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“SPP 101”
SPP.org 3
Our Beginning
• Founded 1941 with 11 members
Utilities pooled resources to keep Arkansas aluminum plant powered for critical defense
• Maintained after WWII for reliability and coordination
SPP.org 4
3
SPP at a Glance• Incorporated in Arkansas as a 501(c)(6)
non-profit corporation
• FERC - Federal Energy Regulatory CommissionRegulated public utility
Regional Transmission Organization
• NERC - North American Electric Reliability Corporation
SPP.org 55
Reliability CorporationFounding member
Regional Entity
Operating Region
• 54 Members in nine states:
Arkansas
Kansas
Louisiana
Mississippi
Missouri
Nebraska
New Mexico
Oklahoma
Texas
SPP.org 6
4
SPP Members
SPP.org 7
• 370,000 square miles service
Operating Region
miles service territory
• 47,000 miles transmission lines:
69 kV – 13,649 miles115 kV – 9,171 miles
SPP.org 88
115 kV 9,171 miles138 kV – 9,294 miles161 kV – 4,550 miles230 kV – 3,531 miles345 kV – 6,620 miles500 kV – 106 miles
5
Independent System Operator (ISO) /Regional Transmission Organization (RTO) Map
SPP.org 9
3 Interconnections / 8 NERC Regions
SPP.org 10
6
SPP Mission
Helping our members work together to k th li ht t d d i thkeep the lights on – today and in the future.
SPP.org 11
The SPP Difference
• Relationship - Basedp
• Member - Driven
• Independence Through Diversity
• Evolutionary vs. Revolutionary
SPP.org 12
• Reliability and Economics Inseparable
7
SPP Milestones1968: NERC Regional Council
1980: Telecommunications network
1991: Operating reserve sharing
1994: Incorporated as non-profit
1997: Security coordination
1998: Tariff administration
2001: Regional scheduling
SPP.org 13
2004: FERC-approved Regional Transmission Organization
2006: Contract Services
2007: Launched EIS market, NERC Regional Entity
2009: Nebraska utilities integrated as full members
Growth in Responsibilities
SPP.org 14
8
SPP Expenses: 2001-2009
SPP.org 15* 2009 Operating Expenses reflect approved budgeted amount$/Mwh based on 12 CP Method
How does SPP impact you?
• Transmission typically represents 10% of residential customer’s billof residential customer s bill
• SPP cost = 30¢ of $100 residential bill
• 2005 independent analysis by Charles River Associates:
$500,000 cost-benefit study
SPP.org 16
$500,000 cost benefit study
On behalf of state regulatory commissions
270% ROI for SPP services over the next 10 years
9
SPP at a Glance
• Little Rock based
• 400+ employees
• $114M operating budget (2009)
• 24 x 7 operation
SPP.org 17
p
• Full redundancy and backup site
IT Facts• Update 65,000+ data points every 10-30 seconds
• Operations model solves 20 000 x 20 000 matrixOperations model solves 20,000 x 20,000 matrix every 2 minutes (6 minutes for contingencies)
• 425 servers
• 300 Terabytes of data storage
• Systems availability goal of 99.98%
SPP.org 18
• Fully redundant Internet and Wide Area Networks with maintained 100% availability
• Operate two data centers
10
Did You Know?• SPP’s 63,000 megawatts capacity resources
would power over 50 million homes. p
• In 2008, SPP members completed98 transmission projects totaling $325 million.
• SPP’s transmission owners spend over $600 million annually to operate their electric transmission facilities
SPP.org 19
electric transmission facilities.
• 47,000 miles of transmission lines in SPP’s footprint would circle the earth- almost twice!
Facilitation – Helping our members work together
SPP.org 2020
11
Regional State Committee
• Retail Regulatory commissioners – Arkansas, Kansas, Missouri, Nebraska, New Mexico, , , , ,Oklahoma, Texas
Louisiana maintains active observer status
• FunctionsCost allocation
Ensure adequate supply
SPP.org 21
Ensure adequate supply
Market cost/benefit analyses
Reliability Coordination
• Monitor grid 24 x 365
As “Air Traffic Controllers,” our operators comply with…
• Anticipate problems
• Take preemptive action
• Coordinate regional response
SPP.org 22
• Independent …over 1,300 pages of reliability standards and criteria.
