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Inter-ITP Coordination Elements

• Honor external constraints in the same way as
  internal constraints are respected.
• Treatment of resources in a multi-market
  environment
• Bidding, control, scheduling, settlement
• Ancillary services
• Parallel flow agreement that includes
• Definition and calculation of parallel flow
• Agreement on usage and compensation
• Convergence of LMP prices at the seams.

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Reliability Backstop Process

• NERC TLR is the reliability backstop process in
  the eastern interconnection
• Relies on a central database of tagged
  transactions
• Relies on a single transmission model for impact
  calculation and curtailments
• Input data and results are available to all SCs
• Equivalent capability needs to be provided under
  SMD
• May require policy changes by NERC

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One-stop Shopping

• Market participants do business over large
  geographical areas
• Establishment of a single network access service
  will enable development of large markets
• Requires compatible market rules
• Timings, scheduling practices, market protocols
  and procedures, settlements
• Development of a single user interface is a must.
• Support for CRRs across several ITP regions.

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The Obvious Fix

• Creation of a single market run by a single
  market operator
• Single RTM, DAM, and FTR markets
• Is this feasible over a very large area?
• Eastern Interconnection
• MISO-PJM-SPP
• What is the criteria for determining the
  appropriate size of a single market?

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Managing Seams

• Type of seams
• Manageable.
• Unmanageable (e.g. unable to control internal
  constraints).
• A couple of factors to consider to manage seams
• Proper grouping of constraints resources.
• Internalize as much loop flow as possible.

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The Midwest Markets

• Dec 2003 is the target date for MISO-SPP market
  operation.
• It is a staged project.
• Functionality to be provided in the first stage
  is based on RTM, DAM with no SCUC, FTR market,
  and Market Power Mitigation.
• Full SCUC and Ancillary Services market will be
  added in future stages.

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MISO Markets Initial Functionality
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The Midwest Markets

• Significant challenges
• No experience operating as a pool.
• Many control areas of all sizes.
• Allocation of transmission rights in areas where
  system is overbooked.
• Coordination with PJM and other neighboring
  entities.
• Resolution of WI and MI hold harmless provisions.
• Aggressive timeline.
• MISO-SPP merger needs to be completed.

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MISO-PJM-SPP Territory
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A Joint and Common Wholesale Energy Market
The goal is to develop a common single wholesale
market with a one-stop shop that meets the
needs of all customers and stakeholders using the
electric grid in the 26 states served by them.
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Schedule

• May 2003 AEP DPL in PJM market
• Oct 2003 Dominion in PJM market
• Dec 2003 ComEd IP in PJM market
• Dec 2003 MISO-SPP market operation
• October 2004 MISO-PJM-SPP market is implemented
  with one-stop shopping

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Current Activities

• MISO and PJM have chosen to resolve seams without
  implementing the single market.
• MISO is also working on its LMP market and the
  integration of Grid America and TransLink while
  PJM is focused on the expansion of its markets in
  AEP DPL areas.

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Market Model for RTO Coordination
Data Transport
Data Transport
Data Transport
Regional Entity
Regional Entity
Regional Entity
Control Area
Control Area
Control Area
ITC
ITC
ITC
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Implementation of the SMD Markets in the Midwest

• Proper solution to the coordination between MISO
  and PJM, and between these RTOs and the
  Independent Transmission Companies in their
  footprints, is the key to a successful
  implementation of the SMD markets in the Midwest.