Wholesale
Potential gains from
altering reserve
procurement
arrangements
A WAG Briefing Paper
5 June 2014
Note: This paper has been prepared for the purpose of discussion
within the Wholesale Advisory Group. Content should not be
interpreted as representing the views or policy of the
Wholesale Advisory Group or the Electricity Authority.
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Contents
1.
Executive summary......................................................................................................................................... 3
2.
Introduction .................................................................................................................................................... 7
3.
There is potential to reduce the quantity of IR procured .............................................................................. 8
4.
Capacity costs and short-run costs could potentially be avoided if FIR procurement was reduced ........... 13
5.
The benefits from altering FIR procurement arrangements depend on SIR ................................................ 19
6.
There may also be opportunities to reduce costs arising from SIR procurement........................................ 28
7.
Altered IR arrangements may result in a reduced risk of over-frequency collapse ..................................... 30
8.
Summary of potential benefits of altered IR procurement .......................................................................... 31
Appendix A
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Analysis for the South Island .................................................................................................... 33
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1.
Executive summary
1.1.1
The Electricity Authority (the Authority) has previously presented the WAG with information
suggesting that introducing a “very fast reserve” (VFR) product or using an “area-under-thecurve” (AUTC) approach to procuring fast instantaneous reserve (FIR) may address concerns
about the systematic over-procurement of reserves, and that such an introduction might result in
lowering the cost of reserves.
1.1.2
At the request of the WAG, this paper considers the potential scale of benefit from developing
altered procurement approaches.
Altering FIR Procurement arrangements could reduce costs from procuring
instantaneous reserve (IR)
1.1.3
The primary benefits of altered FIR procurement arrangements arise from:
(a)
FIR requirements being met by fewer providers, through better performing FIR providers
being dispatched for FIR ahead of less responsive providers. This would result in a net
reduction of spinning reserve being dispatched for FIR provision
(b)
Improved incentives to invest in technology that provides a favourable response to system
events, because a revised procurement approach would better reward resources that
contribute the most to arresting a decline in system frequency, including enabling the
provision of inertia to be rewarded
(c)
An increased ability for existing resources to compete to provide FIR, because some parties
that could potentially offer interruptible load (IL) are currently excluded from doing so
under the existing procurement approach.
1.1.4
The above effects would reduce the amount of FIR procured from the marginal FIR provider in
both the short and long-term. Based on consideration of their relative costs, the marginal FIR
provider is considered to be spinning reserve, rather than IL.
1.1.5
In the long term it is considered that the costs of spinning reserve comprise:
(a)
Fixed costs associated with holding reserve generating capacity on the system to meet
reserve requirements at peak. This cost is estimated to be $145/kW/yr based on the
marginal source of generation capacity
(b)
Costs that arise from operating generation in a mode that allows reserve provision –
estimated to be around $2/MW/h on average for the marginal source of reserves.
1.1.6
Although no specific studies have been undertaken on the amount of reduced FIR procurement
that could be achieved from a VFR or AUTC procurement approach, past analysis undertaken by
the system operator suggests that altering FIR procurement could reduce the amount of FIR
procured by 40 to 60 MW.
1.1.7
If this were translated into avoided spinning reserve costs, this would deliver an NPV of
approximately $50m based on the costs set out above.
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Any gains from reduced FIR procurement are likely to be negated by the continued need
to procure sustained instantaneous reserve (SIR)
1.1.8
The amount of resource held in reserve is determined by the net need for FIR and SIR.
1.1.9
Furthermore, the majority of spinning reserve providers are able to provide both FIR and SIR.
1.1.10
If there is a greater need for resources to provide SIR, and those resources are also capable of
providing FIR, then reducing the procured quantity of FIR is unlikely to have an effect on the total
need for reserve, as the displaced FIR provider would still be required to contribute to SIR. The
opposite is also true – reducing SIR is unlikely to affect the overall need to hold resource in
reserve, if the same resources providing it would be held in reserve anyway, in order to provide
FIR.
1.1.11
Analysis was performed to determine the extent to which reducing FIR would reduce the overall
need for generating capacity to provide spinning reserve to be held in reserve during any single
trading period.
1.1.12
This analysis considered the relative need for FIR and SIR spinning reserve, and the relative
availability of spinning reserve providers that could provide FIR or SIR, to give an overall estimate
of the relative scarcity of spinning reserve resources to provide FIR and SIR.
1.1.13
The analysis focussed on spinning reserve (as distinct to IL), as this form of reserve is considered
to be the marginal IR resource – particularly at times of peak.
1.1.14
On balance, it appears that, at times, FIR has been the binding constraint, and at other times, SIR
has been the binding constraint.
1.1.15
This is further reflected in the fact that average prices for FIR and SIR in the North Island have
been a similar order of magnitude over the last eight years (albeit sometimes with FIR prices
being higher than SIR, and vice versa).
1.1.16
In the South Island, however, FIR prices are consistently much higher than SIR suggesting that FIR
is consistently the binding constraint.
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Figure 1: Annual average FIR and SIR prices
1.1.17
It is difficult therefore to conclusively determine whether benefits associated with avoided
spinning reserve costs could be achieved by altering FIR procurement arrangements. To the
extent that the FIR procured is reduced, it is likely that SIR could progressively become the
binding scarce resource.
1.1.18
However, it appears likely that some proportion of the cost savings from reduced FIR
procurement could be achieved – although the magnitude is uncertain.
There may also be opportunities to reduce costs arising from SIR procurement
1.1.19
If SIR is the binding constraint driving overall spinning reserve requirements at times, this raises
the question as to whether there may be opportunities to reduce SIR procurement.
1.1.20
In this respect there are two aspects of the current SIR procurement approach that appear to be
resulting in over-procurement:
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(a)
Not co-optimising the procurement of FIR and SIR. In this respect, SIR is likely to be overprocured at the moment through not taking into account the contribution of spinning
reserve which is being offered as FIR but not SIR – even though it will help assist with the
frequency restoration function of SIR.
