Pricing Behavior in the Balancing Market Alan Isemonger Manager, - - PowerPoint PPT Presentation

Board of Governors General Session September 6th - 7th, 2007

Pricing Behavior in the Balancing Market

Alan Isemonger Manager, Market Information

2

Report History

Technical root cause type of report Focuses on legitimacy Legitimacy is multi-faceted

• A. Market Power
• B. Software/Modeling/Implementation Issues
• C. Business Practices

Report examines issues related to B and C

• Assumes no market power and valid bidding

Links legitimacy to avoidability

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Nature of the Balancing Market

Balancing market provides near real time matching between generation and load Balancing energy “fills the gap” between hourly scheduled energy and actual demand Two types: hourly pre-dispatched energy (inter-ties) and 5- minute balancing energy Inter-tie transactions do not set price The most expensive balancing energy dispatched per 5- minute interval sets the market clearing price

4

Balancing Energy Volume

The vast majority of energy consumed in CAISO’s balancing area is bilaterally contracted energy transacted outside of CAISO markets. Real Time Balancing Energy typically constitutes less than 5% of total energy consumed Balancing Energy costs are allocated to load deviation as a pro-rata charge to load deviations from hourly schedules

100000 200000 300000 400000 500000 600000 2/1/2007 2/3/2007 2/5/2007 2/7/2007 2/9/2007 2/11/2007 2/13/2007 2/15/2007 2/17/2007 2/19/2007 2/21/2007 2/23/2007 2/25/2007 2/27/2007 Date MWh

CAISO Balancing Market Energy Bilaterally Scheduled Energy

Balancing Energy Volume as a Percent of Total Consumption, Feb. 2007

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What is a “Good” Price for Balancing Energy?

Balancing Energy prices should accurately reflect the short- term value of energy in a five-minute time frame Balancing Energy scarcity can arise for a number of reasons, including: Outage of generation or transmission resources Inherent difficulty in matching day-ahead load forecasts to actual demand Inability of system resources to respond rapidly enough to changes in system requirements High prices are an appropriate market response to scarcity

• f Balancing Energy

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Characterizing Price Events

Two types of price events: less frequent long duration spikes and more frequent short duration spikes Longer, less frequent price events reflect actual scarcity, tend to

• ccur at peak load

times Shorter duration spikes reflect inability of resources to rapidly respond to system conditions and tend to occur at evening ramp times

4 8 12 16 20 24 28 32 36 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour Ending Number of Occurrences 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Intervals Per Event

Number of Events Avg Intervals per Event

Spike Occurrences and Durations by Hour, Aug 2006 – Feb 2007

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Legitimacy of Price Spikes

Longer duration spikes typically indicate an actual shortage due to unavoidable circumstances Weather deviation from forecast Outages Under-scheduling Price elevation is appropriate under these circumstances Shorter Duration spikes indicate short term system scarcity “Ramp Constraint” – system resources cannot change

• utput instantaneously.

Some of these spikes are appropriate, but some could be mitigated through changes to software, regulatory or market structures

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Conditions that Create Short Duration Spikes

20-minute ramping creates balancing energy swings Twenty minute ramp is a WECC standard for interchange transactions Internal generators use same standard Experience of Eastern ISOs

40 50 60 10 20

Actual System Load Balancing Energy Requirement

30 30

Maximum Dec Energy Requirement Maximum Inc Energy Requirement

Total Scheduled Energy Production

Minute

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Ramp Underestimation

Current system uses “Look Ahead” with intervals of varying duration System fails to account for rapid ramping during the 20-minute schedule change period, leading to price spikes after the change of hour This issue will be mitigated in MRTU

50 55 60 5 10

Balancing Energy Requirement Requirement “Seen” by RTMA

Interval 1 Interval 2 Interval 3

Minute Balancing Energy Requirement

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Mitigation of Ramp Underestimation in MRTU

“Look Ahead” intervals all 5 minute duration MRTU dispatch system gets a more accurate picture of the Balancing Energy Requirement over the inter-hour ramp Dispatch system can

• ptimize system

response in advance to avoid undue price elevation

Balancing Energy Requirement Requirement “Seen” by MRTU

Minute 50 55 60 5 10

Interval 1 Interval 2 Interval 3 Interval 4 Interval 5 Interval 6

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Predispatch Declines

RTMA models predispatches as binding commitments Many SCs use them as free options This mismatch degrades RTMA’s dispatch

• ptimization as the modeling does not correspond

to the way predispatch bids are used High levels of declines during stressed system conditions have contributed to price spikes

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Conclusions

High Balancing Energy prices are appropriate if they reflect a true system scarcity Balancing Energy costs represent a small fraction

• f the overall cost of energy in CAISO

Some price spikes are an appropriate reflection of scarcity, others could be mitigated by changes to systems, tariff, or conventions MRTU will greatly improve the modeling of intertie ramps