12
• Provides one-stop shoppingf f t i i li
Transmission ServiceAs “Sales Agents,” we administer …
for use of transmission lines
• Consistent rates, terms, conditions
• Regional focus
I d d t
SPP.org 23
• Independent
• Process > 12,000 transactions/month
…a 1,621 page transmission tariff on behalf of our
members and customers.
Market Operation SPP’s Energy Market is like the “NYSE”…
• Monitors resource / load balance
…and follows over 200 pages of market protocols
load balance
• Ensures economic dispatchwhile meeting system reliability
• Provides settlement data
SPP.org 24
market protocols.
• First year of spot market provided >$100 million in benefits to members
Annual $80 million expectation
13
Compliance Enforcement and Standards Setting
• Enforce compliance with federal NERCEnforce compliance with federal NERC reliability standards
• Create regional reliability standards with stakeholder input
• Provide training and education to users, o ners and operators of b lk po er grid
SPP.org 25
owners, and operators of bulk power grid
SPP Training
• World class regional restoration drills
• NERC certifications
• Train-the-trainer workshops
• 2008 training program awarded 12,116 continuing education hours
SPP.org 26
continuing education hours
16
Projects with Construction Commitments
SPP.org 31
Balanced Portfolio
• Economic transmission upgrades (cost) to lower generation production costs (benefit)lower generation production costs (benefit)
• Must balance costs and benefits in each zone
• Transmission expansion costs shared regionally (load ratio share)
SPP.org 3232
17
SPP.org 3333
Extra High Voltage Study
• Looks to 2026 and beyond
• Suggests overlaying SPP footprint with 500 - 765 kV transmission
• Enhances access to all types of generation, including rene ables
SPP.org 34
renewables
• Long-range plan for short-term decisions
18
SPP.org 35
Wind Development
• Kansas, Oklahoma, Texas Panhandle, New Mexico NebraskaNew Mexico, Nebraska -wind “Saudi Arabia”
50,000 – 100,000+ MW potential
More wind than SPP’s uses during peak
• 3,000 + MW wind in-service
SPP.org 36
Over 51,000 MW in generation interconnection queue
Generation Interconnection Task Force working to improve process
19
Advantages of harvesting “better” SPP wind
• Many high density wind zones are located in the western section of the SPP system
• Advantage of harvesting these wind zones over the “next best” wind resources is significant
30% capacity margin vs. 45% capacity margin
50% more installed wind turbines required for the same wind potential in the 30% vs. 45% scenarios
SPP.org 37
p
• Potential savings of harvesting more effective wind over lower capacity wind in the footprint: Up to $10B
Challenges with Wind Development• Intermittent
M t b l t d ith t tMust be supplemented with constant sources
• Wind in remote areas
Expensive new transmission needed
• “Not in my backyard” siting issues
SPP.org 38
• Seams agreements
• Renewable Electricity Standards (RES)
22
Missouri RESSections 393.1020 - 393.1040• The act creates the Green Power Initiative. Electric companies shall make good-faith
efforts toward meeting the following renewable energy targets:
4% f t t l t il l t i l f t i bl t h l i• 4% of total retail electric sales come from certain renewable energy technologies by 2012;
• 8% of total retail electric sales come from certain renewable energy technologies by 2015; and
• 11% of total retail electric sales come from certain renewable energy technologies by 2020.
Electricity generation from renewable sources prior to August 28, 2007 may be counted toward the targets, provided they continue to be used.
• The act directs the Public Service Commission (PSC) to develop standards for measuring electric companies' progress in meeting the targets. The standards must protect against adverse economic impacts on the companies and reliability of service, as well as consider environmental compliance costs and technical feasibility The PSC shall also develop a
SPP.org
environmental compliance costs and technical feasibility. The PSC shall also develop a weighted scale that gives more credit to renewable energy technologies the PSC determines to be in the public's best interest.
• The act establishes reporting requirements until 2022. Electric companies are required to report every two years on their progress toward meeting the targets. The PSC is required to report every two years on the progress made by electric companies and give recommendations for legislative action. The director of the Department of Economic Development shall report every two years on the impact of this progress on the state economy and the director of the Department of Natural Resources shall report every two years on the environmental impact of this progress.