(b)
Altering the SIR procurement approach to be more consistent with the Reserve
management objective of instantaneous reserves being used to restore frequency to 49.25
Hz within 60 seconds after an event, rather than the current procurement practice of
restoring frequency to 50 Hz within 60 seconds.
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1.1.21
No specific studies have been undertaken estimating the magnitude of over-procurement that
may be occurring because of these aspects of the procurement approach. However, drawing
upon related analysis undertaken by the system operator for altered AUFLS scheme designs, it
appears that the scale of over-procurement of SIR could be of the order of tens of MWs. Using
the values set out in paragraph 1.1.5, reducing such over procurement could deliver an NPV value
of tens of millions of dollars.
1.1.22
However, to the extent that only SIR procurement is addressed, but not FIR, achievement of this
benefit could be materially constrained by FIR becoming the binding scarce resource for IR
procurement.
Addressing FIR & SIR procurement together appears to be likely to deliver the greatest
benefit
1.1.23
As set out above, the fact that FIR and SIR have been the binding scarce resource at different
times suggests that to address one without the other is likely to materially reduce the amount of
savings that could be achieved.
1.1.24
Further, one of the specific issues leading to over-procurement of both FIR and SIR is the fact that
the current procurement approach does not co-optimise between these different products.
1.1.25
Accordingly, developing an approach that procures instantaneous reserves as a whole 1 would
appear to make a lot of sense.
1.1.26
The scale of benefit appears to be of the order of tens of MWs, which would translate to an NPV
benefit of tens of millions of dollars.
The current situation of system over-capacity is likely to materially reduce the gains
from reduced IR over-procurement
1.1.27
Any savings from reduced IR procurement leading to a reduction in the amount of capacity
needed to be carried on the system may be reduced in the short term due to the current oversupply of capacity on the system (delays the big potential benefit of avoided fixed costs from
needing to build new generation).
1.1.28
This situation of short-term over-capacity for reserves in particular may be exacerbated by the
expected introduction of the National Reserves Market (NRM) which is expected to reduce the
total reserve capacity requirements by approximately 60 MW at times of peak.
1.1.29
Thus, in the short-term, any reduction in reserve procurement would largely only lead to savings
in the operating costs associated with reserves. If an average saving of 30 MW of reserves were
achieved over all trading periods (which seems entirely feasible based on the earlier system
operator studies), this would yield an annual saving of $0.5m. (Approximately $5m NPV).
1.1.30
In the long-term, as the supply and demand of capacity on the system came back into balance, it
would be expected that the savings from avoided system capacity would also start to be realised.
1
Procuring instantaneous reserves as a whole could either be achieved as a single product with an objective function to
achieve both arresting and restoring frequency, or through an approach which explicitly co-optimises between FIR and
SIR as well as energy.
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2.
Introduction
2.1.1
At its meeting on 28 November 2013, the Wholesale Advisory Group (WAG) was presented with a
briefing paper regarding the WAG’s investigation into reserve arrangements, which outlined the
apparent shortcomings of the current arrangements for procuring IR, and two alternative
arrangements that may address the identified issues – at least for procuring Fast Instantaneous
Reserve (FIR).
2.1.2
In particular, the paper highlighted that the existing reserve arrangements are resulting in the
systematic over-procurement of reserves, which the system operator and the Authority consider
is both inefficient and has the potential to create system security risks through exacerbating overfrequency risks following an event. It was suggested that introducing a “very fast reserve”
product or using an “area-under-the-curve” (AUTC) approach to procuring FIR may address some
of these concerns.
2.1.3
At its meeting, the WAG asked for information on the scale of the potential benefit that could be
achieved by amending FIR procurement arrangements. This paper attempts to give insight into
that potential benefit, based on first order approximations.
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3.
There is potential to reduce the quantity of IR procured
3.1
Description of current FIR and SIR procurement approaches
3.1.1
In the event of a sudden loss of supply, the amount of demand on the system will exceed the
amount of supply and system frequency will start to drop. Unless demand and supply are
brought back into alignment, system frequency will continue to drop. If frequency drops below
47 Hz, it is likely that other grid connected generators will start tripping off resulting in complete
cascade failure. To avoid this, some quantity of generation or interruptible-load is held in reserve,
to be brought into play if and when the need arises, in order to bring demand and supply back
into alignment.
3.1.2
The existing reserve arrangements were outlined in the 28 November 2013 briefing paper. For
ease of reference, Table 1 reiterates the reserve products that the system operator currently
procures to prevent frequency collapse in the event of the loss of a single large supply asset, and
outlines the requirements for and quantities of each type of reserve that is procured.
TABLE 1: RESERVE PROCURED BY THE SYSTEM OPERATOR TO MAINTAIN SYSTEM FREQUENCY IN A CONTINGENT EVENT
Product Purpose
Requirements
Procurement approach
Qty procured
FIR
Used to arrest
Generation: responds
Generation: based on the
As explicitly
frequency decline –
within 6 seconds of an
increase in output (MW)
modelled to
effectively giving
event and sustains
measured exactly 6
maintain
time for SIR to kickoutput for 60 seconds
seconds after an event.
frequency
in
above 48 Hz
following a
IL: responds within 1
IL: based on the MW
contingent
second of frequency
disconnected measured 1
event (or 47 Hz
falling to 49.2 Hz and
second after frequency
remains off for at least
falls to 49.2Hz in an event. following an
extended CE).
60 seconds
SIR
Used to restore the
Responds within 60
Based on the average
On a one-tofrequency to target
seconds and is sustained additional MW output
one MW basis
levels, and sustain it for up to 15 minutes (in from a generator, or
with the
long-enough for the
the case of generation)
average MW dropped from largest
system operator to
or until re-dispatched by an IL provider, during the
contingent
re-dispatch the
the system operator (in
first 60 seconds of an
risk
system into a normal the case of IL)
under frequency event.
secure state
3.1.3
On a simple MW for MW basis, the amount of SIR that the system operator needs to procure is
almost always greater than the amount of FIR. This reflects the products’ differing purposes, the
differences in how the procured quantities are determined, and the effect of “net free reserves”
– i.e. reserves that respond to an event but are not compensated for being available to do so 2.
