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Changing the System TMOR Reserve Constraint Penalty Factor

Changing the System TMOR Reserve Constraint Penalty Factor . Aleks Mitreski Markets Committee October 13, 2011. Presentation Overview. Problem statement Definitions Background on energy and reserve co-optimization

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Changing the System TMOR Reserve Constraint Penalty Factor

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  1. Changing the System TMOR Reserve Constraint Penalty Factor Aleks Mitreski Markets Committee October 13, 2011

  2. Presentation Overview System TMOR RCPF Change • Problem statement • Definitions • Background on energy and reserve co-optimization • Inefficiencies during Reserve Constraint Penalty Factor (RCPF) activation • RCPF analysis • Part 1 - Determining new RCPF value • Part 2 - Re-running UDS cases with new RCPF value • Recommendation • Proposed timeline • Appendix 1 – Scenario 1 & 2 calculations

  3. Problem Statement System TMOR RCPF Change • The ISO has observed operational and economic inefficiencies when the system real-time Thirty Minute Operating Reserve (“TMOR”) price reaches its ceiling value (i.e., the RCPF) of $100 • Consequences • Failure to follow incentive is created when resources with re-dispatch costs above the RCPF are not compensated according to their lost opportunity cost • The ISO must manually (in most cases inefficiently) re-dispatch resources to supply reserves • Lack of market transparency and understatement of system TMOR price

  4. Background on general market design principles, incentives and price formation of the real-time TMOR price Energy and Reserve Co-optimization System TMOR RCPF Change

  5. Definitions UDS = Matrix System TMOR RCPF Change • TMOR – Thirty (30) minute operating reserves • RCPF – Reserve Constraint Penalty Factor (a price cap) • Lost Opportunity Cost – For the purpose of this presentation the trade off for providing reserves instead of energy • UDS – Unit Dispatch System (software that co-optimizes generators to run energy or reserves) • UDS Case – The dispatch solution for energy and reserves from UDS. A new case is usually run every 10 minutes. • Co-optimization – UDS dispatches resources such that energy and reserves needs are balanced at least cost

  6. Energy and Reserve Co-Optimization System TMOR RCPF Change • UDS uses an energy/reserve co-optimization algorithm to dispatch all available resources for least cost to meet energy and reserve requirements • Resources are dispatched to provide energy or reserves based on their energy offers • There are no real-time reserve offers. UDS determines the resources’ cost for providing reserves in real-time based on their energy offers • However, UDS stops co-optimizing resources once the RCPF cap is reached

  7. Energy and Reserve Co-Optimization System TMOR RCPF Change • In general, real-time reserve prices are predominantly $0 because of surplus of reserves available to meet the requirement • Non-zero real-time reserve prices occur: • When instead of being dispatched up due to the economics of its energy offer, a (fast ramping) online resource is held back for reserves while a more expensive resource is dispatched up for energy (with slower ramping capability); or • When instead of being dispatched online due to the economics of its energy offer, a fast start offline resource is held offline for reserves while a more expensive resource is dispatched up for energy

  8. Energy and Reserve Co-Optimization System TMOR RCPF Change In both instances, the resource that is held back for reserves produces no energy with that capability. If LMP exceeds its energy offer, the resource incurs a lost opportunity cost by not selling its capability as energy The real-time reserve price is supposed to reflect the lost opportunity cost and make the marginal resource indifferent to provide energy or reserves during the energy/reserve co-optimization process When a re-dispatch cost (the lost opportunity cost) of a resource exceeds the current TMOR RCPF value of $100, then the resource is no longer indifferent

  9. Energy and Reserve Co-Optimization System TMOR RCPF Change Key principles that must be adhered for efficient operation of the energy and reserve co-optimization: • Resources dispatched for reserves must be compensated for their lost opportunity cost for not providing energy. • Otherwise, there are financial incentives to not follow dispatch • The UDS should be allowed to perform it co-optimization algorithm • Otherwise, operators are forced to perform manual re-dispatch actions which are not transparent to the marketplace • Price formation must be transparent and efficient • Otherwise, inefficient price determination fails to attract resources with desirable characteristics to provide reserves