• This data was obtained from the US Department of Energy
http://apps1.eere.energy.gov/states/maps/renewable_portfolio_states.cfm
SPP.org
23
The Synergistic Planning Project
New, Proactive Efforts to Improve Transmission Planning and Cost Allocation for the SPP RegionPlanning and Cost Allocation for the SPP Region
Overview
• SPP’s current transmission planning processes
• Synergistic Planning Project:
Integrated Transmission Planning
Priority Projects
Cost Allocation and Cost/Benefit Analysis
SPP.org 4646
24
Where Are We Now?
SPP.org 4747
Existing processes - transmission needed to:
• Reliability Assessment: Maintain reliability for next 10 years
• Aggregate Transmission Service Study: Meet current requests for transmission service
• Generation Interconnection: Connect new resources to grid
• Balanced Portfolio: Provide more benefits than costs per zone
SPP.org 4848
• Extra High Voltage (EHV) Overlay: Meet needs 20+ years
25
Balanced Portfolio
• Economic transmission upgrades (cost) to lower generation production costs (benefit)lower generation production costs (benefit)
• Must balance costs and benefits in each zone
• Transmission expansion costs shared regionally (load ratio share)
SPP.org 4949
SPP.org 50
26
Extra High Voltage Study
• Looks to 2026 and beyond
• Suggests overlaying SPP footprint with 500 - 765 kV transmission
• Enhances access to all types of generation, including rene ables
SPP.org 51
renewables
• Long-range plan for short-term decisions
51
Wind Development
• Kansas, Oklahoma, Texas Panhandle, New Mexico NebraskaNew Mexico, Nebraska -wind “Saudi Arabia”
50,000 – 100,000+ MW potential
More wind than SPP’s uses during peak
• 3,000 + MW wind in-service
SPP.org 52
Over 51,000 MW in generation interconnection queue
Generation Interconnection Task Force working to improve process
52
27
Why do we need to change?
• Address gaps and conflicts between processes
• Simplify multiple cost allocation methods
• Position SPP to respond to the national focus on improving electric infrastructure
• Develop holistic, long-range view
SPP.org 5353
• Be proactive rather than reactive to building and paying for infrastructure
• Capitalize on the region’s wind resources
New planning process will:
• Consolidate:
Reliability Assessment
Balanced Portfolio
EHV Overlay
• Generation Interconnection and Aggregate Studies:
SPP.org 5454
Remain separate
Simplified
28
Synergistic Planning Project Team (SPPT)
• SPP recommended formation of SPPT to:
Look for opportunities to improve transmission planning and cost allocation
Think creatively – unencumbered by Tariff or other limitations
SPP.org 5555
Synergistic Planning Project Team Members
• Paul Suskie; Chairman, Arkansas Public Service Commission
• Barry Smitherman; Chairman, Public Utility Commission of y yTexas
• Kelly Harrison; Vice President – Transmission Operations and Environmental, Westar Energy
• Ricky Bittle; Vice President - Planning, Rates and Dispatching, Arkansas Electric Cooperative Corporation
• Rob Janssen; President and General Manager Dogwood Energy
SPP.org 5656
• Rob Janssen; President and General Manager, Dogwood Energy
• Ric Abel; Managing Director, Prudential Capital Group
• Carl Monroe; Executive Vice President and COO, SPP
• Mark Rossi; Accenture, facilitation and administration
29
Components of SPPT Report
• Integrated Transmission Plan
• Priority Projects
• Cost Allocation
SPP.org 5757
Integrated Transmission Planning
SPP.org 5858
30
What is Integrated Transmission Planning?• ITP: New effort to develop proactive regional
transmission planning principles p g p p
• Goal: Build robust grid to meet near- and long-term needs
• Horizons: 20, 10, and 4 year
• Focus: Regional, integrated with local
SPP.org 5959
g , g
• Update: Every three years
• Resulting in: Comprehensive list of needed projects for SPP region over next 20 years
What is Integrated Transmission Planning?• Major Objectives: Design transmission backbone to
connect load to the most reasonable generation alternatives
Improve connections between SPP’s east and west regions
Make transmission an enabler rather than constraint
Strengthen ties to Eastern and Western Interconnections
• Underlying Value: Reliability and Economics are
SPP.org 6060
• Underlying Value: Reliability and Economics are inseparable
31
SPP is asking state regulators to:
• Participate in development of ITP and new cost allocation mechanisms that meet regional needs;allocation mechanisms that meet regional needs; ESWG and CAWG
• After ITP and cost allocation are approved by SPP’s Regional State Committee, Board of Directors, and FERC, we will return for further discussion of project details, costs, and benefits
SPP.org 6161
• SPP and its members will ultimately seek rate recovery for ITP projects
Priority Projects
SPP.org 6262
32
Priority Projects
• Near-term opportunities while transitioning to ITP
• “Readily apparent” projects that continue to appear in current planning processes
• Relieve grid congestion
• Improve access to transmission service
• Improve transfers between SPP’s East and West regions
SPP.org 636363
• Improve transfers between SPP s East and West regions
• Economic projects up to 765 kV; across SPP region
What criteria were used to select candidate Priority Projects?
