Some issues on
Scarcity Pricing*
FERC Research in Market Oversight (RIMO) Program
CPUC Project
Bishu Chatterjee (CPUC) / Keith Collins (FERC)
In collaboration with FERC Division of Energy Market Oversight
August 10, 2007
CAISO Market Surveillance Committee Meeting
* The views expressed in this project are solely those of the researchers and not necessarily those of the
California Public Utilities Commission nor the Federal Energy Regulatory Commission
1
Overview
•
•
•
•
FERC RIMO Program
Scarcity Pricing context in CAISO
Review of Scarcity Pricing in RTO/ISO
Examine scarcity conditions based on
predefined Heat Rates
• Examine Off-peak hour shortage
conditions
• Role of Scarcity Pricing in energy only
market versus capacity market
• Conclusion
2
The Scarcity Pricing context
In MRTU Release 1 the CAISO will have a limited
scarcity pricing mechanism where bids will be
raised to bid cap when there are insufficient
energy bids
In September 2006 MRTU Order, FERC ordered a
more comprehensive reserve shortage scarcity
pricing to be implemented within 12 months of
the MRTU Release 1
In April 2007 MRTU Order FERC further
emphasized that 1) Prices should rise when
energy and reserves are short in Day Ahead and
Real Time 2) Reserve shortage scarcity pricing
that applies administratively-determined
graduated prices to various levels of reserve
shortage
3
Scarcity Pricing (SP)
SP is based on the idea that under scarcity
conditions generating units will receive
higher compensation. This additional
revenue stream helps to incentivize
investment in new generation and promotes
overall system reliability. When supply
conditions are tight and drop below a predetermined threshold level, the price for
additional MW significantly rises.
4
Scarcity Pricing (SP) Program and
Scarcity Pricing
The SP exists in various ISO /RTOs can be
grouped as follows:
SP Program: SP Program has pre-specified
prices/rules so when scarcity conditions (a
tight supply situation due to pre-specified
shortage) are triggered, such preadministratively determined prices set SP.
SP Programs exist in PJM, MISO, NYISO,
ISONE, CAISO (MRTU Release 1A).
5
SP Programs
• Reserve demand Curve for shortage pricing uses
pre-defined shadow prices for reserves under
scarcity conditions and energy prices automatically
reflect cost of reserves under scarcity conditions.
Example, NYISO and ISONE.
• SP Program also determines SP via the cooptimization of energy and ancillary services. The
locational and temporal constraints for ancillary
services given congestion and scarcity determine
SP. Under the co-optimization, energy and
reserves are priced simultaneously to reflect the
opportunity cost of not providing the product.
Example, NYISO and ISONE. PJM optimizes
energy and reserves sequentially.
6
SP via demand/supply conditions that are
outside the SP Program
SP can also be set outside the SP program by
demand and supply conditions due to tight
supply conditions. Such SP do not have prespecified prices but are based on willingness of
load to curtail load at such price. These
concepts are similar to Value of Lost Load w/ an
Offer Cap. Example: ERCOT ($1500/MWh),
PJM, MISO, NYISO, ISONE
($1000/MWh),CAISO( $500/MWh).
7
SP in PJM
SP Trigger ( SP region is incapable of meeting
demand under normal economic dispatch
conditions) and PJM performs any of the following:
1. Distribution Level Voltage reduction action by 5
percent to provide load relief
2. Dispatch of online generators partially
designated as Maximum Emergency into
emergency output levels, entirely designated as
Maximum Emergency above their minimum load
points, and offline generators designated to run
only in emergency conditions.
3. Manual Load Dump – to disconnect firm
customer load
8
SP in PJM…(2)
SP = Highest Offer Price to supply either energy or
reserves in Real-Time subject to the overall offer
cap of $1000/MWh
In the State of the Market Report 2006 the PJM
Market Monitor recommends
• Stages of SP – based on system conditions with
progressive impacts on prices
•Locational Price Signals
9
SP in MISO
SP Trigger
1. Day Ahead Maximum Generation Emergency
conditions (event steps 1 to 5) – shortage when the
sum of demand bids (including price sensitive
demand), exports, and virtual bids cannot be
satisfied from generation, imports, and virtual
supply. [market demand ≥ market supply].
