IMO Day Ahead Market Design Update
Market Operations Standing Committee
22, 2003
Market September
Evolution
Program
Long-Term Resource Adequacy Update
Jason Chee-Aloy
Marjket Operations Standing Committee
Long-Term Resource Adequacy Update
Agenda
 Long-Term Resource Adequacy Chronology
 Identified Paths and Long-Term Resource Adequacy Working
Group Update
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 2
Long-Term Resource Adequacy (LTRA) - Chronology
 Summer 2002 - Market Participants identified resource adequacy as a high
priority issue in response to the IMO Straw-Plan for Market Evolution
 Fall 2002 - IMO 2003-2005 Business Plan states resource adequacy as a
principle objective in the evolution of Ontario’s electricity market
 February 2003 - work commences on the LTRA project
 March 2003 - first meeting of the LTRA Working Group (LTRAWG)
•
•
Over 25 members (w/ diverse membership)
LTRAWG meets every 2 weeks
 June 2003 - Feasibility Assessment published
• Identifies Paths/Options to address LTRA
• Contains several recommendations but does not champion a single
Path/Option
 June 2003 - Market Advisory Council supported Feasibility Assesssment
recommendations
 July 2003 to Present - LTRAWG continuing discussion on specific
recommendations to address LTRA
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 3
Long-Term Resource Adequacy Update
Agenda
 Long-Term Resource Adequacy Chronology
 Identified Paths and Long-Term Resource
Adequacy Working Group Update
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 4
Potential Paths to Address Long-Term Resource Adequacy
Path A: Complete the initial market design and structures without an explicit
Resource Adequacy Requirement (RAR)
 Rely on results of improved energy and ancillary service markets alone (e.g. Pricing Team
work, day-ahead market, multi-interval optimization, etc.)
Path B: Create Load Serving Entities (LSE) and assign a RAR to these
entities
 LSEs required to contract forward capacity requirements through bilateral contracts
(different to bilateral contracts for energy)
 IMO could administer a resource adequacy auction market (similar to NYISO and PJM) as
a complementary element to LSE capacity contracts
Path C: Allow a central agency to procure adequate resources and allocate
the resource acquisition costs to loads
 IMO administers a resource adequacy auction market and secures forward capacity on
behalf of loads (NYISO, PJM and ISO NE are developing)
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 5
Long-Term Resource Adequacy Working Group Update
 Key points from the current discussion:
• LTRA encompasses all interrelated aspects of the Ontario electricity
market
• Recommendations will contain necessary elements that will help
Ontario move toward a complete, workable and sustainable
approach to addressing LTRA, under a competitive market
framework
• Elements of the identified Paths (from the Feasibility Assessment)
are likely not mutually exclusive
 LTRAWG is now focussing on:
• The high level detail how an explicit resource adequacy requirement
may be workable
• Interim/transitional mechanisms that may be required
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 6
Long-Term Resource Adequacy Update
Agenda
 Long-Term Resource Adequacy Chronology
 Long-Term Resource Adequacy Working Group Update
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 7
Next Steps
 LTRAWG continues to meet every 2 weeks
 Update to IMO Board on LTRAWG on October 3, 2003
 Update to Market Advisory Council on October 8, 2003
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 8
IMO Day Ahead Market Design Update
Market Operations Standing Committee
22, 2003
Market September
Evolution
Program
Day Ahead Market Update
Leonard Kula
Marjket Operations Standing Committee
Day Ahead Market Design Update
Agenda
 DAM Chronology
 DAM Design and Features
 DAM Pricing Options
 DAM Benefits
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 10
Day Ahead Market (DAM) - Chronology
 Fall 2002 - IMO 2003-2005 Business Plan identifies that a DAM is a critical
element in creating a more effective, reliable and mature market
 January 2003 - work commences on the DAM project
 February 2003 - call for DAM Working Group (DAMWG) members
• ~ 28 members from all industry sectors (generators, loads, transmitter,
distributors, marketers, OEB and OEFC)
• meet every ~10 days - 23 meetings to-date
 April 2003 - DAMWG recommends further development of a
comprehensive DAM
• closely aligned with day ahead markets in neighbouring jurisdictions
 May 2003 - DAM hi-level design summary prepared
 June 2003 - broad stakeholder consensus obtained regarding design
direction and plan to continue to develop DAM (Market Advisory Council)
 July - Aug 2003 - DAMWG discusses hi-level design concepts and reviews
hi-level design strawman
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 11
Day Ahead Market Design Update
Agenda
 DAM Chronology
 DAM Design and Features
 DAM Pricing Options
 DAM Benefits
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 12
Day Ahead Market - Initial Options
Day Ahead Market (DAM) Evolution
No DAM
Simple DAM
(e.g. Energy Forward
Market)
Current
Option 1
Real Time
Market only
Clear offers/bids
(ignore congestion)
Financial commitment
Comprehensive DAM
financial commitment
+ unit commitment
(considers congestion)
real-time market
becomes a
balancing market
Option 2
uniform price model
Option 3A
nodal price model
Option 3B
nodal price model
loads pay...
