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2004 State of CAISO Markets Federal Energy Regulatory Commission Meeting May 4, 2005 Anjali Sheffrin, Ph.D. Director of Market Analysis. Market Performance Stable costs to serve load Demand and supply fundamentals Market competition and revenue sources to sustain new entry

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  1. 2004 State of CAISO MarketsFederal Energy Regulatory Commission MeetingMay 4, 2005Anjali Sheffrin, Ph.D.Director of Market Analysis

  2. Market Performance Stable costs to serve load Demand and supply fundamentals Market competition and revenue sources to sustain new entry Key Market Issues Reviewed New real-time market software installed in Oct 2004 Rising real-time congestion costs in southern California Ancillary Services market bid insufficiency Summer 2005 Outlook Outline AYS

  3. Overview of Control Area COI • 11 million households served in PG&E, SCE, and SDG&E and some municipal utilities • 2004 Peak Load of 45,597 MW • 43,460 MW of available generation capacity at peak after derates for hydro and outages • 9,116 MW net imports on peak hour • California ISO Markets • Real-time balancing • Day Ahead and Hour Ahead Reserves (Reg-Up, Reg- Dn, Spin, Non-spin) • Day Ahead zonal congestion management • No Day Ahead Energy Market Pac DC NP15 SF SP15 Path 15 ZP26 Mead Market Place McCullough LA4 LA2 Eldorado Path 26 Lugo Vincent Mohave Sylmar AZ3 Palo Devers Verde N.Gila Imperial Valley Miguel AYS Mexico

  4. Third year of stable market performance Total Cost $12.8 billion in 2004, v. $11.4 billion in 2003; Increase in costs affected by natural gas pricesWholesale Energy and Ancillary Service Costs, 1998-2004 AYS

  5. Competitive Market Outcomes in 2004 Price-to-cost markups for short term energy 5.2% in SP15; 4.9% in NP15 Short-Term Markup Indices: SP15 AYS

  6. Real-time Energy Prices Rise in Q4 of 2004 2002-2004 Wtd. Average Monthly Real-time Energy PricesPeak Hours AYS

  7. 2004 load growth increased around 3.7 % from 2003 levels due to economic growth 2004 net generation additions slowed to lowest level in past three years but expected to pick up in 2005 2004 net imports increased 5% with sharp increase in Southwest imports Demand Supply Fundamentals AYS

  8. Major paths with Day Ahead interzonal congestion costs2004 Interzonal Congestion Revenues on Selected Paths AYS

  9. Net generation additions slowed considerably in 2004 compared to previous three years 2001-2005 Generating Capacity Additions and Retirements AYS

  10. Transmission constraints result in large regional differences in reserve marginsNP 15 and SP 15 Reserve Margins during southern Calif peak on Sept 10, 2004 AYS

  11. Key Market Issues • New Real-time Market Software Installed in Oct 2004 - Real-time Market Application (RTMA) • Rising intra-zonal congestion costs in southern California • Chronic Ancillary Services market bid insufficiency • Summer 2005 Outlook AYS

  12. Automated real-time dispatch to insure feasible instructions in real-time market Better Operator Control resulting in fewer CPS violations Reduced need for Regulation Service Elimination of declined dispatch instructions Some benefits from illustrating potential impact of uninstructed deviations penalties More price volatility Software tuning and enhancement continues to incorporate better unit information and known load and generation deviations 1. New Real-time Market Software InstalledOctober 2004 AYS

  13. Annual real-time congestion costs increased from $151 million in 2003 to $426 million in 2004: Results from sustained derates for transmission upgrades More efficient, cheaper generation available from southwest scheduled in forward markets to meet southern California load may not be feasible in real-time Zonal congestion management market does not account for intrazonal congestion and allows infeasible forward schedules resulting in significant real-time congestion Transmission enhancements and new LMP market design are long –term solutions to address real-time congestion costs 2. Real-time Intra-zonal Congestion AYS

  14. The frequency of insufficient AS market bids to meet reserve requirements has increased over the past year First became problematic in 2002 when a significant amount of capacity signed up as condition 2 RMR and no longer able to participate in AS markets Exacerbated in 2004 by locational procurement of AS and increased amount of capacity committed by ISO 2004 market changes implemented to mitigate severity of AS market bid insufficiency Amendment 60 provided that ISO committed units could sell into the AS market and retain their commitment payments- July 11 ISO commitment timeline moved forward so that committed units could participate in DA AS markets—increased market capacity by 12 percent – early Sept 3. Ancillary Services Market Bid Insufficiency AYS

  15. ISO 2005 Summer Assessment 13% reserve margin (without interruptible load) to meet demand for expected “1-in-2” or average conditions—southern California margins are thin Challenges for southern California for “1-in-10” or high load condition 2005 State Preparedness Plan Summer peak-hour simulation to assess how much market is going to rely on ISO redispatch in real-time 4. 2005 Summer Outlook AYS

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