Criteria 5 points 4 points 3 points 2 points 1 point
Congestion Relief (C)$170K -$100K $99K - $50K
$49K –$20K $19 - $8K $7K - $0K
Transmission Service Request Impact (T)
300 – 100 MWI value
99 – 50MWI value
49 – 19MWI value
18 – 10MWI value
9 – 0MWI value
Generation Interconnection Impact (G)
1600 – 1300MWI value
1299 – 1000MWI value
999 – 700MWI value
699 – 400MWI value
399 – 0MWI value
SPP.org 6464
Economic Benefit (E) Above 1.2 1.19 – 0.9 0.89 – 0.65 0.64 – 0.4 0.39 - 0
West - East Transfer (W) 765kV 500kV 345kV 230kV Under 230kV
33
Priority Projects to be Analyzed 1. Hitchland – Woodward District EHV (765kV/Run at 345 kV)
2. Spearville – Comanche - Medicine Lodge – Wichita (765kV/Run at 345 kV)p g ( )
3. Comanche or Medicine Lodge – Woodward District EHV (765kV/Run at 345 kV)
4. Woodward District EHV – Elk City – LES - Seminole (765kV/Run at 345 kV)
5. Wichita – Wolf Creek (765 kV)
6. Woodward District EHV – Woodring (345 kV)
7. Valliant – NW Texarkana (345 kV)
SPP.org 6565
7. Valliant NW Texarkana (345 kV)
8. Stateline – Potter – Roosevelt – Tuco (345 kV)
9. Nebraska City – Stranger Creek or (11) Cooper – Maryville – Sibley (345 kV)
10. Riverside Station – Tulsa Power Station (Add Reactor) (138 kV)
SPP.org 66
34
Wind Siting for Priority ProjectsBase Case (5%) 10% Case 20% Case
State Installed Nameplate Wind Capacity (GW) State Installed Nameplate
Wind Capacity (GW) State Installed Nameplate Wind Capacity (GW)
• The Priority Projects have defined several levels of wind penetration to
KS 1.05 KS 1.24 KS 2.64
MO 0.00 MO 0.00 MO 0.10
NE 0.18 NE 0.57 NE 0.74
NM 0.20 NM 0.15 NM 0.21
OK 0.85 OK 0.48 OK 1.75
TX 0.71 TX 1.41 TX 1.39
Total 3.00 Total 6.84 Total 13.67
SPP.org
The Priority Projects have defined several levels of wind penetration to be studied in the SPP footprint.
• For each level (Base Case (5%), 10% and 20% Energy Penetration), a set of generators was included in the studies.
• Wind generators are based upon IA status or position in GI queue.
SPP.org
Figure 1 – Base Case (5%) Wind Location Map
36
Priority Projects next steps
• Extensive analysis being performed
• Stakeholder involvement and review at each phase
• Projects with Benefit to Cost analysis ≥ 1 recommended for Board approval in October
• Cost allocation methodology for Priority Projects is to be determined
SPP.org 71717171
is to be determined
Cost Allocation
SPP.org 7272
37
Who pays for transmission now?