uniform price +
uplift for
congestion (CMSC)
(most) loads pay...
uniform price
(weighted average
of nodal prices)
loads pay...
nodal price
generators receive...
uniform price +
side payments for
congestion (CMSC)
generators receive
(and some loads pay)
...nodal price
generators receive...
nodal price
same settlement
treatment as
current
real-time market
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 13
Day Ahead Market - Initial Options
Day Ahead Market (DAM) Evolution
No DAM
Simple DAM
(e.g. Energy Forward
Market)
Current
Option 1
Real Time
Market only
Clear offers/bids
(ignore congestion)
Financial commitment
Comprehensive DAM
financial commitment
+ unit commitment
(considers congestion)
real-time market
becomes a
balancing market
Option 2
uniform price model
Option 3A
nodal price model
Option 3B
nodal price model
loads pay...
uniform price +
uplift for
congestion (CMSC)
(most) loads pay...
uniform price
(weighted average
of nodal prices)
loads pay...
nodal price
generators receive...
uniform price +
side payments for
congestion (CMSC)
generators receive
(and some loads pay)
...nodal price
generators receive...
nodal price
same settlement
treatment as
current
real-time market
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 14
Day Ahead Market - Initial Options
Day Ahead Market (DAM) Evolution
No DAM
Simple DAM
(e.g. Energy Forward
Market)
Current
Option 1
Real Time
Market only
Clear offers/bids
(ignore congestion)
Financial commitment
Comprehensive DAM
financial commitment
+ unit commitment
(considers congestion)
real-time market
becomes a
balancing market
Option 2
uniform price model
Option 3A
nodal price model
Option 3B
nodal price model
loads pay...
uniform price +
uplift for
congestion (CMSC)
(most) loads pay...
uniform price
(weighted average
of nodal prices)
loads pay...
nodal price
generators receive...
uniform price +
side payments for
congestion (CMSC)
generators receive
(and some loads pay)
...nodal price
generators receive...
nodal price
same settlement
treatment as
current
real-time market
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 15
What Is Meant By A Comprehensive Day-ahead Market?
The DAM WG recommended further development of a
Comprehensive DAM (April 2003).
Key features include:
 A financial market administered by the IMO, which accepts supply offers
and demand bids and clears the market at day-ahead prices.
• Creates a 2-settlement system, with the RTM a “balancing” market.
 Integrates a 3-part bid process to optimize unit commitment for:
• Supplies available to the DAM to meet loads buying in the DAM
• Supplies available to the RTM to meet RTM forecast load
 A multi-pass process for committing units, arranging DAM schedules,
and defining DAM prices, plus indicative schedules for the RTM.
 The use of uplifts to cover commitment costs not recovered from market
revenues.
 The simultaneous optimization of energy and operating reserves, and
the optimization of the market over the 24 hour period.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 16
DAM - Design And Features
The Proposed DAM would:
 Be based on...
• supply offers to sell and demand bids to purchase energy
• supply offers to sell operating reserves
 Be open to all MPs
 Include imports and exports
 Allow virtual offers and bids
 Include an IMO-optimized unit commitment process
 Use multiple commitment and/or dispatch passes to optimize results
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 17
A DAM Functions Before The RTM
In A Two-Settlement System
Real Time Market
Day Ahead Market
MPs offer to sell and bid to buy
energy day ahead.
MPs offer to sell and bid to buy
energy in real time.
