LOCATIONAL MARGINAL PRICING UNDER STANDARD MARKET DESIGN

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LOCATIONAL MARGINAL PRICING UNDER STANDARD MARKET
DESIGN David LaPlante Jim Milligan ISO New
England Markets Development
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Overview of Standard Market Design

• Standard Market Design (SMD) consists of
• Multi-Settlement system
• Congestion Management system
• SMD is based on PJM Market Rules, Tariff, and
  software capability as modified by ISO-NE and
  NEPOOL

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Multi-Settlement System

• Multi-Settlement system consists of
• Day Ahead financial markets
• Real time physical markets
• Initial implementation of MSS includes
• Energy Market (DA and RT)
• Spinning Reserve Market (RT only)
• Regulation Market (RT only)

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Congestion Management System

• Congestion Management System (CMS) is a set of
  procedures and software to manage the coordinated
  dispatch of generation and transmission based the
  concept of Locational Marginal Pricing (LMPs)
• CMS concepts apply to the clearing of both the DA
  and RT Markets

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Locational Marginal Pricing

• Locational Marginal Pricing is the cost to supply
  the next increment of demand at each node in the
  system while respecting the binding transmission
  constraints

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Locational Marginal Pricing

• Two power system models used in LMPs
• Transmission system model
• Physical model (bus/branch) of NEPOOL
  transmission system that includes PTF and non-PTF
  facilities monitored and dispatched by ISO
• Commercial Network Model
• Financial model that describes locations where
  Market Participants conduct business

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Locational Marginal Pricing

• Model Components
• Node - a physical point in the power system.
  LMPs are calculated for each node.
• Zone - an aggregration of nodes for which LMP is
  calculated as a load weighted average of nodal
  LMPs within the zone.
• Hub - special case of Zone where load weight
  equals 1 for each node.

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Locational Marginal Pricing

• Model Components (cont.)
• LMPs are calculated for each node in system
• LMPs are determined and published for Zones/Hubs
  and public nodes.

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SMD and the Commercial Network Model External
Nodes
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External Nodes

• External Nodes represent trading points for
  external transactions
• If scheduled and dispatched separately, then it
  should be pricing node
• Modeled External Nodes
• NY-NE (may include separate node for LI cable)
• HQ (two interfaces)
• New Brunswick

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What is an LMP?

• LMP is the cost of serving the next increment of
  demand at each node in the system while
  respecting all transmission constraints
• LMP (/MW)
• Energy component plus
• Loss component plus
• Congestion component

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What is an LMP?

• Energy component
• cost of providing next MW of energy assuming
  optimal generation dispatch
• absent losses and transmission constraints,
  energy component is same for all nodes in system
  and is supplied by generator with lowest marginal
  offer price

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What is an LMP?

• Loss component
• based on physical transmission characteristics
• calculated as the price of supplying additional
  energy at the node to cover an increment of
  system losses and equals the energy price times
  the loss sensitivity at the node
• Loss sensitivity factors computed by state
  estimator

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What is an LMP?

• Congestion component
• cost to supply next MW of demand at a node when
  transmission constraints prevent marginal energy
  from supplying demand
• calculated as the difference between the marginal
  energy component and cost to supply additional
  energy at location (absent losses)

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What is an LMP?

• Components described individually to understand
  concepts
• Actual implementation is a linear optimization
  problem in which all LMPs are determined at same
  time and then split into components

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Definition of System Constraints

• LMP Constraints are pricing mechanisms in the
  optimization to reflect physical conditions that
  must be observed in market clearing
• LMP constraints fall into two categories
• Generator constraints
• Transmission system constraints

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Definition of System Constraints

• Generator Constraints
• Operating limits and response rates
• Operating parameters (min run, min down, etc)
• Capacity constraints
• Reserve constraints

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Definition of System Constraints

• Transmission Constraints
• Normal operating limits on network elements
• Post contingency (what-if?) operating limits on
  network elements
• Power flow constraints
• Generic constraints (voltage limits, interface
  limits, etc.)

