Concerns Regarding ISO-NE ASM Proposal

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Concerns Regarding ISO-NE ASM Proposal

• NEPOOL Markets Committee
• June 28-29, 2005
• John Farr
• Technical Director

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General Concerns Regarding ISO Proposal

• Does not adequately recognize the value of
  spinning reserve capacity nor recognize the full
  extent of required services provided by spinning
  resources upon which ISO-NE depends (e.g., load
  following service).
• Does not provide sufficient incentives for owners
  to offer their resources into the pool in a
  flexible manner
• Does not provide tools through which unit owners
  can manage costs and risks
• Fuel-price risks
• Lost energy margins when operating at inefficient
  DDP
• Excessive ramping of units
• Other instances where market does not reflect
  value apparent in operational practices

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Services Needed by ISO-NE Provided by Spinning
Reserve Resources
Note ISO-NE has no operational requirement for
quick start capacity

• In Addition, Spinning Resources Provide Load
  Following Service
• Need combination of hydro/pumped storage and
  synchronized reserve to meet load ramp up/ramp
  down (can be much larger requirement than total
  30 minute requirement).
• Currently mandated, but uncompensated.
• Yet ISO proposal appears to place much greater
  value on quick-start capability

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Why Pay Spinning Resources?

• Spinning resources are better able to meet
  operational needs of ISO-NE
• Its better market design
• ISO proposal errs by targeting a specific unit
  type instead of providing an efficient means to
  procure needed services.
• More efficient to provide transparent indication
  of value of service and allow market to figure
  out what resources can more efficiently provide
  needed services.
• Significant reason exists to believe that current
  market provides poor incentives and needs reform
• Current uplift-based based approach provides no
  incentives for flexibility and may even encourage
  inflexibility
• Flexibile units face greater risks by being
  flexible (e.g., fuel price risks), thus further
  encouraging inflexibility