Generator inertia is a primary example of free reserves, and makes a significant contribution to
2
Net free reserves includes the effect of generator inertia, and increased output from generators due to factors
such as governor response. Generators providing net free reserves do get paid for the energy they provide (but not any
inertia). Also applies to South Island generators that respond when the HVDC responds to North Island events.
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arresting frequency decline during the first few seconds following an event, reducing the need for
FIR.
3.1.4
The generating capacity required by the system during any one trading period is based on the
energy requirement, plus the extra capacity required to ensure that all FIR and/or SIR
requirements are met.
3.1.5
For example, if the SIR requirement was 400 MW, and the FIR requirement was 150 MW, then
the required system generating capacity would be equivalent to that necessary to meet energy
requirements plus 550 MW. However, in practice, two factors will significantly reduce this
generating capacity requirement, being the extent to which:
(a)
reserves are provided by IL resources
Any reserves provided by IL reduce the need for generator spinning reserve capacity.
On average, around 60% of FIR and SIR requirements in the North Island, and 30% in the
South Island, are typically met by IL 3. As set out later, the quantity of IL provided varies
over the time of day and year, with the amount offered at times of peak tending to be
reduced as providers control their load for energy and network management purposes.
(b)
different products can be provided by the same resources
Some IR providers (generator spinning reserve and IL) have performance characteristics
that mean they are only capable of providing one type of reserve, while others are capable
of providing both FIR and SIR. This means they are capable of reacting sufficiently quickly
as to make a contribution within the first 6 seconds, and can also sustain an increase in
output/reduction in load for sufficient time as to meet the SIR requirements.
However, their contribution to FIR may not be the same (in MW terms) as their
contribution to SIR, depending on their response profile. For example, a generator that
requires some time to ramp up is likely to make a lower contribution to FIR than SIR.
In practice, almost all resources offered as FIR are also offered to varying degrees as SIR,
with this being the case for all industrial IL. However, not all providers of SIR are fast
enough to provide FIR; in the North Island there is around 200 MW of spinning reserve, and
a further 60 MW of residential IL (i.e. hot-water) that only offers SIR 4.
3
Based on the average proportion provided across all half-hour periods for April 2012 - April 2013
Based on what is offered into the reserves market. As of February 2014, the SO has contracts for 335 MW of FIR
IL and 790 MW of SIR IL in the North Island, representing approximately 7% and 16% of North Island peak demand,
respectively. These are the maximum quantities of IL that can be offered into the reserves market. In practice it appears
they are not normally offered into the market. The system operator sought additional IL for the HVDC pole 3
commissioning period, which may contribute to some of this apparent latent IL.
4
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3.1.6
Therefore in the example above, assuming the providers of FIR and SIR are the same, total
spinning reserve capacity requirements would likely be much closer to 160 MW than the full 550
MW (assuming North Island). - i.e.
(SIR required + FIR required) – (Quantity providing both) - (proportion that is IL) = spinning reserve
or
(550-150) *(100%- 60%) = 160 MW
3.2
Altering FIR Procurement arrangements could reduce IR costs in
three ways
3.2.1
As discussed in the 28 November 2013 briefing paper, the system operator and Authority are
currently investigating an “area under the curve” (AUTC) and a “very fast reserve” (VFR)
approaches to procuring FIR. There are three ways in which this revised approach could lead to a
reduction in the cost of FIR.
It could result in fewer resources being held in reserve to meet FIR
3.2.2
Two different reserve providers may react to an under-frequency event at different speeds (i.e.
one ramping up quickly, and the other slowly), but achieve a similar MW output at 6 seconds.
Under current arrangements these different response profiles would attract a similar reward –
even though the faster responding provider will have contributed significantly more to arresting
the decline in frequency.
3.2.3
Furthermore, multiple slow reserve providers may end up being procured based on low offer
prices, requiring a large amount of resource to be held in reserve while contributing very little.
However, faster but higher-priced providers may have been able to meet the requirements at
lower total cost, and with less overall resource being held in reserve.
3.2.4
Altered FIR procurement arrangements could avoid these issues. Specifically:
3.2.5
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(a)
Payments would better reflect the contribution to different events. Slower providers would
be paid for a smaller amount of MWs in fast events. This would require them to increase
their offer prices to maintain cost recovery, which could potentially result in them being
displaced in the market behind more responsive reserve providers.
(b)
The system operator could be enabled to select resources in a more targeted fashion,
procuring faster resources when the event is likely to be fast (at times of low system
inertia).
Therefore, altered FIR procurement arrangements would likely result in fewer, but more
responsive resources being procured to meet FIR requirements, potentially resulting in a
reduction in the MW quantity of resource that needs to be held in reserve.
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It could improve incentives to invest in technology that provides a favourable response
to system events
3.2.6
Both the AUTC and VFR approaches would reward resources that provide a faster response to
system events. They could also enable those parties who are currently excluded (e.g. generators
providing an inertial response) to participate in the reserve market.
3.2.7
This would have dynamic efficiency benefits, as it would improve the incentives for installing or
maintaining technology capable of providing a desirable response. Specifically, this could:
(a)
increase the speed of reserve available
Rewarding reserve providers that had a faster response could incentivise investment in
generator and IL technology that was capable of providing such a response.
If the resources available provided an under-frequency response that better matched the
system’s needs, the overall amount of capacity required to be held in reserve could be
reduced.
(b)
increase the amount of inertia on the system 5
Inertia is a very valuable resource when it comes to post-event system security. It is a
spinning turbine’s resistance to a change in frequency, and hence works immediately to
help arrest a frequency decline.
A greater inertial response can reduce the quantity of FIR (as currently defined)
required to stabilise the system, and hence the need for capacity to be held in reserve
to provide it.
In this regard, it is noted that the system has been experiencing a relative reduction in
inertia in recent times, because of the increase in wind generation, and loss of thermal
generators 6, including two Huntly units.
3.2.8
For example the Huntly coal units can make a significant contribution to arresting a decline in
system frequency due to their significant inertial response, but they are currently not rewarded
for such a response. Altering FIR procurement arrangements may help to incentivise the
continued operation of these units if their response was particularly valuable.
