Transmission Rights for the Texas Nodal Market

1
Transmission Rights for the Texas Nodal Market

• Shmuel S. OrenUniversity of California at
  Berkeley
• Presented at the PUCT Technical Workshop on
  Transmission Rights
• Austin, Texas, September 5, 2003

2
Objectives

• Understanding the role of property rights in
  forward energy trading and risk management
• Understand the difference between flowgate
  congestion revenue rights (FG-CRR) and point to
  point congestion revenue rights (PTP-CRR) as
  hedging instruments
• What type of transmission rights will best serve
  the Texas Nodal market

3
Tradable Property Rights

• Purpose
• Facilitates efficient use of scarce resources
  (Coase)
• Mechanism to reward investment
• Enable risk management (hedging, forward markets)
• Aspects of Property rights
• Right to financial gain from asset
• Right to use asset (weak physical)
• Right to exclude others from using the asset
  (strong physical)

4
Forms of Financial Transmission Rights

• PTP CRR (Obligation)
• Holder is entitled to or obligated to pay nodal
  price difference between designated locations per
  MW denomination
• FG CRR (Option)
• Holder is entitled to shadow price on congested
  element in designated direction per MW
  denomination
• PTP CRR Options
• Holder is entitled to nodal price difference
  between designated locations per MW denomination
  if value is positive but can walk away if it is
  negative
• FG CRR Obligation
• A combination of Long FG CRR and Short FG CRR in
  the opposite direction. Holder is entitled to
  shadow price on congested element per MW
  denomination in Long direction and is obligated
  to pay shadow price on congested element per MW
  denomination if flow is reversed

5
Fundamental Relationship Between Nodal Prices and
Flowgate Shadow Prices

• Let
• Ni Energy nodal spot price at bus i
• Fj ATC shadow price at flowgate j (flowgate
  spot price)

Only congested flowgate need to be counted
PTDFPower Transfer Distribution FactorSHIFT
FACTOR
6
Hedging Forward Transactions with PTP and FG CRRs

• G1 has a bilateral contract with L3 to deliver
  150 MW and wants to hedge congestion charges

PTP approach Buy 150MW of FTR 1 3 FG
approach Buy 100MW of FGR 1 3
50MW of FGR 1 2 50MW of FGR 2
3 (FGR portfolio emulates the
distribution of flow according to the PTDFs
published by ERCOT)
G1
1
G3
?300
2/3
Limits shownX1 for all lines
?100
3
?220
1/3
G2
L3
1/3
2
7
Real Time Settlements

• Suppose real time dispatch is based on security
  constrained OPF and the flow constraint on
  link 2 3 with corresponding shadow price F23
  (shadow prices on uncongested links are zero) and
  nodal prices N1 , N2, N3
• Nodal pricing based congestion charges paid by
  the generator for the 150MW transaction from node
  1 to 3 are 150(N3- N1)
• Settlement for 150MW PTP CRR 1 3 paid to the
  generator is 150(N3- N1)
• Settlement for 50MW FG CRR 2 3 is 50 F23..
  But N3- N11/3 F23 (relation
  of nodal and shadow prices)
• Both the PTP and FG settlements offset the real
  time congestion charges (full hedging)

8
So What is the Difference?

• PTP CRRs guarantee a perfect hedge
• Insurance against congestion on flowgates
• Insurance against changes in PTDFs
• Insurance against changes in ATC on flowgate
• Revenue adequacy conditions necessitates limiting
  the PTP CRR offering
• FG CRRs only provides insurance against
  congestion on flowgates
• Holder is responsible to maintain proper mix
• PTDF tracking services or insurance against
  deviation can be offered as a service by private
  commercial entities

9
Issuing and Trading PTP CRRs

• PTP CRRs representing financial property rights
  to the transmission system must be issued
  centrally by the ISO (Speculative PTPs off track
  betting can be issued by anyone but have no
  physical cover)
• To insure that congestion revenues can cover PTP
  settlements, PTPs must meet a simultaneous
  feasibility condition
• The virtual CRR operating point corresponding
  to simultaneous bilateral schedules replicating
  all outstanding PTP CRRs must meet all security
  and flow constraints.
• In an PTP CRR auction (PJM) bidders submit bids
  for specific PTPs, ISO selects winning bids by
  treating CRR bids as proposed schedules using a
  security constraint OPF that maximizes CRR
  auction revenue

10
Issuing and Trading PTP CRRs (contd)

• When the RT operating point differs from the CRR
  operating point, congestion charges will exceed
  CRR settlements. The difference represents
  unhedged congestion.
• Reconfiguration of simultaneously feasible PTP
  CRRs to track the operating point must be done
  centrally (monthly at PJM).
• Low liquidity due to large number of CRR types
  and coordination requirements makes secondary
  trading impractical.
• PTP CRRs must be issued as two sided instruments
  (that can have negative value) in order to
  provide adequate hedging capability.
• Issuing PTP CRRs as options while meeting
  simultaneous feasibility severely restricts CRR
  offering and hedging capability.