Type Reliability Economic
Purpose Keep lights on Reduce congestion with benefit/cost ≥ 1
Also Called Base Plan Funding Balanced Portfolio
Funded By Region - 33% Shared regionally
SPP.org 7373
Funded By Region 33% Impacted zone- 67%
Shared regionally(postage stamp)
Voltage All 345 kV+
Implemented 2005 2009
What is being considered for the future?Initial, high-level rate design proposal
• Highway/Byway rate design
• Highway rate considerations include assessments of access and usage charges
• Byway rate design – under discussion
SPP.org 7474
38
Next Steps
• RSC’s Cost Allocation Working Group (CAWG) is meeting every two weeks to present ameeting every two weeks to present a recommendation to RSC October 26
• Initial cost allocation policy-level concepts developed by CAWG are being converted to tangible, illustrative member impacts
B i i ith CAWG A t 26 ti
SPP.org 7575
Beginning with CAWG August 26 meeting
• CAWG will focus on Highway in August and Byway in September
Cost/benefit analysis to be performed
• 40-year horizon20 ear resid al impacts capt red20-year residual impacts captured
• Identify cost/benefit of each scenario by zone/stateScenarios include load sensitivities, wind levels, fuel/carbon prices, etc.
• Quantify benefits from:
SPP.org 7676
Avoided projects
Reduction in emissions, operating reserves, congestion, etc.
Interconnection and deliverability improvements
• Assess impact on typical residential customer
39
How would “highway” impact customers?
• Regional EHV “highway” cost: ~ $6-7 billion (there will be additional underlying costs for the supporting infrastructure)
• Customer impact: Benefits expected to exceed cost
Example – SPP’s analysis found that for 7 Balanced Portfolio projects that cost $700 million, average residential customer would:
Pay 88¢ on $100 monthly utility bill (less than 1% of bill)
SPP.org 7777
Gain $1.66 in benefits
Cost/Benefits vary by zone
How would “highway” impact customers?
• Customer savings come from:
Greater grid efficiency (reduced congestion / lower line losses)
Improved access to broad range of generation options
Increased competition in SPP wholesale market
Higher reliability
SPP.org 7878
State-by-state, zone-by-zone, and/or customer impacts are yet to be determined
40
Cost Recovery From Retail Load
• The revenue requirements associated with Base Plan Upgrades and Approved Balanced Portfolios are allocated to benefiting loads pursuant to the costallocated to benefiting loads pursuant to the cost allocation and recovery plan specified in SPP’s Tariff (Sec. 40 – 42)
SPP bills Schedule 11 charges to Transmission Customers (TCs) and Transmission Owners (TOs) who serve those loads to recover those costs
These charges are paid by these LSEs and the cost is recorded in their books as a transmission expense
SPP.org 79
their books as a transmission expense
Cost Recovery From Retail Load, Cont.
• This arrangement anticipates that each LSE would, in turn, recover such costs from the loads they serve
The LSE would seek recovery of an appropriate share of that booked expense from retail load subject to state jurisdiction
Once state regulators find that such cost should be included in retail rates, as a component of the transmission-related revenue requirement, the LSE would recover such cost from the benefiting retail load by billing such load pursuant to its retail rates
SPP.org 80
41
Illinois Commerce Commission vs. FERC7th Circuit Decision: August 6, 2009
• PJM Cost Allocation for facilities that operate at p500kV and above
• Court of Appeals found that FERC did not present “even the roughest estimate of benefits” to the objecting utilities
• Court of Appeals did not say that regionalization
SPP.org 81818181
• Court of Appeals did not say that regionalization of costs was impermissible and remanded the case
FERC Options
• Seek a rehearing before the full court
• Appeal to the U.S. Supreme Court
• Reenforce and reissue the decision
• Hold further paper or hearing procedures
• Attempt to have the parties settle the case
SPP.org 82828282
• Render a new decision eliminating regionalization of costs
42
Impact on SPP
• Decision only directly applies to PJM
• Decision doesn’t undo any existing SPP Tariff provisions
• Decision does not establish a new policy for future cost allocation, but it does affect the factual support needed
SPP.org 83838383
SPP Mission
Helping our members work together to k th li ht t d d i thkeep the lights on – today and in the future.