  10. An example how the energy and reserve co-optimization functions Energy and Reserve Co-optimization System TMOR RCPF Change

  11. Energy and Reserve Co-Optimization • Energy demand is met with the last marginal resource which sets the LMP at $70 • There is surplus of reserves so the reserve price is $0 Energy Offers LMP ($) $70 A B C Energy (MW/h) System TMOR RCPF Change

  12. Energy and Reserve Co-Optimization – Scenario 1 cont. • As energy demand increases the next economic offer is D ($80), a fast start off-line resource that has been counted for reserves so far • Assume that by dispatching D we will cause a shortage of reserves Energy Offers LMP ($) $80 $70 A B C D Energy (MW/h) System TMOR RCPF Change

  13. Energy and Reserve Co-Optimization – Scenario 1 cont. • To avoid the reserve shortage, we want to keep D off-line for reserves and obtain energy from the next available lowest priced offer F ($100) • Assume resource F has no reserve capability so dispatching it would not cause a reserve deficiency EnergyOffers LMP ($) $100 $70 A B C D F Energy (MW/h) System TMOR RCPF Change

  14. Energy and Reserve Co-Optimization – Scenario 1 cont. - When F is dispatched, it becomes the marginal resource which sets the LMP to $100 - Reserve price becomes $20 because of the opportunity cost of D which was kept off-line to provide reserves Dispatched Energy Offers LMP ($) $100 While economic to provide energy, D is kept off-line to provide reserves. If D is providing energy it would make $20 profit per MW [($100LMP – D’s energy offer $80). If off-line, it makes $20 profit per MW due to the reserve price being $20. $70 D A B C F Energy Load (MW) System TMOR RCPF Change

  15. Energy and Reserve Co-Optimization – Scenario 1 cont. System TMOR RCPF Change • In Scenario 1, offer D is the marginal reserve provider • Its lost opportunity cost to provide energy instead of reserves is $20 • If reserve price = $20, seller D is indifferent between providing energy and reserves • If reserve price <$20, seller D has the financial incentive to produce energy and NOT supply reserves (failure to follow dispatch) • Implication: to incent the appropriate resource behavior, the reserve price cannot be set inefficiently low

  16. An example how the energy and reserve co-optimization functions when the RCPF price cap is activated Inefficient Energy and Reserve Co-optimization when RCPF is activated System TMOR RCPF Change

  17. Inefficiencies during RCPF Activation System TMOR RCPF Change • The real-time reserve price is supposed to reflect the lost opportunity cost and make the marginal resource indifferent to provide energy or reserves during the energy/reserve co-optimization process • However, when the system TMOR price reaches its RCPF cap of $100 then two problems occur: • The reserve price no longer fully reflects the actual lost opportunity cost for providing reserves instead of energy • UDS cannot automatically re-dispatch resources, so the ISO operators must manually re-dispatch resources for energy and reserves

  18. RCPF Activation - Scenario 2 - If the next available offer is E priced at $400 and is dispatched, it becomes the marginal resource which sets the LMP to $400 - Reserve price reaches the RCPF cap of $100 $400 Dispatched Energy Offers LMP ($) $100 While economic to provide energy D is kept off-line to provide reserves. If D is providing energy it would make $320 profit per MW [(LMP – D’s energy offer). If off-line, it makes $100 profit per MW due to the reserve price being $100. $70 LMP D A B C E Energy (MW/h) System TMOR RCPF Change

  19. RCPF Activation - Scenario 2 System TMOR RCPF Change • In Scenario 2, offer D is the marginal reserve provider • Its lost opportunity cost to provide energy instead of reserves is $320 • If reserve price = $320, seller D is indifferent between providing energy and reserves • If reserve price <$320, seller D has financial incentive to produce energy and NOT supply reserves (failure to follow dispatch) • Today the RCPF limits the system TMOR price to $100 • Implication: to incent the appropriate resource behavior, the reserve price cannot be set inefficiently low

