Operation of Electricity Markets

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ELECTRICITY MARKETSMOHAMMED PITHAPURSNEHA CHERUVATTATH1

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ELECTRICITY MARKETS20 YEARS OF EVOLUTION

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Federal energy regulatory commissionNotice of proposed rulemakingStandard Market Design Avoid discrimination and assure reasonable rates through open accessTheNortheast blackout of 2003 (2 days)was a widespreadpower outagethat occurred throughout parts of theNortheasternandMidwestern United Statesand the Canadian province ofOntarioon Thursday, August 14, 2003The blackout's primary cause was asoftware bugin the alarm system at a control room of theFirstEnergyCorporation, located in Ohio. A lack of alarm left operators unaware of the need to re-distribute power after overloaded transmission lines hit unpruned foliage, which triggered arace conditionin the control software2

REGULATED MONOPOLY MODEL

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1. This structure was predominant in the U.S. prior to restructuring efforts which began in the mid-1990s.Most of the capacity(~75%) in the U.S. was owned by ~200 investor-owned utilities, most of whom were vertically integratedMost of the utilities(~3000) were small, distribution municipal or cooperatively owned systems, many of whom who bought their generation and transmission services from cooperatively owned generation and transmission (G&T) suppliers.

2. Reliability and trading agreements between monopolies were common. In the Northeast, there were a number of tight power pools which became PJM, NYISO and NE-ISO. In other regions, there were reliability and trading agreements, but not central dispatch of utility-owned systems which characterized the tight power pools.

3. Both versions of the monopoly structure shown are still common in those regions of the U.S. that have not opened their markets to competition.

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WHOLESALE & RETAIL COMPETITION4

In every state, regardless of whether they allow retail competition or not, supply for end-use customers is obtained either through the open, competitive wholesale marketIn states where full retail competition (often called "retail choice") is provided, customers may choose between their incumbent utility supplier and an array of competitive suppliers, as opposed to being a captive customer to a single provider.They may also offer services to hedge against price fluctuations, more choices for alternative energy resources, and newer energy efficiency projects, among others.In most states providing retail competition, customers who don't choose a supplier are served by their incumbent utility through a service called "provider of last resort" (POLR - also sometimes referred to as standard offer service, SOS). The POLR or SOS supplier will then secure its needed power on the wholesale market through a competitive bid process.This is the model that was pursued by most states in the U.S. who embraced restructuring(such as California, New York, New Jersey, Pennsylvania, Massachusetts, Illinois, Rhode Island, Maine, New Hampshire, Virginia, etc.) Wholesale competition is more widespread than retail competition, even in states where retail customers can chooseStructured wholesale markets serve 66% of consumers in the United States, and more than 50% of Canadas populationThere are no credible proposals to eliminate existing ISOs/RTOs.In other regions, further restructuring has stalledEmphasis in bilateral markets is on improving open accessTheres no political support to introduce competitionStrong support in the Northwest and Southeast for state regulation over federally mandated organized markets

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ORGANIZED ELECTRICITY MARKETS (NORTH AMERICA)Ten Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) serve 66% of consumers in the U.S. and more than 50% of Canadas population. 5

Source: ISO/RTO Council website www.isorto.org

LOCATION MARGINAL PRICE

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Price of a unit of electricity MWh is called LMP.It islocationalbecause there are costs associated with transmitting the electricity from the generation source to the location (node) where it is consumed.Marginal refers to the fact that the cost ofallthe electricity consumed at a given time and place is determined by the most expensive (marginal) resource in the mix

Unique marginal clearing price at multiple nodesNode is a point where supply enters the system ex: generation busbarLMP at each node calculated using last MW +1

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LMP: NO CONSTRAINTS

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If no trans constraints b/n two nodes they are collapsed into one common zone to set an LMP (same prices in both nodes)

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LMP: NO CONSTRAINTS

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LMP: NO CONSTRAINTS

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LMP WITH CONSTRAINTS

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If constraint, separate price at each node based on marginal clearing price (overloading)

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LMP WITH CONSTRAINTS

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LMP WITH CONSTRAINTS

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LMP WITH TRANSMISSION LOSSES

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If transmission losses are considered, then it needs to be taken into calculation for LMP(ISO procedure), prices can be different even if no congestion because power loss creates increase in price

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AUCTIONSuppliers are selected to supply power for certain time along with price and other terms Organized by RTO: Regional Transmission OrganizationsSome places distribution utilities have auctions to supply basic service customers

Proposed change from uniform price to pay as bid auction

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But problem is continued changing of market rules creates regulatory uncertainty and fears of regulator opportunism that may discourage investment in new generation and transmission facilities.The auction process is designed to match electricity supply to demand at the lowest possible price point. The ISO, which oversees the process, predicts the hourly demand. Each generator offers a specific amount of generation capacity (supply) into the market at specific prices. In theory, the offer prices are based on the cost to operate the facility.Once the offers are made, the ISO sorts them in ascending order to determine how much supply is available at different price points. It then selects the winning bids the lowest-priced combination of offers required to meet demand which will be dispatched at the hour dictated by the auction. The clearing price is set based on the marginal (most expensive) unit of generation required to meet demand.

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Uniform Price Auction15Pay As Bid AuctionTotal Cost:DEMAND: 20 MW

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Source: NYISOwww.nyiso.com

Pay vs bid sounds appealingWhy pay a higher price to a supplier than the offer priceContinued changing of market rules creates regulatory uncertainty Fears of regulator opportunism Unlikely to have any significant effect on market prices More likely than not will raise prices rather than lower them

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17SIMULATION

SIMULATION

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Tomorrows Electricity Markets!!!Large number of traders (maybe millions)Some with a physical position as supplier and consumerMaking lots of transactions (several times a minute)Over the entire supply time scale (long, years-out to real-time)Across the entire network (generator bus to end-use device)

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REFERENCEShttps://en.wikipedia.org/wiki/Electricity_markethttps://en.wikipedia.org/wiki/California_electricity_crisishttps://www.eia.gov/Energyexplained/index.cfmpagehttps://www.fortnightly.com/fortnightly/2008/03/pay-bid-vs-uniform-pricinghttps://www.epsa.org/industry/primer/wholesaleMarket

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