SPP.org 8484
43
Evolution of Regional Coordination• 1941 – Interconnection of utilities
1997 R li bilit C di ti• 1997 – Reliability Coordination
“Air traffic controller”
• 1998 – Regional Tariff Administration
“Sales agent”
• 2004 Regional Planning
SPP.org 85
• 2004 – Regional Planning
“Multi-state compacts”
• 2007 – Real-Time Market
“Stock exchange”85
Regional Benefits
• Systematically optimizing the economies of scale and diversity to improve reliability andscale and diversity to improve reliability and efficiencies
• More opportunities?
YES!
Load and generation balancing (additional real-time)
SPP.org 86
g g ( )
Regional generation commitment (day-ahead)
Proactive transmission expansion (5-25 years)
86
44
Load and Generation Balancing
• “Regulation Market” (ancillary services)
Benefits from diversity of resources
1. Fuel type differences
2. Speed of resource movement
3. Use more efficient resource
4. Demand response
SPP.org 87
Competitive pricing
1. Manage renewable intermittency
2. Encourage more players to reduce price
87
Regional Generation Commitment Optimizes
• Economies of scaleFewer resources on-line needed to meet reliable electricity delivery
Resources are able to run more efficiently
• Competitive pricingEncourage other resources, demand response, etc.
SPP.org 88
g p
• CHALLENGESHow to reduce risk to load of allowing SPP market to make decisions about regional generation commitment? Congestion hedging
88
45
Future Markets and Challenges
SPP.org 8989
What kind of markets does SPP have now?• Transmission: Participants buy and sell use of
regional transmission lines that are owned by different parties
• Energy Imbalance Service (EIS): Participants buy and sell wholesale electricity in real-time
Market uses least expensive energy from regional resources to serve demand (load) first
SPP.org 909090
Sometimes it’s cheaper for a market participant to purchase power from another provider than to generate
SPP monitors resource/load balance to ensure system reliability
46
“Manufacturing”, “transportation”, and “delivery” must occur instantaneously
SPP.org 9191
Utilities have several “manufacturing” options to serve retail customers
3rd Party Purchases/
R t il
Utility
Purchases/SalesSelf Supply
SPP.org 9292
Retail CustomersSPP
Facilitated EIS Market
47
Timing of arrangements differs
3rd Party P h /
Daily
Purchases/Sales
Self Supply
R t il
UtilityAnnual Monthly DailyH l
SPP.org 9393
Retail CustomersSPP
Facilitated EIS Market
Hourly
RealReal--timetime
When “transportation” is limited, some “manufacturing” options are also limited
Third Party
PurchaseUtility A
X
SPP.org 9494
Utility A
SPP Spot MarketCongestion
48
What is congestion?• Desired electricity flows exceed physical capability
C ti d b• Congestion caused by:
Not enough transmission in certain areas, often due to load growth
Line and generator maintenance outages
Unplanned outages such as storms or trees on lines
SPP.org 959595
Too much generation is pushed to the grid in a particular location
• Results in the inability to use least-cost electricity to meet demand
500 kV
345 kV
Congestion prevents access to lower-cost generation
230 kV161 kV138 kV115 kV69 kV
SPP.org 969696
June 2008
49
500 kV
345 kV
230 kV
Congestion changes all the time
161 kV138 kV115 kV69 kV
SPP.org 9797
June 2009
Why develop new markets?• SPP conducts complex cost-benefit studies
before beginning any new market developmentg g y p
Under Regional State Committee oversight
2005 Charles River and Associates (CRA) analysis of the EIS market:
Estimated benefit of $86 million for first year
Actual benefit of $103 million for first year
SPP.org 9898
$ y
• New markets will bring estimated average additional benefits of $100 million
According to 2009 Ventyx analysis
98
50
How do new markets benefit participants?• Currently, each market participant decides to start
its own generation to meet its own needs
Generation choices are limited
Market participants may incur costs that could be reduced
For instance, if a high-cost generator is turned on but kept at minimum, this costs the utility money
• New Day Ahead market will decide which
SPP.org 999999
generation to start to meet regional needs, reducing overall costs
Generation choices optimized for the entire region
What needs to change to claim the additional $100 million benefits?