11
EXAMPLE
(nomogram faces correspond Congested flowgates)

Changing capacity of line 2 to 3
G3

• Two sided PTP CRRs must stay within the outer
  nomogram
• 2 3 CRR have negative value (must pay) if RT
  operating point is at D or B.
• One sided PTP CRRs (options) must stay within
  inner nomogram

12
EXAMPLE (contd)
 

• Negative valued 2 ? 3 PTP CRRs at D represents a
  counterflow obligation (needed to offset
  settlement of extra 1 ? 3 PTP CRRs)
• If CRR operating point matches RT operating
  point then PTP CRR settlements equals congestion
  revenues, ISO breaks even and all transactions
  can be perfectly hedged.
• If Award point is Z and operating point is Y then
  there are too many 2 ? 3 CRRs and not enough 1
  ? 3 CRRs
• ISO has excess congestion
• revenue
• Not all transactions can be hedged
• (those that are hedged
• have perfect hedges)

13
Congestion and PTP CRRs Settlement
(OPF solution Point D on nomogram)
MCPE40/MWh

• In Real Time
• G2 receives 5/MW/h for counterflow
• G1 is charged 10/MW/h congestion
• And 2 to 3 CRRs must pay 5/MW/h
• And 1 to 3 CRRs receives 10/MW/h

14
Revenue Adequacy
CASE 1 Operating Point D is forecasted correctly
and bids for PTP CRRs match settlements.
Simultaneous feasibility auction also clears at
Pt. D, awarding 100 MW 2 to 3 CRRs and 400MW 1 to
3 CRRs at 10/MW/h 1. PTP CRR obligations
Congestion rents400x10-100x53500/h CRR
settlement400x10-100x53500/h ISO breaks
even. 2. PTP CRR options Congestion
rents400x10-100x53500/h CRR
settlement400x104000/h ISO is short CASE 2
CRR auction clears at Point B awarding 320MW 2
to 3 PTP CRRs and 20MW 1 to 3 PTP CRRs (Auction
revenue may be negative). RT dispatch is still
at Point D Congestion rents400x10-100x53500
/h CRR settlement20x10-320x5 - 1400/h ISO
surplus 4900

15
Issuing and Trading FG CRRs

• ISO auctions FG CRRs as financial property rights
  to the directional flowgates physical capacity
• Only flowgates likely to be congested need to be
  included in the auction (but RT congestion rent
  will be charged on all congested flowgates)
• FG CRRs are issued as options since settlement
  (based on shadow prices) can only be positive or
  zero
• CRR capacity on each flowgate is determined
  independently of others (no simultaneous
  feasibility condition)
• ISO publishes current PTDFs informing traders of
  changes in FG CRR mix needed to hedge various
  point to point transactions
• PTP CRRs can be synthesized from FG CRRs. PTP CRR
  options can be synthesized by buying only FG CRRs
  with positive PTDFs.

16
Issuing and Trading FGRs (contd)

• All congestion revenues are paid as settlements
  of FG CRRs issued by ERCOT or as real time
  negative congestion payments to counterflow
  producers
• FG CRRs can be traded on secondary markets
• Traders or private commercial entities update
  their FG portfolio to maintain point to point
  hedges
• Producers of counterflow on congestion prone
  flowgates can sell private FG CRRs (i.e. take
  short positions covered by their expected real
  time counterflow revenues from the ISO) on
  secondary markets (these will command the same
  prices and settlement as ISO-issued FG CRRs but
  will be settled privately)
• Sellers of counterflow FG CRRs undertake an
  obligation. Such obligations are necessary to
  enable full hegdging cover for all transactions
• ISO- issued FG CRRs for physical capacity
  private FG CRRs for counterflow gt All
  transactions can be fully hedged for any
  operating point (but it is up to the market to
  get the FG CRRs into the right hands)

17
EXAMPLE

• ISO can sell FG CRRs covered by physical grid
  capacity.
• 100MW 2?1 FG CRRs, 100MW 1?2 FG CRRs, 300MW 1?3
  FG CRRs, 300MW 3?1 FG CRRs, 220MW 2?3 FG CRRs,
  220MW 3?2 FG CRRs
• FG CRRs covered by wire capacity will only
  provide hedges for operating points in light
  area. To cover dark area of nomogram
  counterflow producers must undertake counterflow
  obligations and sell virtual FG CRRs covered by
  RT counterflow revenue.