3.2.9
Further, while the wind generation currently installed on the system is understood to be unable
to provide inertia or reserves, altering the approach to FIR procurement may encourage future
investment in technology to allow wind to contribute to inertia and reserves more generally.
5
There are other options that could incentivise an inertial response. For example, allocating a share of IR
procurement costs to generators that do not provide an inertial response would also incentivise participants to consider
inertia in their asset investment or retirement decisions.
6
Conventional generators provide some degree of inertial response to a drop in frequency because they are
directly coupled to the grid. The exact response varies for different turbines. Generators that are decoupled from the
grid, including most wind generators, generally do not provide an inertial response.
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It could increase the ability for existing resources to provide FIR
3.2.10
Under current arrangements, IL that is unable to respond within 1 second of the frequency
reaching 49.25 Hz cannot be procured as FIR. However, it is possible that their response may still
be fast enough to contribute to arresting the system frequency, and hence may still be of value.
3.2.11
It may be possible to develop FIR procurement arrangements, such as an AUTC approach, that
would allow IL with a response time of more than 1 second to compete in the FIR market based
on its merits.
3.2.12
This could increase the pool of resources available to be procured, and may reduce the need for
generation capacity to be held in reserve to otherwise provide the necessary response. The
increased potential for IL to meet reserve requirements could free up generators that would
otherwise provide reserves to instead provide energy.
3.2.13
However, this is unlikely to affect times of peak energy demand, as load that potentially could be
used to provide IL often has a higher value use: namely pre-emptively reducing load to avoid peak
network and generation costs.
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4.
Capacity costs and short-run costs could potentially be
avoided if FIR procurement was reduced
4.1
The value of reduced IR will reflect underlying costs of the
marginal resource
4.1.1
In order to determine the value of any reduction in IR procurement, there is a need to determine
the potential value of avoiding a MW of IR being procured. In this regard it is considered that the
most robust basis on which to estimate the value of reduced FIR procurement, is to consider the
underlying costs of providing the marginal sources of IR.
4.1.2
There are two key providers of IR: IL and spinning reserve. These two resources have different
underlying costs.
4.2
Interruptible load is unlikely to be the marginal resource
4.2.1
IL providers will likely face some fixed administrative and compliance costs in setting up the
necessary systems to interrupt load. However, these are likely to be relatively minor.
4.2.2
Once these systems are in place, IL reserve provider costs will largely arise if they are interrupted
following an event. In submitting half-hourly offers into the IR Market, IL providers will take into
account expected interruption costs (event frequency and costs).
4.2.3
The costs of interrupting load vary widely: the cost of interrupting hot water load for quarter of
an hour (the likely duration of IL outage after responding to an event) is considered to be virtually
zero; inspection of the rolling outage protocol information suggests that many of the direct
connects who offer interruptible load have interruption costs in the range $150/MWh to
$500/MWh; and, the assumed interruption cost of IL for the purposes of setting the underfrequency event charge was $5,000/MWh. The table below translates these different costs into
an average $/MW/h availability charge assuming that approximately six under-frequency events
occur each year, each with a ¼ hour duration of outage.
VoLL ($/MWh)
Derived availability cost ($/MW/hr)
5,000
0.86
500
0.09
150
0.03
0
0
4.2.4
This suggests the costs of interrupting load are likely to be relatively low. A high level inspection
of IL offers supports this, with most providers offering their load into the market at close to
$0/MW/h – essentially acting as price takers. While some IL providers offer portions of their load
at much higher prices, these offers are likely to be opportunistic, and not a true reflection of the
associated costs.
4.2.5
Based on this, it is expected that IL is unlikely to be the marginal resource that would be displaced
from the market if the need for reserve to meet FIR requirements was reduced through altered
procurement arrangements.
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4.3
Avoiding the fixed costs associated with holding reserve capacity
on the system is the big prize
4.3.1
It is expected that spinning reserve will be the marginal provider of reserve given its higher costs.
In the long term it is considered that the cost of spinning reserve comprises:
(a)
Fixed costs associated with holding extra generating capacity on the system in order to
provide spinning reserve
(b)
Costs that arise from operating in spinning reserve mode.
4.3.2
Of these, the operating costs of operating in reserve mode are significantly outweighed by the
fixed costs associated with holding capacity on the system. Avoiding these fixed costs would
represent the greatest potential benefit from altered procurement arrangements.
4.3.3
Sufficient generating capacity needs to be held on the system to meet both energy and reserve
requirements at times of capacity scarcity – predominantly at times of peak demand. Therefore,
if the amount of spinning reserve required at times of system peak can be reduced, less
generating capacity will need to be held on the system, deferring the need for additional
investment in generating capacity to meet demand, and thereby avoiding the fixed and capital
costs of building new generation.
4.3.4
At times of peak, the marginal source of generation is considered to be an OCGT whose fixed and
carrying costs are estimated to be approximately $145/kW/yr 7. If spread over all hours in the
year, these carrying costs equate to an availability cost of approximately $16.5/MW/h.
4.3.5
It is important to note that an OCGT is considered to be the marginal source of capacity, even
though it is unlikely to actually provide reserve. This is because generating reserve providers are
also capable of providing energy. If more capacity was required at times of peak because of
higher net reserve requirements, construction of an additional OCGT to provide energy would
free up another existing plant capable of providing reserve to do so, instead of providing energy.
4.3.6
However, as noted in more detail later, any gains from avoiding the need to build generation to
meet periods of peak capacity are likely to be materially reduced in a market with significant
over-capacity, as is currently the situation in New Zealand.
4.4
Avoiding spinning reserve operating costs will generate small
savings
4.4.1
Spinning reserve providers will incur operating costs in terms of:
(a)
costs associated with operating generating units at less than optimal efficiency in order to
provide partially-loaded spinning reserve (PLSR) 8
(b)
drawing power to operate a hydro machine in tail-water depressed (TWD) mode
7
As determined by analysis performed for the Authority for its Scarcity Pricing project.
It should be noted that this cost of operating in partially-loaded mode does not generally apply to hydro
machines as in fact they are at their most efficient if operated at part load.