• Today: Each market participant decides what ti th ill th t d b d th igeneration they will run the next day based on their
knowledge of their system
• Future: SPP determines what generating units should run the next day for maximum cost-effectiveness, based on knowledge of resources available for entire region
SPP.org 100100
available for entire region
• Result: Regional commitment of generation responsible for bulk of projected additional $100 million benefits
51
Today, utilities make generation choices based on limited knowledge of other available resources
XXXX
Utility A
Third Party
Purchase
X
SPP.org 101101
XUtility A
SPP EIS MarketX
Future market will choose generation based on knowledge of all regional options SPP
Market
Third Party
X X
Utilit A
SPP.org 102
Purchase
XUtility A
Other Utilities
102
52
What issues will Day Ahead market address?
• Set next day’s electricity prices for participating loadload
Currently, prices are set in real-time based on the generation participants have decided to start
• Day Ahead market will select and start the cheapest generation to meet regional needs
SPP.org 103103
• Prices will be set for the next day and in real-time based on a more efficient selection of generation
Day Ahead market increases “manufacturing” options
3rd Party P h /
UtilityAnnual Monthly Daily
Daily
Purchases/Sales
Self Supply
SPP.org 104104
SPP Facilitated Day Ahead
MarketDailyReal-timeSPP
Facilitated EIS Market
53
Day Ahead market continues to use Locational Marginal Prices (LMP)
• Price for energy (LMP) will vary by location
Price for energy is the least-cost megawatt, while considering congestion
Called Locational Imbalance Price (LIP) in today’s EIS market
• Congestion causes locational prices to vary
SPP.org 105
With no limitations, the cheapest generator could deliver the next megawatt to ANYWHERE on the grid
105
Day Ahead market bring benefits, but there are challenges to mitigating risks…
• To claim the additional $100 million in benefits, $ ,generation start-up must be optimized for entire region
• For generation owners to allow their resources to be optimized for the region rather than their own needs, they need assurance they will be protected f th t i t f k t d i i
SPP.org 106106
from the cost impacts of market decisions
• Protection against the cost of congestion is needed to provide assurance
106
54
What is a congestion hedge?
• Protects market participants from exposure to high energy prices due to congestionhigh energy prices due to congestion
• Reimburses the cost of congestion for market participants that had reserved the right to use the transmission grid
• If the hedge is perfect, participant will incur no dditi l t d t ti
SPP.org 107107107
additional cost due to congestion
How does hedging work in current market?
• Market consists of expensive and less expensive generationgeneration
• If a utility has inexpensive generation, it can schedule in advance to use 100% of its own generation to serve its own customers
Schedule protects utility from higher cost of purchased power
Utility then does not have to buy power to meet demand
SPP.org 108108108
Utility then does not have to buy power to meet demand
This advance scheduling is a hedge against market electricity prices and congestion costs
If market prices were higher than the utility’s due to congestion, the hedge was financially beneficial
55
How Should We Hedge Against Congestion?
SPP.org 109109
Who was involved in the congestion hedge recommendation?
• Congestion Hedge Task Force (CHTF) representatives include:
State regulatory staff
Load-serving members
Transmission owning members
Power marketers
SPP.org 110
Power marketers
Merchant generators
SPP Staff
Industry consultants
110
56
What is the CHTF’s goal?
• Create hedge against congestion that allows market participant to offer resources into the p pregional commitment and Day Ahead market with reasonable assurance that they will derive a benefit
• Not to create a deep, liquid financial rights market
SPP.org 111111
Wide range of initial positions at the CHTF
• Some believed the outcome had to be a physical hedge
• Some believed the outcome had to be a financial hedge
• Most were somewhere in between
SPP.org 112
• All meeting participants displayed an open mind and shared a desire to learn, understand, and then make the best decision
112
57
What was the CHTF decision process?
• Thorough, reasoned approach
• Analyzed numerous complex examples
Engaging in these discussions and extensive “what-ifs” provided the most learning
• Reviewed the decisions of other RTOs
Asked questions like:
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• Asked questions like:
How would your company evaluate a recommendation?
What would the ultimate impact be to rate payers?