Offers/bids used to define DA
schedules and prices
Offers/bids used to define RT
schedules and prices
DA schedules are financial
obligations to buy/sell energy at
DA prices
IMO uses offers/bids to arrange
constrained dispatch
1st Settlement =
2nd Settlement =
DA purchases and sales times
DA prices
Quantity Deviations from DA
purchases and sales times RT
prices
(QDA x PDA)
+
PRT(QRT - QDA)
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 18
Virtual Supply Offers And Load Bids Add Liquidity
To DAM And Converge DAM And RTM Prices
•
Day Ahead Market
Real Time Market
Participation voluntary
Participation unavoidable
MPs submit virtual offers to
sell Q in DAM =
•
MPs submit virtual bids to
buy Q in DAM =
•
With virtual offers/bids, DAM
prices tend to =>
Commitment to buy Q in RTM
Commitment to sell Q in RTM
Converge to expected RTM prices
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 19
The Day Ahead Market Includes A Unit Commitment
Process For DAM and RTM
Day Ahead Market
MPs submit 3-part price offers:
(1) Incremental energy
(2) Start-up costs
(3) Minimum generation costs
IMO optimizes commitment and
commits units for:
(1)
DAM bid-in load
(2)
Forecast RT load
Real Time Market
IMO-committed units from DA
unit commitment are available
for dispatch to meet RT loads
IMO arranges securityconstrained economic dispatch
from supply offers and demand
bids
Bid Production Cost Guarantee
(BPCG) - Generators made
whole if DAM revenues don’t
cover full bid-in costs
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 20
DAM Uses Multiple Passes To Commit Units And
Define Dispatch Schedules And Prices
Pass 1
Pass 2
Commit units to
meet DAM bid-in
load
Commit units to
meet RT forecast
load
(Optional)
Pass 3
Pass 4
Optimize
dispatch/define
schedules to meet
DAM bid-in load
Dispatch to indicate
schedules/prices for
RT forecast load
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 21
Proposed DAM Uses Multiple Passes To Define
Commitments For DAM And RTM
Pass 1 and Pass 2 optimize unit commitment
using 3-part offers/bids
Pass 1
Pass 2
IMO optimizes
commitment and
commits units to meet
bid-in DA load
Results
IMO optimizes and
commits more units
to meet forecast RT
load
Constrained pass
Constrained pass
Physical Suppliers
Physical Loads
Exports/Imports
Physical Suppliers
Physical Loads
Exports/Imports
Virtual offers/bids
No Virtuals
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 22
Committed Units Are Used To Define
Schedules And Prices For DAM (and RTM)
Given the units committed in Passes 1 & 2,
Passes 3 & 4 define schedules and prices
Pass 3
Pass 4
IMO optimizes
dispatch over 24
hours for bid-in load
IMO optimizes
dispatch for forecast
RT load
Defines DAM
schedules and nodal
prices
Defines indicative
schedules & prices for
RTM
Constrained Pass
Constrained pass
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 23
Committed Units May Not Recover Bid Costs From Market.
Uplifts Are Needed
Principle: Those on whose behalf the commitment costs were
incurred pay the associated uplift
Pass 1
Pass 2
Committed units
entitled to bid-cost
payment guarantee
Committed units
entitled to bid-cost
payment guarantee
Uplift paid primarily by
all physical RT loads
Uplift for these units
paid by net RT loads
(those who chose not
to participate in DAM)
Uplift based against
DAM revenues
Uplift based against
DAM revenues
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 24
Efficient Results Need Consistent Schedules and
Price Formation Between DAM And RTM
Day Ahead Market
Real Time Market
Schedules
Schedules
From Pass 3 = constrained,
Includes all committed
units
From constrained dispatch.
OK
Based on all units with closed
breakers or able to close
breakers within 5-minutes
Prices
Prices
From Pass 3 = constrained
Limited to committed units
and quick start units
From constrained dispatch.
OK
Based on all units with closed
breakers or able to close
breakers within 5-minutes
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 25
Moving Import & Export Trades To The DAM
Should Reduce IOG Payments And Uplifts
Day Ahead Market
DAM is hourly
Real Time Market
RTMs are 5-minutes
Imports offer to sell into DAM
Imports offer to sell into RTM
Exports bid to buy from DAM
Exports bid to buy from RTM
Imports/Exports are cleared in
the DAM and settled at
the DAM prices
Imports/exports are cleared in
the pre-dispatch, but settled at
RTM prices
No intertie offer guarantee
payments are needed for
DAM import/exports
IMO must pay intertie trades at
their offers if RTM prices are
not enough to cover offer
prices for pre-dispatch
schedules
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 26
Imports And Exports
The procedures proposed for the IMO to schedule imports and
exports in the DAM are generally similar to the procedures that it
uses to schedule internal generation and loads in the RTM.
