Ensuring the Reliability of Electricity Supply

1
Ensuring the Reliability of Electricity Supply

• Florence School of Regulation May 11, 2006

Claude Crampes ccrampes_at_cict.fr
2

• Contribution to the Regulatory Round Table on
  "Liberalisation and Security of Supply a
  Challenge for Regulation"

3
1. What reliability means.

• North American Electric Reliability Council
  (NERC) definition, www.nerc.com
• Reliability is the degree to which the
  performance of the elements of the electrical
  system results in power being delivered to
  consumers within accepted standards and in the
  amount desired.
• Reliability encompasses two concepts
• Security
• Adequacy.

4
Security and Adequacy

• Security
• the ability of the system to withstand sudden
  disturbances, such as electric short circuits or
  unanticipated loss of system facilities.
• this aspect concerns short-term operations and is
  addressed by ancillary services which include
  voltage support, congestion relief, regulation
  capacity, spinning reserves, non-spinning
  reserves, replacement reserves.
• Adequacy
• the ability of the system to supply the aggregate
  electric power and energy requirements of the
  consumers at all times.
• this aspect concerns planning and investment and
  is addressed by planning reserves, installed
  capacity, operable capacity or available capacity.

5
Occurrences in the Green Paper SEC(2006) 317

• Security 43 secure 12
• Adequacy 0 adequate 3
• Reliability 1 reliable 0

6
In the Green Paper

• Actually, Commission's "Security" is Ferc's
  "Adequacy"
• example p. 8 of the GP 'Liberalised and
  competitive markets help security of supply by
  sending the right investment signals to industry
  participants.'
• and Ferc's security is addressed by Commision's
  'physical security'
• example p.8 of the GP 'The physical security of
  Europes energy infrastructure against risks from
  natural catastrophe and terrorist threat, as well
  as security against political risks including
  interruption of supply is critical to
  predictability.'

7
However

• Definition 28 of the Directive 2003/54/EC
  concerning common rules for the internal market
  in electricity
• security' means both security of supply and
  provision of electricity, and technical safety

8
Why does it matter 1?

• VOLL
• lost load due to system collapse
• vs.
• lost load due to inadequate supply
• see V. Costantini and F. Gracceva (2004), Social
  Costs of Energy Disruptions, INDES WP n6, CEPS,
  Brussels, March.

9
Why does it matter 2?

• FERC's security is a public good
• it requires public intervention.
• FERC's adequacy is a private good
• it should be supplied through market mechanisms
  even though some coordination may be required.

10
2. Security

• Security is a "public good"
• each user of the grid cannot purchase his own
  level of security, unlike private goods or
  services.
• no possibility of exclusion once a "security
  charge" has been set, an individual must either
  accept the risk that follows from the charge, or
  choose not to use the grid.
• Yet, each individual has his own demand curve for
  security
• if individuals are different, their demand curves
  are different,
• as the grid's users have different valuations for
  security, efficiency should require a different
  security price for each user Lindhal prices.

11
Market mechanisms fail to provide security
12
Lindhal prices
p
p
p
social demand for security
willigness to pay of a
willigness to pay of b
marginal cost
pb
pa
security
q
security
security
q
q
13
security provision

• the SO (or the MO) is the surrogate for demand
• it procures electricity reserves in advance,
  which can be quickly dispatched to maintain
  system reliability in real time.
• problems on the demand side
• how much security (reserve capacity) to install?
• how to price it to individual generators and
  consumers?
• problems on the supply side
• which grid's users will produce security?
• how to reward them?

14
demand side

• in general, the optimal level of security is
  fixed empirically
• technical threshold imposed by political pressure
• no clear idea of how much individual users are
  ready to pay
• need for systems to extract information
• consequence
• uniform price
• obvious redistributive effects some users
  subsidize others.
• Nota there is a bunch of literature on
  revelation mechanisms that limit opportunistic
  behavior (Clarke- Groves- Vickrey,
  Green-Laffont).

15
supply side

• standard organization in electricity markets
• the ISO assigns generating units to reserve
  status through an auction separate from energy
  markets
• each generator submits a two-part bid for
  reserve a capacity price and an energy price
• the ISO ranks the bids by using some scoring rule
  and makes assignment and dispatch decisions
• all units with the reserve status receive a
  capacity payment and units which are dispatched
  to generate in real time receive an energy
  payment.

16
market design

• how to fix the scoring rule and the settlement
  rule without abandoning excessive rents to
  generators
• auctions mechanisms analyzed by Bushnell and Oren
  (1994) and Chao and Wilson (2002) both have
  two-part bids
• one part offering a price for capacity
  availability
• another offering a reserve price for energy
  called in real-time.

17
final remark on security

• security problems are exacerbated under
  decentralization
• ? unbundling advocacy should be systematically
  accompanied with proposals for the efficient
  provision of security

18
3. Adequacy

• Adequacy is a "private good"
• Two main references
• C. Vásquez, M. Rivier and I. Pérez-Arriaga
  (2002), A market approach to long-term security
  of supply", IEEE Transactions on Power Systems,
  vol 17, n2, pp. 349-357, May
• S. Oren (2004), Ensuring Generation Adequacy in
  Competitive Electricity Markets
• www.ieor.berkeley.edu/oren/pubs/Adequacy
  Paper.pdf
• Three basic approaches to ensuring adequacy
• Planning reserves requirement
• Energy only markets
• Capacity payments

19
3.1. Planning reserves requirement

• US (PJM, NYPP, New England).
• Load Serving Entities are required to have a
  prescribed level of reserve capacity above their
  peak load within a certain time frame, or to
  contract with generators for the reserve.
• The reserve requirements and the capacity markets
  provide generators with the opportunity to
  collect extra revenue for their unutilized
  reserve generation capacity and provide
  incentives for the building of reserves beyond
  the reserves that meet the short term needs for
  ancillary services.
• Reserve capacity obligations are accompanied by
  formal or informal capacity markets that allow
  trading of capacity obligations among the LSE.

20
3.2. Energy only markets

• USA (California), Nordpool, Australia (Victoria
  pool).
• Generators bid only energy prices.
• In the absence of constraints, all bids below the
  market-clearing price in each hour get dispatched
  and paid the market-clearing price.
• The primary income sources for recovery of
  capacity cost is the difference between the
  market clearing price and the generators'
  marginal costs.

21
3.3. Capacity payments

• UK, Spain, Latin American countries.
• Generators are given a per MW payment based on
  their availability (whether they get dispatched
  or not) or based on generated energy as an adder
  to the energy market clearing price.
• The capacity payments are collected from
  customers as a prorated uplift similarly to other
  uplift charges such as transmission charge.

22
Market-based capacity payments

• Pérez-Arriaga standard capacity payments are
  fixed administratively, based on the ex ante
  physical characteristics of the equipment.
• A system of marketable "calls" would protect
  energy buyers against too high prices on the spot
  market. Selling calls, energy producers are
  rewarded for the insurance they provide.
  Additionally they must pay a penalty when they
  fail to supply the energy they have contracted
  upon.
• The options are marketed by the SO or the MO
  through yearly uniform price auctions.

23
final remark on adequacy

• adequacy problems are exacerbated under
  decentralization
• ? unbundling advocacy should be systematically
  accompanied with proposals for efficient
  coordination between production investment and
  transport investment.