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Definition of System Constraints

• To the extent possible all system constraints are
  defined and used in both Day Ahead and Real Time
  Market Clearing
• Day Ahead uses forecasted conditions
• Real Time uses actual conditions

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Day Ahead Market

• DAM is financially binding
• Quantities bought/sold in DAM and not
  purchased/delivered in real time are settled at
  RT market prices
• DAM clears to bid in demand not forecasted demand

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Locational Marginal Prices Day Ahead Market

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Day Ahead Market

• DAM Inputs
• Offers
• Generator offers and operating parameters
• External Purchases
• Increment offers (virtual supply)
• Bids
• Demand (fixed and price sensitive)
• External Sales
• Decrement bids (virtual demand)

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Day Ahead Market

• Forecasted power system state (hourly)
• Power system model
• Reserve requirements
• Scheduled transmission outages
• System constraints (hourly)
• Transmission constraints
• Generic constraints
• Capacity constraints

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Day Ahead Market

• DAM outputs
• Day Ahead LMPs
• Financial schedules for all resources
• generator hourly schedules
• demand purchases
• external transaction schedules
• Hub/Zone LMPs
• Settlements data

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Day Ahead Market

• Eligibility To Set LMP in DAM
• In general, resources must be
• economic relative to market clearing price,
• able to respond to changing market signals
• Exception is quick start units when needed

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Day Ahead Market

• DAM Emergency Conditions Pricing
• Excess Generation (supply gt demand)
• If emergency min lt demand lt economic min,
• then LMP lowest offer of cleared MW
• If 0 lt demand lt emergency min,
• then LMP zero
• Can apply to nodes, zones, system

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Day Ahead Market

• DAM Emergency Conditions Pricing
• Deficient Generation (supply lt demand)
• If economic max lt demand lt emergency max,
• then LMP highest offer price of cleared MW
• If emergency max lt demand,
• then LMP highest offer price of cleared MW,
• or bidcap, whichever is higher
• Can apply to nodes, zones, system
• Reserve requirements will be relaxed to meet
  demand

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Real Time Energy Market

• Real time energy market is
• spot market for energy to meet actual demand
• based on offers submitted to DAM
• Demand is fixed
• Commitment/decommitment not allowed except for
  quick start units
• Uses ex-ante dispatch rates and ex-post LMPs

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Locational Marginal Prices Real Time Market

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Unit Dispatch System Real Time Market

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Real Time Market - UDS

• Produces ex-ante dispatch rates and DDPs
• Primary Inputs
• SE defines system state
• Active constraints from EMS (RTCA and ILC)
• Load Forecast
• Generator offers and operating parameters
• Executes with 5 minute periodicity

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Real Time Market - UDS

• Primary Outputs
• Security constrained economic dispatch to
  forecasted load
• Nodal dispatch rates and DDPs for all generator
  nodes
• List of binding constraints
• Dispatch rates are input to LMP Calculator

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LMP Calculator
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Real Time Market - LMPc

• Determines ex-post LMPs based on actual
  performance
• Primary Inputs
• Dispatch rates from UDS
• SE that defines system state
• Active constraints (same as previous UDS)
• Generator offers

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Real Time Market - LMPc

• LMP pre-processor determines eligibility to set
  LMP
• Pre-processor screens for eligibility
• Generators
• Quick start units on-line
• Dispatchable External transactions

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Real Time Market - LMPc

• Pre-processor screen - Generators
• Output MW from SE
• If offer (MW) lt dispatch rate,
• r/t offer price is bid offer at SE MW
• If offer (MW) gt dispatch rate,
• r/t offer price is dispatch rate
• If SE MW lt 110 of MW at dispatch rate, eligible
• If manual dispatch, and following dispatch,
  eligible

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Real Time Market - LMPc

• Pre-processor screen - Quick start units
• Output MW from SE
• If offer (MW) lt dispatch rate, eligible
• If on for congestion, eligible
• If dispatchable (from UDS), eligible
• UDS dispatchable based on MW gt 0 needed for nodal
  power balance

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Real Time Market - LMPc

• Pre-processor screen - External Dispatchable
  Transactions
• If transaction MW gt 0,
• and, bid price lt interface dispatch rate,
• then transaction is eligible
• Only dispatchable imports can set LMP