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Reviewed Other RTOs
Midwest ISO
PJM
ISO New England
New York ISO
California ISO (future market design)
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California ISO (future market design)
ERCOT Nodal Market
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CHTF determined there were three types of congestion hedges
• Pro-rata
Congestion costs are returned to market participants through some static formula
• Transactional
Congestion costs are returned to market participants based on their scheduled use of transmission grid
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• Independent
Financial instrument that functions as “insurance policy” that pays market participants back if they incur congestion costs
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Worked through many detailed examplesConstrained Day Ahead and Real-time with Energy Transaction
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Pros and Cons -Compared traits of Transactional vs. Independent
• Comparability to self-commitment decision
• Does each mechanism:
• Minimize the need for uplift
• Hedge period (hourly, daily, monthly, yearly)
• Tradability of rights
• Transparency of results
• Is native load any worse off
promote full use of the transmission system?
increase ability to trade bilaterally?
support trading hubs?
allow a participant to place a value on the right?
i h d li f N ti
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Is native load any worse off financially?
• How complex?
• What system changes?
require scheduling of NativeLoad?
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CHTF Developed Consensus
• Pro rata – eliminated quickly
• Could make Transactional or Independent work• Could make Transactional or Independent work
Became a question of weighing pros and cons
• Some stated a preference for Transactional (physical)
That is the business we are in
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• Most stated that their choice was not overwhelming in either direction, but preferred Independent (financial)
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Primary Reasons Given for Independent
• Majority were in favor of independent financial transmission hedge mechanismtransmission hedge mechanism
Removes requirement to manage native load schedules
Provides more flexibility for trading and reconfiguring the hedges
Better supports the establishment and use of trading hubs within SPP
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Independent hedge summary
• Congestion credit based on price difference between locationsbetween locations
Does not require scheduling
Hedge is known in advance
• DrawbacksAdds another layer of complexity to market participation
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Feasibility is assessed much farther in the future, increasing the likelihood that the operating day will be different
New – fear of the unknown
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Summary of CHTF recommendation
• Utilize a financial mechanism to hedge against transmission congestion coststransmission congestion costs
• Transmission Service still required to be purchased per SPP Tariff requirements
• Transmission service should be the basis for determining an initial allocation of the financial rights
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gOnly parties that own firm transmission rights will be allocated financial rights
ONLY rights that the holder CHOOSES to NOT accept will be available in an auction
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Other RTOs offer similar hedging, but SPP’s mechanism differs:
• SPP’s Regional State Committee will decide hedging allocation methodology
SPP’s Market Working Group is recommending allocation based on firm transmission reservations
• Market participants may elect to retain, rather than auction, a congestion hedge
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• Only Transmission Customers may participate in congestion hedge activity
This important decision requires RSC consideration
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How will hedging work in future markets?
• Participant doesn’t have to schedule generation in advance to get value of the congestion hedgein advance to get value of the congestion hedge
• As energy prices diverge because of congestion, hedge value adjusts an equal amount to provide offsetting value to holder
• Reservations entitle holder to congestion hedge req est on ann al basis
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request on annual basis
Hedge applies to every hour of the year
Example of future market congestion hedge• Utility A can tell SPP, “For the next year, I want 20% of
Generator A to serve a particular load”Thi i t f h d i t ti tThis is a request for a hedge against congestion costs
• For the coming year, SPP may only grant 15% of Generator A to the utility’s load as an annual hedge due to projected physical congestion
Other more expensive generation may have to be used
• Each month SPP will review upcoming month and
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• Each month, SPP will review upcoming month and determine whether an additional 5% can be granted
• For each operating day, the utility will receive credit for congestion costs (price differences) related to the granted hedges
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Challenges are different, but not new
• Today we all deal with the possibility of losing a critical resource during peak timesg p
May not be able to find replacement power
May not be able to get transmission service
Price exposure can be significant!
• But, utilities have always had to deal with these issues
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issues
• We are familiar with these risks
• We are unfamiliar with the financial hedge risks
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Next Steps
• Additional education will be provided to Markets and Operations Policy Committee in Octoberand Operations Policy Committee in October
• Discussion with Regional State Committee in October
• Board of Directors scheduled to vote on proposed market design in January 2010
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• SPP is available for detailed educational working sessions with commissioners and staff
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Regional Benefits
• Helping our members work together to keep the lights on…today and in the futurelights on…today and in the future
• Systematically optimizing the economies of scale and diversity to improve reliability and efficiencies
• More opportunities?
YES!
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Load and generation balancing (additional real-time)
Regional generation commitment (day-ahead)
Proactive transmission expansion (5-25 years)
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