Imports In The Reliability Commitment
When it is necessary to commit additional generating capacity to
ensure that the IMO will be able to meet its load forecast:
 Only the commitment costs of slow-starting generation will be
considered when determining whether it should be committed.
 In cases when the offer for an import is less than the commitment
costs of internal generation, selecting the imports can reduce the
cost of committing additional units to cover forecast load.
 The IMO will charge net real-time load for the cost of committing
these imports.
 Committing these imports can reduce the amount that real-time
load needs to pay in these circumstances.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 27
Transmission Rights Settlements
Once the DAM is implemented, TRs will need to be settled in the DAM.
 Transmission rights could be options or obligations (still to be
discussed in detail).
 DAM schedules are obligations.
Settling TRs in the DAM will maintain revenue adequacy for the IMO.
 The FTRs and the DAM schedules otherwise would constitute
competing sets of claims on RTM congestion rents.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 28
Day Ahead Market Design Update
Agenda
 DAM Chronology
 DAM Design and Features
 DAM Pricing Options
 DAM Benefits
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 29
A Day Ahead Market Based Upon Uniform Pricing?
The Comprehensive Day Ahead Market was expected to comprise
a constrained schedule of resources and a uniform price
methodology to determine prices
 for the DAM and RTM to converge, require consistent methods in
DAM and RTM to determine schedules and prices
 the current real-time market determines schedules on a
constrained basis
 the current real-time market determines price using a uniform
pricing methodology
The DAM WG examined the implications of employing a uniform
pricing methodology in the DAM.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 30
“Uniform” Pricing Is Misnamed.
It Has Locational Differences, But The Wrong Ones
A so-called “uniform” pricing system must pay different prices to
generators at different locations whenever there is congestion.
 During congestion, the value of energy necessarily varies at different
locations, because transmission constraints prevent some cheaper
generation from getting to some loads.
• Lower-cost generators at some locations must be “constrained off” to
relieve constraints, while at other locations . . .
• Higher-cost generators must be “constrained on” to meet load.
 The IMO cannot manage congestion in a market without paying different
prices to generators at different locations relative to the congestion.
• Otherwise, generators would not follow dispatch instructions.
 During congestion, uniform prices must therefore be augmented by side
payments that vary by location, depending on the extent and location of
the congestion and the prices that generators offer.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 31
“Locational” Prices Under Uniform Pricing Are Not
Efficient and Not “Market” Prices
Although generators at different locations are paid different prices
under uniform pricing whenever there is congestion, the resulting
prices are not true market-clearing prices and are not efficient.
Generators paid “constrained-off” payments are usually paid more
than their energy is worth (they are paid not to run or produce less).
• And they have an incentive to adjust their offers to maximize the side
payments they receive for not running or producing less.
Generators paid “constrained-on” side payments are often not paid
as much as their energy is worth. They’re paid “as bid.”
• So they have an incentive to adjust their offers to maximize the side
payments to try to capture the market value, but they have to guess
and will often be wrong, yielding inefficiency – there is no transparent
market price.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 32
A Uniform Pricing System Is Problematic
The current uniform pricing system is the root source of several
problems. It creates price incentives that may:
 Encourage supply and demand-side investments at the wrong locations.
 Discourage supply and demand-side investments at the right locations.
Every US ISO that has tried uniform pricing had to develop
extensive non-market mechanisms to counteract the undesired
incentives from uniform pricing. Eventually, each such US ISO
concluded that it must replace uniform pricing with nodal locational
marginal pricing for generators.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 33
Uniform Pricing “Simplicity” Is A Myth
A uniform pricing system is always more complex than the
alternative of settling generators at their respective nodal prices.
 Requires a complex set of side payments that are non-transparent -This complexity will be magnified with a DAM, as shown in the July 28
presentation to the DAM WG. (Only 8 of 64+ cases were shown.)
 Experience in other markets has shown that some generators can be
encouraged to manipulate their offer prices to maximize the side
payments.