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1) Comparability for Spinning Resources
Concern Discussion NEPGA Proposal
Because the forward markets appear likely to be
more valuable than the real-time market, the ISO
proposal neglects the valuable and necessary
service provided by spinning reserve resources.
Spinning reserve resources are left with too few
incentives to bid flexibly. Spinning resources
are capable of providing spinning, ten minute
reserves, and thirty minute reserves. Thus,
spinning reserves resources are, by definition,
at least as valuable as non-spinning resources to
ISO operations. By neglecting to include a
comparable spinning reserve market, the ISO
proposal fails to efficiently compensate spinning
resources and misses an important opportunity to
promote unit flexibility. Very important to add
a spinning market/spinning payments in manner
comparable to TMNSR and TMOR in ASM Phase 2.
This may be accomplished in many ways 1) Add a
forward TMSR market to operate in parallel with
the TMNSR and system TMNSR market. The deadline
for reporting bilateral trades would be late
enough to provide participants with an
opportunity to cover their forward obligations.
Market would cascade forward prices such that
TMSRgtTMNSRgtSystem TMOR. 2) Alternatively,
real-time TMSR prices could be cascaded based on
forward reserve prices without conducting a
forward TMSR auction. 3) Ultimately, proper
treatment of TMSR resources may require more
significant changes to the ISO proposal (e.g.,
daily forward auction, limits on obligations
faced by non-providers).
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2) Local Real-Time Requirements in Excess of
Forward Purchase
Concern Discussion NEPGA Proposal
Because local forward reserves are procured for
an extended period of time, the forward purchase
amount may or may not be sufficient to meet
real-time reserve obligations. Resources
providing reserves in real-time will most often
make up the gap, but will not be
compensated. The ISO proposes to purchase a
forward amount sufficient to cover local reserve
requirements in 90-95 of hours. Some
participants are lobbying the ISO to select a
lower percentage/ local forward reserve
requirement. In any instance, in at least some
hours, the real-time requirement will exceed the
forward purchase amount. Real-time resources
will be expected to make up the shortage and
should be compensated. Pay all resources
providing local reserves in real-time (i.e., not
selling forward) for any real-time requirements
in excess of the forward purchase requirement.
Payment could be based on RCPF for local
reserves. In addition, these payments could be
subtracted from uplift payments, where applicable.
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3) Alter RCPFs when TMOR Shortages are Expected
to Last More Than 4 Hours
Concern Discussion NEPGA Proposal
The RCPFs are intended to reflect the value of
operating reserves implicit in ISO operational
practices. ISO practices regarding TMOR are
different during TMOR shortages forecast to last
longer than 4 hours. RCPF values need to reflect
this difference when it occurs. When TMOR
shortages are forecast to occur over 4 hours,
reliability rules require the ISO to procure TMOR
reserves without regard to cost. For example,
the ISO may procure a 1,000 external resource in
order to restore TMOR even though the marginal
offer of internal resources is much lower. To be
consistent with this practice, a much higher RCPF
for TMOR is required in these instances. Increase
the RCPF for system TMOR to 950 and decrease
the RCPF for TMNSR to 0 in instances when system
reserve deficiencies are forecast to last more
than four hours.
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4) Use of Penalties from Forward Providers
Concern Discussion NEPGA Proposal
Under the current ISO proposal, penalties paid by
forward reserve providers that fail to meet their
obligations reduce payments by real-time load.
Yet, in most instances, load still receives
real-time reserve service and reserve resources
that make up the difference receive no
payment. Reserve penalties are paid whenever a
forward reserve provider fails to meet their
obligations, either by not offering sufficient
resources into the market or failing to provide
energy when called upon. In most instances, when
such penalties are paid, the ISO still meets its
real-time reserve requirements. In these
instances, payment should go to the resources
actually providing reserves, but do not have a
forward obligation, in proportion to the amount
of service provided. Allocate revenues from all
penalties paid by forward reserve providers to
non-forward resources that provide reserves in
real-time. Revenues would be allocated in
proportion to the amount of reserves actually
provided, and could reduce uplift payments to
out-of-merit resources.
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5) Level of Penalties Faced by Forward Providers
Concern Discussion NEPGA Proposal
Under the current ISO proposal, penalties paid by
forward reserve providers are much higher than in
the current market and do not vary based on
real-time reserve prices. These penalties may
not be indicative of the value of the reserve
service that forward resources owners fail to
provide. The ISO proposes that forward resources
that fail to provide reserves not be paid and
face a penalty equal to 1 or 1.5 times the offer
cap converted to an hourly value. Resources that
fail to start pay the real-time LMP when it is
higher than the cap. These values appear likely
to exceed 100/MWH in most circumstances.
Finally, resources have the ability to opt out of
providing reserves day-ahead in times when
reserve shortages are likely without paying
shortage pricing. Consider tightening
relationship between penalties and real-time
reserve values. For example, consider raising
penalties in instances where real-time reserve
prices reach values larger than the current
penalties and lowering penalties when reserves
are plentiful.
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6) Out-of-Merit Costs Not Reflected in Real-Time
Reserve Pricing
Concern Discussion NEPGA Proposal
The operational practice of committing
out-of-merit resources to ensure reserve levels
provides a clear demonstration of the value of
real-time reserve services, yet the proposed
markets do nothing to make this value transparent
and too little to promote the real-time
flexibility among units. In most hours, the
current ISO proposal continues the current
practice of requiring spinning resources to
provide reserves without compensation. Real-time
pricing that include out-of-merit costs would
significantly improve the ISO proposal by
accounting for a much larger fraction of the
value provided by reserves. Such reserve
pricing would also significantly reduce uplift
charges by proving out-of merit resources with
significant additional market revenue. Commit to
ASM reforms that reform real-time reserve and
energy pricing by ensuring that real-time prices
reflect the out-of-merit costs of resources
needed to meet reserve requirements. This reform
should also address the distorting impact that
such commitments have on energy price.
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7) Related Reforms Needed to Manage Risks and
Costs of Offering Flexible Capacity
Concern Discussion NEPGA Proposal
In most hours, the current ISO proposal continues
the current practice of requiring many resources
to provide reserves without compensation. More
bidding flexibility is needed to allow resource
owners to better manage the risks and costs of
providing operational flexibility. Resource
owners providing spinning reserves to the ISO
face several costs directly related to providing
the service. These include 1) fuel-price risks
associated with changes in fuel prices after the
day ahead deadline 2) lost energy margins when
operating at inefficient DDPs and 3) wear and
tear associated with the ramping of units. Phase
1 reforms do not address intraday changes in fuel
prices. Introduce 1) real-time re-bidding 2)
daily re-bidding of start-up and no-load offers
and 3) real-time increases in ramp-rates and/or
decreases in EcoMin in order to maximize ability
of units to provide real-time reserve/operational
flexibility.
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8) Acknowledge Need for Spinning Reserve to
Provide Load Following Service
ISO-NE proposing only to price Ten Minute
Spinning Reserves (TMSR), yet ISO-NE will
schedule generation adequate to meet all reserve
requirements (to the extent not satisfied by FR)
Load Following Service requirements. In
addition to not addressing compensation for LFS.
This practice will produce zero TMSR prices in
most hours. Currently, the ISO requires all
units capable of dispatch to offer that dispatch
capability to meet operating reserve needs not
satisfied by offline, quick start generators and
to meet load following requirements. Thus, in
scheduling the system, ISO operations seeks
additional capability far beyond their forward
requirements. For markets to work, the amount of
real time optionality procured must match
operational practices. Add load following
service to the scope of services compensated as
ancillary services New item for discussion
Concern Discussion NEPGA
Proposal Status