8
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4.4.2
The operating costs of spinning reserve will vary from machine to machine.
4.4.3
To estimate a ‘typical’ value for the cost of operating in a mode that allows for reserve provision,
historical reserve prices have been used.
4.4.4
However, using a direct average of the historical prices for FIR is not considered a good basis for
estimating the value of avoided FIR procurement (and similarly for SIR).
4.4.5
Most reserve providers are able to operate in both FIR and SIR markets (discussed further in
Section 5). Providers are therefore likely to recoup their costs of operating in reserve from both
of these markets. The price of FIR and SIR combined is hence likely to be a better representation
of the costs of operating in reserve mode.
4.4.6
However, it is possible that not all providers will split their costs between the two markets like
this, because the two markets are not co-optimised. As such, some providers – particularly the
marginal provider – may be unsure if they will be dispatched in both markets at the same time,
and submit offers in both markets at their level of operating cost. Therefore the costs of
operating in reserve mode are likely to be somewhere between the FIR (or SIR) price, and the
combined FIR and SIR price.
4.4.7
Another important consideration is that the historical price series reflects a lot of other shortterm factors such as hydrology and the extent to which the system is in a situation of relative
over- or under-capacity – all of which have exhibited considerable variation over recent years.
4.4.8
Overall, a direct average of historical reserve prices would be dominated by the costs associated
with providing spinning reserve capacity during a small number of periods of system capacity
scarcity. This is demonstrated by Figure 2, which shows a duration curve of North Island FIR and
SIR prices over the past seven years.
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FIGURE 2: NORTH ISLAND FIR AND SIR PRICES FOR 2007 – 2013 AS A PROPORTION OF TIME
4.4.9
Clearly, a simple average including these periods would not be appropriate. Figure 3 shows the
same data but with a logarithmic scale for the y-axis.
FIGURE 3: NORTH ISLAND FIR AND SIR PRICES FOR 2007 – 2013 AS A PROPORTION OF TIME – LOGARITHMIC SCALE
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4.4.10
Figure 3 suggests that, aside from the few high-price periods of general capacity scarcity, reserve
costs are typically below $10/MW/h, and are frequently less than $1/MW/h – though the
proportion of time that this is the case varies significantly from year to year.
4.4.11
Using an average of the bottom 90% of periods across 2007-2013 results in an average cost of
around $3.50/MW/h.
4.4.12
Figure 4 shows a duration curve of North Island FIR prices only, over the past seven years, using a
logarithmic scale for the y-axis.
FIGURE 4: NORTH ISLAND FIR PRICES FOR 2007 – 2013 AS A PROPORTION OF TIME – LOGARITHMIC SCALE
4.4.13
Again using an average of the bottom 90% of periods across 2007-2013 results in an average cost
of around $1.40/MW/h.
4.4.14
Furthermore, anecdotal evidence suggests that the costs of operating in spinning reserve mode
are of the order of $1/MW/h.
4.4.15
Therefore, for the following analysis, $2/MW/h has been used as an approximation of the
operating costs of IR that could be avoided through altered FIR procurement arrangements.
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4.5
Scale of potential benefit from reducing FIR procurement
4.5.1
The above analysis indicates that for every MW of reduced spinning reserve procurement the
likely long-term benefit will be:
(a)
$145k per annum ($1m NPV 9) in avoided capacity costs (based on a carrying costs of
$145/kw/yr)
(b)
$17.5k per annum ($0.12m NPV) in avoided operating costs (based on a spinning reserve
operating cost of $2/MW/h), if the reduction is achieved in all trading periods.
4.5.2
In May 2012 the System Operator released a report: “Under frequency management – Collective
Review Phase 1”. Amongst other things it addressed FIR procurement approaches and concluded
that altering the way in which the Reserve Management Tool (RMT) procures FIR “will reduce FIR
procurement quantities by between 40MW to 60MW of FIR per period”.
4.5.3
Discussions with, and further information provided by, the System Operator at the time revealed
that they expected FIR savings at times of high demand as well as low demand.
4.5.4
While this report was not specifically investigating AUTC or VFR approaches, this nonetheless
appears to indicate that the scale of potential reduced FIR procurement is significant.
4.5.5
If it were to be the case that 40MW of capacity could be reduced at peak, then in the long run,
using the framework set out above, this could yield approximately $40m NPV costs savings.
4.5.6
The current investigations by the Authority into AUTC approaches have not formally investigated
the likely scale of savings that could be achieved, but it is understood that the proof-of-concept
model has demonstrated that an AUTC approach could yield the type of benefits outlined in
section 3.2.
4.5.7
However, this economic evaluation has also considered whether the benefits from reduced FIR
procurement may be limited because of constraints arising from the need to procure SIR. These
issues are addressed in the next section.
9
NPV calculation using 8% over 10 years.
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5.
The benefits from altering FIR procurement arrangements
depend on SIR
5.1
The marginal resource may be required to provide FIR or SIR
5.1.1
Because a large proportion of generating reserve resources are able to provide both FIR and SIR,
the benefit of altered FIR procurement arrangements will depend on the extent to which the
need for FIR is the ‘binding’ scarce resource driving the overall need for spinning reserve.
5.1.2
For instance, if altered FIR procurement arrangements resulted in a reduction in FIR, but the
resource displaced from the FIR market was still required to provide SIR, there would be no
change in system costs.
5.1.3
High-level analysis was undertaken to estimate the extent to which savings in spinning reserve
FIR procurement may be negated by the continued need to hold spinning reserve to provide SIR.
5.2
The relative need for capacity to provide FIR and SIR has been
analysed
5.2.1
Some simple analysis has been performed to try and understand the extent to which generating
capacity to provide FIR and SIR is in greater need.
5.2.2
The analysis has been performed separately for the North Island and the South Island. The
outcomes of the analysis are similar for both Islands, and as such, the South Island analysis is
shown in Appendix A.
5.2.3
The analysis first identified the actual amount of FIR and SIR (in MW) required during each
trading period (that is, the amount cleared), for the most recent year for which data is available i.e. from 1 October 2012 until 31 Sept 2013 10.