  20. RCPF Activation-Economic & Operational Inefficiencies System TMOR RCPF Change • Failure to follow dispatch incentives • Resources can have a counterintuitive incentive to not follow the ISO’s dispatch instruction to provide reserves • These incentives appear when system reserves are already deficient which further exacerbates reserve shortage problems in real-time • Inefficient dispatch of resources by UDS/manual actions • The UDS automatically halts dispatching resources to provide reserves when a resource’s opportunity costs exceeds the RCPF • ISO is reserve deficient and operators must manually dispatch resources to meet energy and reserve requirements • Pricing and transparency • The real-time reserve price does not reflect the true cost for providing the product • Price of manual actions are not transparent to the market

  21. Determining what the RCPF value should be? System TMOR RCPF Analysis System TMOR RCPF Change

  22. RCPF Analysis - Part I System TMOR RCPF Change Questions asked during our analysis: • How frequently does the system TMOR price reach the $100 RCPF cap? • How severe is the lost opportunity cost compensation problem? • Does it have negative reliability implications? • Can it be fixed by increasing the RCPF? • What would be the appropriate new RCPF value?

  23. RCPF Analysis - Part I System TMOR RCPF Change • Since 2008, there have been 252 approved Unit Dispatch System (UDS) cases where: • The real-time system TMOR price reached the RCPF value of $100 • The lost opportunity cost of a resource that provided reserves instead of energy exceeded $100 • In each UDS case, the ISO calculated the marginal opportunity cost for providing reserves instead of energy (nodal LMP – offer block in which a resource was dispatched), as system was actually run • The maximum observed lost opportunity cost in our analysis was $386 • Pricing TMOR at $100 is inefficient when the actual lost opportunity cost for providing the product was much higher

  24. RCPF Analysis - Part I System TMOR RCPF Change

  25. RCPF Analysis - Part II System TMOR RCPF Change • If the RCPF (price cap) value was increased in order to correct the incentive problem, could it: • Reduce the frequency of actual Operating Reserve shortages? • Reduce the severity (magnitude) of Operating Reserve shortages? • Is that a positive outcome? • The answer to all three questions is: Yes. • Let’s look at the data

  26. RCPF Analysis - Part II System TMOR RCPF Change • The ISO performed two RCPF simulations • In the first simulation we re-ran 231 actual UDS cases with TMOR deficiency using a RCPF value of $500 (some cases could not have been simulated) • UDS was able to re-dispatch the system and automatically cure the reserve deficiency in all but 40 cases • From the 40 cases with reserve deficiency (with RCPF at $500) 27 occurred on July 22nd 2011 • Would increasing the RCPF value to a much higher value (e.g., $1,000) solve the reserve deficiencies in all UDS cases?

  27. RCPF Analysis - Part II System TMOR RCPF Change • We increased the RCPF value to $1000 and re-ran the 27 UDS cases on July 22nd 2011 • UDS was able to re-dispatch the system and cure the reserve deficiency in only one case • 26 UDS cases remained reserve deficient even with RCPF value of $1,000 • We observed that sometimes the reserve deficiency is not a pricing issue but a physical limitation of reserve availability (i.e., reserves are not available at any price)

  28. Recommendation System TMOR RCPF Change • To address the observed inefficiencies, the ISO recommends increasing the System TMOR RCPF value to $500 • This higher RCPF value should significantly decrease the frequency when the RCPF is activated in “tight conditions” • Minimizing RCPF activation provides the following benefits: • Allows UDS to co-optimize the system for reserves and energy • Reduces the frequency and severity of reserve shortages • Makes resources indifferent to providing energy or reserves • Enables efficient and transparent pricing of the cost of providing reserves • Decreases the amount of manual actions by operators

  29. Tentative Timeline System TMOR RCPF Change Initial stakeholder discussion – October MC Stakeholder action – December MC/January PC Regulatory filing – Q1 of 2012 Implementation – Q2 of 2012

  30. Appendix 1 – Scenario 1 and Scenario 2 System TMOR RCPF Change In Scenario 1, the resource is indifferent whether it provides reserves or energy In Scenario 2 when the RCPF is activated the resource has an economic incentive to provide energy instead of reserves

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