18
Congestion and FG CRR Settlement
(OPF solution Point D on nomogram)
MCPE40/MWh
In Real Time FG CRR 1 to 2 receives 20/MW/h FG
CRR 1 to 3 receives 5/MW/h All other FG CRRs
receive 0 G2 receives net congestion rent 20/3
- 5/35/MW/h G1 pays net congestion rent
-20/3 - 5(2/3)-10/MW/h
ISO congestion revenue 400x10-100x53500/h FG
CRR settlement 100x20300x53500/h ISO always
breaks even Regardless of RT operating point
19
Pros and Cons of PTP CRRs

• Offers full hedges that account for security
  constraint dispatch
• If RT operating point differs from CRR operating
  point then not all transactions can be hedged
• Centrally managed frequent reconfiguration
  auctions needed
• CRRs must be defined as two sided instruments
  (otherwise feasibility condition is too strict)
• Not conducive to secondary trading

20
Assumptions Underlying Flowgate Approach

• Flowgates can be defined
• Number of commercially significant flowgates is
  small and predictable
• PTDFs are relatively stable
• Flowgate capacities are stable and known

21
Pros and Cons of FG CRRs

• Amenable to secondary trading
• No simultaneous feasibility required
• Requires less central coordination
• Small number facilitates liquidity
• FGRs can be issued for long periods
• Effective property rights for investment or
  grandfathered rights
• All the grid capacity is sold (all congestion
  charges are distributed as FG CRR settlements)
• FG CRRs are one sided instruments (holder has no
  obligation but issuer does)
• Reliance on market to assemble hedges for point
  to point transactions
• Hedges are not perfect unless the cost of PTDF
  variation is socialized (can create gaming
  incentives)
• Underlying assumptions may not be valid
• Traders interested in PTP hedges may have to deal
  with too many FG CRRs

22
Best of Both Worlds

• Real time congestion settlement based on
  locational marginal prices (nodal for resources
  and zonal for load)
• ISO can offer both PTP and FG CRRs so that
  combination of CRRs is within the nomogram but
  remaining capacity on flowgates can also be sold
• FG CRRs settled based on flowgates shadow prices.
  PTP CRRs settled as portfolio of FG CRRs or based
  on nodal price differences (who underwrites the
  difference?)
• PTP CRR options offered and settled only as
  portfolios of FG CRRs
• Secondary FG CRR markets enable traders to
  reconfigure their hedges so as to track changes
  in operating point

23
Other Issues

• Derating CRRs
• Do we need all PTP CRRs if congestion settlements
  are based on resource node to load zone?
• Limiting CRR ownership to prevent market power
• Relaxing the simultaneous feasibility criterion
  for revenue adequacy

24
Derating
165 MW
If PTP CRRs are awarded based on Pt. D. and RT
dispatch is at Pt. H, then congestion revenues
will not cover CRR settlements. OPTIONS 1. Full
payment to CRR based on nodal prices and uplift
of rev. shortfall 2. Prorate settlement to
all PTP CRRs to cover shortfall 3. Prorate
settlement to derated flowgates Options 1 and 2
socialize cost of derated line (1 to load and 2
to CRR holders) Extreme case when derated line is
radial. Option 3 directly assigns shortfall to
the users of derated flowgate.
25
What CRRs are Needed?

• Since load imbalances are settled at zonal
  prices, congestion charges on bilateral
  transaction must be based on difference of load
  zonal price minus resource nodal price (to avoid
  arbitrage)
• Hedging needs can be met with node to zone CRRs,
  which can be settled without publishing price for
  each load node
• In absence of a state estimator nodal prices at
  load nodes may be imprecise but zonal load price
  tends to average out the statistical error.

26
Limiting CRR Ownership
Dear node
Cheap node

• Generator with market power at Dear node and
  dominant CRR holding on line from Dear node to
  Cheap node benefits twice from high prices at
  Dear node through local energy sales and through
  CRR settlement (combined holding amplifies
  market power).
• Excessive CRR holdings increase incentive to
  exercise market power.
• Shares of CRR holdings on congested interfaces
  must be limited (at least for QSEs with market
  power in the load pocket).
• Hard to impose such limits with PTP CRRs since
  many different PTP CRRs can be used to control a
  single FG CRR.
• Easy to implement limits for FG CRRs.

27
Relaxing the Simultaneous Feasibility Criterion

• Simultaneous feasibility insures revenue adequacy
  in every operating interval.
• Criterion is too stringent, limiting PTP CRR
  awards and distorting clearing prices.
• Not a problem with FG CRRs since all capacity is
  sold.
• Possible relaxation of SF condition may impose
  revenue adequacy over longer periods or use a
  value at risk criterion for ISO revenue shortfall.