5.2.4
From this, the amount of offered reserve that was IL in each trading period was subtracted. The
result is the amount of spinning reserve required to meet FIR/SIR requirements in each trading.
5.2.5
The analysis focussed on the need for spinning reserve because, as set out in section 4.2, spinning
reserve is considered to be the marginal resource for the provision of IR.
5.2.6
In some periods, there may be sufficient IL that no spinning reserve is theoretically required. This
would hence mean there is no potential to reduce the overall need for generation capacity during
that trading period, and no associated cost savings. However, this is less likely to occur during
periods of high demand, as the amount of IL is seen to reduce during high demand periods, since
IL providers pre-emptively drop load to avoid high energy and/or network prices. This is
demonstrated in Figures C and D under Table 2, which demonstrate a decrease in the amount of
IL offered, and in Figures E and F, which demonstrate an increase in the need for spinning reserve
to meet FIR/SIR requirements during periods of relatively higher demand.
10
The period prior to the commissioning of Pole 3 of the HVDC is less relevant to this analysis so have not been
considered.
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5.2.7
Therefore, the basic calculations are as follows:
‘residual’ spinning reserve required to provide FIR = Total FIR cleared – IL offered as FIR
‘residual’ spinning reserve required to provide SIR = Total SIR cleared – IL offered as SIR
5.2.8
Table 2 shows the inputs and outputs of these calculations for the North Island, for each
individual trading period, versus the demand during that trading period.
TABLE 2: SPINNING RESERVE REQUIRED TO PROVIDE FIR AND SIR IN THE NORTH ISLAND (1 OCT ‘12 TO 31 SEP ‘13)
FIR
SIR
Total quantity of IR required vs load for individual trading periods 11
Figure A
Figure B
Offered quantity of IL vs load for individual trading periods
Figure C
Figure D
IL reduces at times of
high demand
11
Note that zero values relate to data quality issues
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FIR
SIR
‘Residual’ required quantity of spinning reserve vs load for individual trading periods
Figure E
Figure F
5.2.9
The analysis then looks at the difference between the amount of spinning reserve required to
provide SIR, and the amount of spinning reserve required to provide FIR, in order to identify the
resource that is in greater demand in any particular trading period. For this purpose, the required
quantities of spinning reserve are taken as being zero or greater - i.e. any surplus of IL is ignored.
5.2.10
For example, if the residual requirement for FIR spinning reserve were 150 MW and the residual
requirement for SIR spinning reserve were 200 MW, there would be a net 50 MW greater
requirement for SIR than FIR. i.e. the relative need for SIR would be greater.
5.2.11
This is illustrated in Figure 4 below, which calculates for each trading period whether the need for
SIR spinning reserve is greater than FIR spinning reserve.
5.2.12
Periods where the need for SIR spinning reserve is greater than FIR spinning reserve are above
the x-axis.
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FIGURE 5: EXTENT TO WHICH THERE IS MORE SPINNING RESERVE REQUIRED TO PROVIDE SIR OR FIR VS LOAD FOR
INDIVIDUAL TRADING PERIODS
Need for SIR >> FIR at
times of highest
demand
5.2.13
Figure 5 suggests the need for spinning reserve to provide SIR is greater than for FIR in most
trading periods, and most significantly, at times of peak demand, when a reduction in capacity
held in reserve could result in avoided fixed costs.
5.2.14
If there is a greater need for spinning reserve to provide SIR, then reducing the procured quantity
of FIR may not have an effect on the total need for system capacity, as the displaced provider
would still be required to contribute to SIR, and vice versa.
5.2.15
However, while the need for spinning reserve to provide SIR is greater, it is important to also
consider the supply of spinning reserve for the two resources. As discussed in section Error!
Reference source not found., many reserve providers will contribute less to FIR than SIR because
of the ramping up effect – demonstrated in Figure 6 - and some will not be fast enough to
provide any FIR.
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FIGURE 6: DIAGRAM DEMONSTRATING THE LOWER SUPPLY OF FIR VS SIR
5.2.16
The implications of this are discussed in the next sub-section.
5.3
The relative availability of capacity to provide FIR and SIR has
been analysed
5.3.1
This reduced capability of some spinning reserve providers to provide FIR relative to SIR may
make FIR the scarce resource rather than SIR.
5.3.2
To illustrate this, consider a simple example which uses grossly over-exaggerated values for
illustrative purposes:
(a)
if there were a need for 200 MW of SIR spinning reserve, which was provided by
approximately 200 MW of generating capacity 12.
(b)
Conversely if there were a need for 150 MW of FIR spinning reserve but, because of
ramping up effects, the spinning reserve providers’ contribution to FIR was only 50% of
their contribution to SIR, this would result in a need for 300 MW of generating capacity.
i.e. FIR becomes the scarce resource driving the overall requirement.
5.3.3
To analyse the availability of capacity to provide FIR and SIR, the offered quantities of spinning
reserve have been found. This is shown in Figure A and B in Table 3 below.
5.3.4
From this, the required spinning reserve from the previous analysis (i.e. Figure E & F from Table 2
above) has been subtracted to find the ‘surplus’ spinning reserve that is available to provide FIR
and SIR. This corresponds to Figure C and D in Table 3 below.
12
In practice, more than 200 MW would be required since it is procured based on an average over 60 seconds.
However, for illustrative purposes, it has been assumed the average and actual output are the same.
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TABLE 3: SPINNING RESERVE OFFERED TO PROVIDE FIR AND SIR IN THE NORTH ISLAND (1 OCT ‘12 TO 31 SEP ‘13)
FIR
SIR
Offered quantity of spinning reserve vs load for individual trading periods
Figure A
Figure B
Spinning reserve offered but not required vs load for individual trading periods 13
Figure C
Figure D
Surplus low at times
of peak demand
5.3.1
13
Figures C and D under Table 3 suggest that, at time of peak demand, the availability of reserve
to provide both FIR and SIR, above and beyond that which is required (i.e. the surplus), can be
quite low – i.e. FIR and SIR become relatively scarce . Figure C in particular suggests that there
Note that zero values relate to data quality issues
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are frequently periods where there is little surplus spinning reserve available that can provide
FIR.