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Real Time Market - LMPc

• LMP Calculator
• Purpose is to calculate nodal, zonal and HUB LMPs
  from input data
• LMP calculations are performed every 5 minutes
• LMP is computed from the marginal cost of meeting
  the system constraints and the offers of the
  resources for each node in system

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Real Time Market - LMPc

• LMP inputs
• Eligible resources from pre-processor
• SE that defines system state (actual conditions)
• System constraints
• Supply offers

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Real Time Market - LMPc

• LMP outputs
• Nodal LMPs that reflect the marginal cost of
  energy at each node in the system based on actual
  conditions

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Real Time Market - LMPc

• Real time emergency conditions
• Excess generation (supply gt demand)
• UDS will produce nodal dispatch rates that
  mitigate excess generation using same criteria as
  DAM for condition,
• emergency min lt demand lt economic min
• For the condition,
• 0 lt demand lt emergency min,
• UDS will present infeasible solution to operator

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Real Time Market - LMPc

• Real time emergency conditions
• Deficient generation
• UDS will produce nodal dispatch rates that
  mitigate deficient generation using same criteria
  as DAM for condition,
• economic max lt demand lt emergency max
• For the condition,
• emergency max lt demand,
• UDS will present infeasible solution to operator

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Issues For Discussion
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• I. NE-NY Interface
• Section 2.1.1.1
• Proxy bus for the Long Island and Cross-Sound
  cables.
• Separate price if line is dispatched separately.
• Not separate if line is dispatched as part of the
  entire NY interface.
• Further discussion with New York is planned.

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• II. External Transactions in DAM
• Section 3.3.5 In the DAM, how should external
  interfaces be allocated when fixed transactions
  exceed interface limit?
• Net imports gt interface limits LMP 0
• Net exports gt interface limits LMP max(cap) or
• Net exports gt interface limits LMP system LMP
• All exports must be price responsiveness

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II. External Transactions in DAM

• NY Procedures
• Net exports gt interface limit LMP max cap
  (1000)
• Net imports gt interface limit LMP - 1000
• PJM
• Net exports gt interface limit Does not happen,
  no software or rules to support.
• Net imports gt interface limit Same

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• III. Fixed Demand gt Gen Reserve
• Section 3.6 DAM
• Equivalent to energy deficiency in RT market
• Most expensive resource cleared sets LMP
• Reserve requirements not met
• Two conditions -
• capacity to meet energy available
• capacity to meet energy not available
• PJM practice

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• IV. External Transactions
• Section 4.3.3 External Transaction Pricing in
  real time
• Resolved.
• Summary
• Dispatchable imports are eligible to set LMP if
  bid price lt dispatch rate

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• V. RMR Units
• Sections 2.3.3 and 3.3.3
• Out-of-merit-order in real time
• Recommendation Generating units operating at
  EcoMin continue to be ineligible to set LMPs
• Least disruptive for the market.
• Units normally run above EcoMin when they are
  needed for energy
• Historical analysis shows that resources usually
  are eligible to set price for at least one hour
  during their run time

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• V. RMR Units

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• V. RMR Units
• Boston/NEMA Area

• Not analyzed because operating conditions are
  expected to alleviate congestion
• Changes to reliability criteria for interface
  limits
• Addition of Sithe Units

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• V. RMR Units
• Connecticut/Southwest Connecticut

• Historical Analysis of Hourly Data
• Time Period February 2001 - February 2002
• 13 generators most likely to be flagged for
  transmission

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• V. RMR Units

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V. RMR Units Resources Flagged for Transmission
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• V. RMR Units

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• V. RMR Units

• Conclusions
• Analysis shows that these resources are often in
  merit order and eligible to set price
• Market signals are usually correct
• Risk of increased market inefficiency if attempt
  to correct this problem

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• VI. Out of Merit External Transactions
• Section 4.3.8
• Out-of-merit-order in real time
• Needed for operating reserves
• Recommendation The ISO believes that such
  contracts should not be eligible to set the
  energy price.
• Without reserve markets, cannot appropriately
  account for opportunity costs.