• This problem will substantially increase with a DAM if based on
uniform pricing. (See, California ISO web site re Enron practices)
• Extensive administrative rules will be needed to monitor, limit and
counteract this behaviour
Conclusion of DAM working group (August 19, 2003):
 A Day Ahead Market under a uniform pricing regime would be costly to
implement and maintain, complex and confusing, and is not
recommended
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 34
Day Ahead Market - Pricing Options
Day Ahead Market (DAM) Evolution
No DAM
Simple DAM
(e.g. Energy Forward
Market)
Current
Option 1
Real Time
Market only
Clear offers/bids
(ignore congestion)
Financial commitment
Comprehensive DAM
financial commitment
+ unit commitment
(considers congestion)
real-time market
becomes a
balancing market
Option 2
uniform price model
Option 3A
nodal price model
Option 3B
nodal price model
loads pay...
uniform price +
uplift for
congestion (CMSC)
(most) loads pay...
uniform price
(weighted average
of nodal prices)
loads pay...
nodal price
generators receive...
uniform price +
side payments for
congestion (CMSC)
generators receive
(and some loads pay)
...nodal price
generators receive...
nodal price
same settlement
treatment as
current
real-time market
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 35
Nodal Pricing Is Simpler, More Efficient
 For Generators: Unlike uniform prices, the nodal prices make intuitive sense
to generators – they are consistent with the generators’ offers.
• If not dispatched, the nodal prices were below the offer
• If partially dispatched, the nodal prices are consistent with the offer
• If fully dispatched, the nodal prices will be at least as high as and possible
higher than the offer.
 For Dispatchable Loads: Nodal pricing provides correct incentives for priceresponsive demand
• Sends correct price signals about the value of demand-side responses at
different locations
 For the IMO: Unlike uniform prices (even with side payments), nodal prices
are consistent with the actual dispatch.
• So the price signals are consistent with what the IMO needs the
generators to do to maintain reliable operations.
• So complex rules for side payments aren’t needed for reliability.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 36
Nodal Pricing For Generators Can Coexist With
‘Uniform Pricing’ Applied To Loads
 The nodal pricing framework used in US ISOs continues to settle most
loads at “zonal” prices, which are averages of nodal prices for each
utility’s service area.
 This construct could be used in Ontario if it wishes to continue charging
all consumers the same price for energy, as today. In this scenario,
‘uniform prices’ could be the weighted average price of all load nodes.
 It should be understood that any averaging scheme introduces some
inefficiency and inherently involves cost shifts. For reliability purposes,
this is not a serious problem, except for those customers/loads that
could participate in price-responsive demand opportunities.
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 37
Day Ahead Market - Nodal Price Model
Need to assess the impact of a nodal pricing solution
before making recommendations:
 Market Participants
• While the DAM WG agrees that Uniform Pricing in a DAM is not
workable, more analysis of nodal pricing is needed:
– pricing impact - historical and going-forward
– broad Market Participant education and stakeholdering
 Impact upon DAM design
• DAM based upon nodal pricing is simpler
• System of transmission rights for internal congestion required
 Impact upon RTM design
• RTM would need to be settled on nodal basis - settlement system
changes
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 38
Day Ahead Market Design Update
Agenda
 DAM Chronology
 DAM Design and Features
 DAM Pricing Options
 DAM Benefits
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 39
Day Ahead Market - Benefits
Improved point of convergence for forward products
 DAM provides a transparent and predictable price that converges on the
RTM price
• Lower volatility - DAM price volatility lower than RTM price
• Greater liquidity - DAM explicitly allows non-dispatchable load bids
and ‘virtual’ participation
• Price convergence - ‘virtual’ participants in DAM encourage price
arbitrage between DAM and real-time market
 DAM price better than RTM price as an index - facilitates forward price
curve development  contracting
 Experience in other markets...
• Contracting in PJM and NY > 50% of market
• PJM futures activity setting volume records on NYMEX
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 40
Day Ahead Market - Benefits
Improved reliability
 Allows for direct participation of all loads in market
• Additional opportunity for demand-side response
 Improved commitment process
• Allows IMO to commit sufficient resources to meet forecast demand
• Drivers to ensure committed resources ‘show-up in real-time’
• Utilizes 3-part offer construct and provides BPCG
 Imports and exports priced and scheduled day-ahead
• Moves transactions from RTM to DAM and reduces intertie trading
uncertainty
– Should reduce number of failed intertie transactions
– Should reduce Intertie Offer Guarantee (IOG) uplift
payments
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 41
Day Ahead Market Design Update
Agenda
 DAM Chronology
 DAM Design and Features
 DAM Pricing Options
 DAM Benefits
 Next Steps
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 42
DAM - Next Steps
 Assess Impact of Nodal Pricing
• The DAM WG will continue to address DAM-related issues,
including those related to nodal pricing
• Need to determine appropriate vehicle to stakeholder issues
related to impact of nodal pricing in RTM
 Complete DAM High Level Design Strawman
Market Operations Standing Committee of the IMO
September 22, 2003
Slide 43