5.3.2
The difference between the amount of surplus spinning reserve offered as SIR, and the surplus
spinning reserve offered as FIR is shown in Figure 7.
FIGURE 7: EXTENT TO WHICH THERE IS MORE SURPLUS SPINNING RESERVE OFFERED AS SIR THAN FIR VS LOAD FOR
INDIVIDUAL TRADING PERIODS
14
Unclear if more surplus SIR
than FIR at peak
5.3.3
Figure 7 shows that there is almost always more surplus spinning reserve offered as SIR than FIR.
This suggests that supply constraints are much more likely in the FIR market than the SIR market.
5.3.4
Based on this analysis, it could be expected that a resource displaced from the FIR market would
not necessarily be required to provide SIR, with associated operating cost savings.
5.3.5
However, digging deeper into the underlying data revealed that most of this apparent surplus of
SIR relative to FIR relates to a very small number of stations 15 that offer SIR but little or no FIR.
All other spinning reserve providers are able to provide FIR quantities that are much closer to
their SIR quantities.
5.3.6
Given that energy and reserves are co-optimised, in theory these handful of ‘SIR-only’ spinning
reserve providers should be allocated to energy duties, and the other ‘SIR + FIR’ spinning reserve
providers allocated to IR provision duties. This would alter the analysis as to the relative scarcity
of SIR and FIR spinning reserve to again make SIR relatively more scarce. However, no analysis
has been done to estimate the extent to which this may be the case, and further it is not clear
that such outcomes would occur because of the lack of co-optimisation between FIR and SIR. This
issue is addressed later.
14
15
Note that zero values relate to data quality issues
Tokaanu, TCC and Waikaremoana.
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5.3.7
Furthermore, at times of peak, Figure 7 suggests that there may in fact be some times when
supply constraints are more significant in the SIR market than the FIR market. (As indicated by the
circled dots below the line).
5.3.8
Indeed, system security reports of times when there has been insufficient generation to meet
energy and reserve requirements suggest that SIR has generally been the constraint, rather than
FIR. 16
5.3.9
On balance, it appears that at times FIR has been the binding constraint, and at other times SIR
has been the binding constraint.
5.3.10
This is further reflected in the fact that average prices for FIR and SIR in the North Island have
been a similar order of magnitude over the last eight years (albeit sometimes with FIR prices
being higher than SIR, and vice versa).
5.3.11
In the South Island, however, FIR prices are consistently much higher than SIR suggesting that FIR
is consistently the binding constraint.
Figure 8: Annual average FIR and SIR prices
5.3.12
16
It is difficult therefore to conclusively determine whether benefits associated with avoided
fixed costs could be achieved by altering FIR procurement arrangements. To the extent that
FIR procured is reduced, it is likely that SIR could progressively become the binding scarce
resource.
In the recent event of 28 May 2014, SIR appears to have been more scarce than FIR.
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5.3.13
Ultimately, whether FIR or SIR is the binding constraint at times of peak demand will depend on a
range of complex factors that depend on the specific mix of stations offering reserve, their
offered quantities, and their likely position in the offer stack for the FIR and SIR markets.
5.3.14
However, it appears likely that savings in operating costs could be achieved in a number of
periods.
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6.
There may also be opportunities to reduce costs arising
from SIR procurement
6.1.1
If SIR is the binding constraint driving overall spinning reserve requirements, this raises the
question as to whether there may be opportunities to reduce SIR procurement. Alleviating this
constraint could in turn allow for greater benefits from reducing FIR procurement, as each
iteratively became binding.
6.1.2
In this respect, high level analysis suggests there may also be opportunities to reduce SIR from
two perspectives.
Co-optimising FIR & SIR
6.1.3
At the moment SIR is simply procured on a one-for-one basis based on the size of the contingent
event. i.e. if the event is 400 MW, 400 MW of SIR is procured.
6.1.4
However, as illustrated in Error! Reference source not found. below, there is some spinning
reserve that is offered as FIR which isn’t offered as SIR. This amounts to 12 MW on average.
Given that the requirement for FIR is that it be provided within 6 seconds and sustained for 60
seconds, this FIR which isn’t also offered as SIR will reduce the amount of SIR needed to bring
frequency back to its target level within 60 seconds.
FIGURE 9: QUANTITY OF ‘UNMATCHED’ FIR YEAR BEGINNING OCTOBER 2012
Consistency of amount procured with the reserve management objective
6.1.5
While FIR is intended to arrest the decline in frequency, SIR is intended to restore frequency.
6.1.6
The objective for this restoration function is set out in Schedule 8.4 of the Code. This specifies
the reserve management objective is to “schedule a minimum quantity of instantaneous reserve”
to achieve the under-frequency standard, which for the North Island is:
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(a)
Stay at or above 48 Hz; and
(b)
Return to or above 49.25 Hz within 60 seconds after the event.
6.1.7
In other words sufficient SIR must be procured to restore the frequency to at least 49.25 Hz
within 60 seconds, and maintain that level for a further 15 minutes.
6.1.8
The intent of this is that the system operator can then re-dispatch the system to achieve 50 Hz
within this 15 minute window.
6.1.9
However, at the moment the amount of SIR procured is consistent with bringing the frequency
back to 50 Hz within 60 seconds, not 49.25 Hz. While this is consistent with the “or above” aspect
of the objective, it could be argued this is not consistent with the “minimum quantity of
instantaneous reserves” objective.
6.1.10
If it were to be established that the benefits of restoring frequency to 50 Hz within 60 seconds,
rather than 49.25 Hz, outweighed the costs of requiring extra reserve to achieve this it would
appear that the Reserve Management Objective would need to be changed.
6.1.11
However, if it were to be established that the current 49.25 Hz objective for SIR is appropriate,
then there would appear to be opportunities to reduce the amount of SIR procured.
6.1.12
Previous work undertaken by the System Operator looking at the implications of raising the lower
frequency threshold from 48 Hz to 48.5 Hz (undertaken as part of its review of AUFLS
arrangements 17) suggest that altering the frequency target by 0.5 Hz can alter the amount of
reserve required at times of peak by between 50 and 125 MW.
