Message-ID: <3855819.1075848226871.JavaMail.evans@thyme> Date: Mon, 14 May 2001 08:02:00 -0700 (PDT) From: eric@ehirst.com To: eric@ehirst.com Subject: Report on real-time markets and operations Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Eric Hirst X-To: Eric@EHirst.com X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_5\Notes Folders\Market structure X-Origin: KEAN-S X-FileName: skean.nsf Dear Colleague: The Edison Electric Institute just published a report I wrote on Real-Time Balancing Operations and Markets: Key to Competitive Wholesale Electricity Markets. The report is available from the Publications page of my website, www.EHirst.com. Here is a summary of the report: Electricity production and consumption must occur at essentially the same time. Therefore, real-time (minute-to-minute) operations and the associated markets and prices are essential ingredients of a competitive wholesale electricity industry. In addition, these intrahour markets are the foundation of all forward markets and contracts, including hour- and day-ahead markets, monthly futures, and bilateral contracts. Finally, these intrahour operations maintain system reliability by ensuring that enough and the right kinds of supply and demand resources are available when needed. Because of various load, generation, and transmission factors, balancing generation to load on a minute-to-minute basis is complicated. Loads are volatile, both from hour to hour and from minute to minute during the morning rampup and evening dropoff. Generators differ substantially in their costs of electricity production. In addition, generators have various idiosyncratic characteristics, such as maximum and minimum output levels and maximum ramprates, that limit their ability to respond rapidly to changes in system load or generation. Finally, transmission characteristics affect the real-time balancing function because of congestion and sudden transmission outages. These factors can lead to dramatic and rapid changes in electricity prices, including occasional negative prices when generators pay someone to take their output. The early years of operations by independent system operators (ISOs), based on the experiences in New England, New York, and California, show how difficult it is to translate the theory and initial design of competitive markets into ones that work efficiently. These ISOs have been plagued with various startup problems that artificially raise electricity costs to consumers, implicitly encourage strategic bidding by some generators, do not sufficiently discipline generator market power, sometimes yield insufficient resources, and impair reliability. Fortunately, the ISOs have been quick to identify and remedy flaws in their initial market designs. On the other hand, the ISOs have done a poor job of documenting these problems and their resolutions. This report is primarily a primer on how such intrahour operations and markets should work. It demonstrates these principles through several examples. These examples deal with generator ramprate limits, low-operating limits, startup costs, and other generator characteristics. Other examples show how energy-limited (e.g., hydro) units differ in their bidding and operations from capacity-constrained (e.g., thermal) units, how the consideration of multiple time intervals affects operations and pricing, how generators located outside the control area are treated differently from those within the control-area boundary, how interval pricing combined with hourly settlements can encourage generators to ignore dispatch signals, and how intermittent resources (such as wind) affect control-area operations. Although U.S. wholesale competitive markets today suffer from a variety of problems, there is reason to be optimistic. Ultimately, the ISOs (and, later on, RTOs) will identify and fix the problems within their market structures, and they will adequately document their problems and the associated resolutions so that their market participants and the designers of other systems can learn from past mistakes. Ultimately, efficient real-time markets should allow reliability councils and system operators to largely replace command-and-control rules with market signals (i.e., prices that vary rapidly in response to changes in system security). These changes should lower the costs of maintaining reliability; deploy supply and demand resources more efficiently; and guide investments in new generation, transmission, and demand-side resources. Eric ---------------------------------------------- Eric Hirst Consulting in Electric-Industry Restructuring 106 Capital Circle Oak Ridge, TN 37830 865-482-5470 (phone & fax)??? Eric@EHirst.com http://www.EHirst.com