TLR, Reliability and Efficiency

1. TLR, Reliability and Efficiency Fernando L. AlvaradoProfessorElectrical and Computer EngineeringThe University of Wisconsin (also: Senior Consultant, LRCA) Presentation to the Harvard Electricity Policy GroupMilwaukee, WI, November 18, 1998 www.pserc.wisc.edu

2. Objective • Discuss congestion relief alternatives • Describe a problem with the present NERC TLR procedures • Propose market-efficient alternatives that are compatible with present institutional structures

3. Observations • Congestion leads to high spatial volatility • This is necessary for economic efficiency • However, bad rules can increase volatility and reduce efficiency • Internalizing loop flows leading to zonal prices may result in inefficiencies • Efficiency requires adjusting to conditions • Static average prices are inefficient

4. Congestion relief alternatives • Market-blind • Operators deal with security issues only • Market-aware • Operators deal with security but facilitate markets operation • Pure market • Market deals with congestion

5. Congestion management options • Command and control -- no choices (FAA) • As internalized ancillary costs (Uplift) • By curtailment rules (NERC) • By locational spot pricing • Spot pricing (Schweppe, Hogan) • Transmission-only pricing (TCCs, Glavitsch)

6. The NERC TLR Procedure • A method for determining who to curtail and by how much • Based on pre-computed flow sensitivities • Uses “arbitrary” formulas

7. The procedure • Determine amount to curtail • Select curtailment category • Firm, non-firm • Determine flow sensitivities • Ignore those with less than 5% impact • Determine transaction size • Apply formula, determine amount to curtail

8. 6 transactions and 4 flowgates

9. Impact of transactions on flows

10. The curtailment formula

11. The curtailments

12. The problems • Phantom schedules • Inability to create packaged multilateral schedules • Ability to play games with contract paths • Possible games with the 5% dropout rule • Conflicting curtailment rules for multiple congestion

13. Phantom schedules

14. Consequence of phantom schedule • Transaction A to C benefits at the expense of transaction B to C • It can also work the other way around • It results in gaming behavior • It leads to suboptimal, possibly unstable, market conditions

15. Packaged multilateral trades The packaged trade has no negative impact

16. The curtailed trade This curtails a desirable packaged trade

17. Consequences • With congestion, optimal trades will (almost) always be packaged trades • NERC rules will discourage optimal behavior • NERC rules result in much higher spatial volatility • We have a model that demonstrates this • There are problems with the present NERC rules for TLR • Nodal pricing can lead to optimality, but the NERC rules will not get you there

18. price 250 100 150 (limit: 100) 100 150 250 100 250 Another view of curtailment

19. Quantity rationing (NERC) Limit transaction 200 150 100 (limit: 100) 100 100 250 100 250

20. Transmission pricing price 200 150 100 (limit: 100) 100 100 250 100 250

21. Transmission pricing alternative • It is indeed possible to attain secure operation with price signals • There are practicality/institutional concerns • Speed/reliability of response • Degree of participation • Use ex-ante contracts • Curtailment is, however, compensated • The system is voluntary for everyone

22. Recommendations (1) Can’t have it both waysin the same time frame • Improve NERC rules • Allow packaged trades • Phantom trades still possible • System could be efficient if no games are played • or: permit economic signals • Full bid/auction dispatch • Use transmission congestion “adders” • Average charges are inefficient • Explicit voluntary trading of TCCs

23. Recommendations (2) • Enable futures market that permit hedging against spatial volatility • Can be done within existing financial market structures • Integrate demand management into the picture • Airlines analogy