6.1.13
This would suggest that there could be opportunities for material reductions in the amount of SIR
procured if the procurement approach were altered to be consistent with an objective of
achieving 49.25 Hz by 60 seconds, rather than 50 Hz.
6.1.14
Using the rough rule of thumb set out in section Error! Reference source not found. that every
MW of spinning reserve avoided equates to roughly $1m NPV, this could deliver material gains.
17
“Automatic Under-Frequency Load Shedding (AUFLS) – Scheme Options Economic and Provision review”, 4 August 2011
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7.
Altered IR arrangements may result in a reduced risk of
over-frequency collapse
7.1.1
The other potential benefit that altering IR procurement arrangements could provide is a
reduction in the risk of over-frequency collapse following an event. Using an AUTC approach or
introducing a “very fast reserves” product, and amending the approach to SIR procurement,
thereby reducing the over-procurement of reserves, could provide the system operator with
greater certainty and control over the restoration process, as the procured amounts could more
closely match the response necessary to stabilise frequency and return it back to 50 Hz.
7.1.2
However, because the costs of over-frequency management are currently being reviewed by the
system operator, no analysis has been performed for this paper on the extent to which altered IR
arrangements may result in a reduced risk of over-frequency collapse, and the potential value of
such reduced risk.
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8.
Summary of potential benefits of altered IR procurement
8.1
Benefits in the tens-of-millions could be expected
8.1.1
In summary, it is expected that altered FIR procurement arrangements appear likely to reduce
the amount of generation capacity required to be held on the system, through a reduction in the
amount of resource that needs to be procured, improved investment incentives, and an
increased ability for existing resources to provide reserves.
8.1.2
Based on related analysis undertaken by the system operator in 2012, the scale of potential
benefit could be a reduction of FIR of the order of tens of MWs. To the extent this translated into
overall reductions in spinning reserve required, this would be worth tens of millions of dollars on
an NPV basis.
8.1.3
However, not all of this reduction in FIR procurement will likely translate into a reduction in the
overall quantity of spinning reserve procured. This is because, at times, SIR is the binding
constraint dictating the need for spinning reserve. This will increasingly be the case as the
amount of FIR procured is reduced.
8.1.4
That said, it appears that just addressing FIR procurement would result in some spinning reserve
cost savings – although it is difficult to estimate the extent because of the complex interrelationship between FIR and SIR.
8.1.5
It appears that the greatest benefit would be achieved from jointly addressing the overprocurement of FIR and SIR.
8.1.6
In this respect there are two areas where current SIR procurement approaches appear to be
resulting in over-procurement:
(a)
Not co-optimising the procurement of FIR and SIR. In this respect, SIR is likely to be overprocured at the moment through not taking into account the contribution of spinning
reserve which is being offered as FIR but not SIR – even though it will help assist with the
frequency restoration function of SIR.
(b)
Altering the SIR procurement approach to be consistent with the Reserve management
objective of instantaneous reserves being used to restore frequency to 49.25 Hz within 60
seconds after an event, rather than the current procurement practice of restoring
frequency to 50 Hz within 60 seconds.
8.1.7
Given the paucity of data from specific studies looking at the impact of these potential revised
procurement approaches on the quantity of FIR and SIR procured, it has not been possible to
develop firm estimates of the potential cost savings.
8.1.8
However, drawing upon earlier related system operator studies on reserve procurement and
AUFLS, it is estimated that the overall amount of spinning reserve procured could be reduced by
some tens of MWs – including at times of peak.
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8.1.9
If just 10 MW of spinning reserve savings were achieved at times of peak (which seems entirely
feasible given the scale of savings indicated from these earlier system operator studies), this
would roughly deliver an NPV benefit of $10m.
8.2
The National Reserves Market and current over-supply are likely
to reduce the potential benefit in the short-term
8.2.1
Any savings from reduced IR procurement leading to a reduction in the amount of capacity
needed to be carried on the system may be reduced in the short term due to current overcapacity on the system – i.e. capacity is not currently a scarce resource.
8.2.2
This situation of short-term over-capacity for reserves in particular may be exacerbated by the
introduction of the National Reserves Market (NRM), which is expected to reduce the total
reserve capacity requirements by approximately 60 MW at times of peak 18.
8.2.3
Thus, in the short-term, any reduction in reserve procurement would largely only lead to savings
in the operating costs associated with reserves. If an average saving of 30 MW of reserves were
achieved over all trading periods (which seems entirely feasible based on the earlier system
operator studies), this would yield an annual saving of $0.5m. (Approximately $5m NPV).
8.2.4
In the long-term, as the supply and demand of capacity on the system came back into balance, it
would be expected that the savings from avoided system capacity would also start to be realised.
18
There is currently some allowance for reserve sharing from the South Island to the North Island
(50 MW at times of peak), so this results in a net gain of 71 MW. Incorporating losses across the HVDC
(which can be 15% at the margin during high transfers) results in a net saving of 60MW.
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Appendix A Analysis for the South Island
TABLE A1: SPINNING RESERVE REQUIRED TO PROVIDE FIR AND SIR IN THE SOUTH ISLAND
South Island
FIR
SIR
Total quantity cleared vs load for individual trading periods
Figure A
Figure B
Offered quantity of IL vs load for individual trading periods
Figure C
Figure D
Required quantity of spinning reserve vs load for individual trading periods
Figure E
Figure F
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Extent to which there is more spinning reserve required to provide FIR or SIR vs load for individual trading
periods
Figure G
SIR > FIR at times of
highest demand
(though potentially
somewhere SIR = FIR)
TABLE A2: SPINNING RESERVE OFFERED TO PROVIDE FIR AND SIR IN THE SOUTH ISLAND
FIR
SIR
Offered quantity of spinning reserve vs load for individual trading periods
Figure A
Figure B
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Spinning reserve offered but not required vs load for individual trading periods 19
Figure C
Figure D
Extent to which there is more spinning reserve required to provide FIR or SIR vs load for individual
trading periods
Figure E
19
Note that zero values relate to data quality issues
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