2. Real Time shortage when real Time demand
forecast ≥ Available generation + Self Schedules +
Demand Response Resources.
SP = The higher of the Market Participant
submitted Resource Offer/ARC in step 1 or
$1000/MWh in step 2
10
Step 1 SP in MISO…(2)
Step 1 uses up to 50% of the emergency range of online
generators to handle load change less than 1 hour in
duration (addresses temporary supply and demand)
Adequate Ramp Capability (ARC): ARC captures the value
of operational flexibility and electricity price fluctuation.
ARC allows an incremental procedure to release operating
reserves for energy dispatch.
The ARC price is set by the higher of offered price or a
Peaker Proxy Offer (Daily Peaker Proxy is calculated from
monthly Peaker Proxy Heat Rate based on average CT
offers in Real Time market during previous month) and
Daily Spot Price (Chicago spot gas) index.
11
SP in MISO…(3)
Adequate Ramp Capability Pricing example:
Start-up = $3,000 per start
No-load = $750 per hour, Incremental energy = $100/MWh
Capacity = 50 MW
Total Single Hour Offer = ($3000/50) + ($750/50) + $100 = $175/MWh
Total offer = $175/MWh
Spot Gas = $7.44/MMBtu
Peaker Proxy heat Rate = $175/$7.44 = 23.5 MMBtu /MWh
The Proxy Peaker Price is determined as follow:
On 6/1/2005 gas price = $6.32
Proxy Peaker Heat Rate = 23.5
Proxy Peaker Price = $6.32 * 23.5 = $148.5
Shortage Price is set higher of the offer or proxy peaker price.
Step 2 uses additional capacity needed or longer period, 100% of the dispatch range.
In step 2, the offer price released capacity segments is set to $1,000/MWh
Interruptible generation is called on when MISO calls a Max Generation Emergency - Event Step 1
(NERC Engineering Emergency Alert 2) to Firm load shedding - Event Step 5 (NERC EEA 3).
12
SP in NYISO
SP Trigger
Reserves (10-min spinning, 10-min nonsynchronized, 30-min ) by location shortage
SP =
NYCA
Eastern NY
Long Island
10 m Spinning
$500
$25
$25
10 m Total
Reserve
$150
$500
$25
30 m Reserve
200 MW @ $50
200 MW @ $100
200 MW @ $200
$25
$300
13
SP in NYISO…(2)
NYCA
Eastern NY
Long Island
$850
$1400
$1750
= $500+$150+$200
=$500 + $25 + $$150 +
$500 + $200+ $25
= $500 +$25+$25 +
$150 + $500 + $25
+$200 + $25 + $300
10 m Total
Reserve
$350
$875
$1200
= $150 + $200
= $150 + $500 + $200
+$25
=$150 + $500 +$25
+ $200 +$25 + $300
30 m Reserve
$200
$225
$525
= $200 + $25
= $300 + $200 + $25
10 m Spinning
14
SP in NYISO…(3)
System Wide Regulation Demand Curve
Regulation
Demand Curve Value
Need > 25 MW to
meet Target
Need < 25 MW to
meet Target
$300/MW
$250/MW
2. Energy Reserve co-optimization in Real Time
Guarantees that the clearing prices of energy, reserves, and
regulation fully reflect opportunity cost
Example: LMP = $120/MWh Offer Price = $50/MWh
SP for LI = $70 + $1750/MWh
15
SP in ISONE
SP Trigger via Locational Forward and Real Time Reserve
Market that co-optimize Energy and Reserve
Physical Reserve Shortage = System not having
enough capacity to meet the total energy and
reserve requirement
LMP = Marginal Unit’s Offer Price + Reserve
Market Clearing Price
Economic Reserve Shortage = System redispatch cost to procure reserve exceeds the
value of Reserve Constraint Penalty Factors
(System 10 Min spin - $50/MWh, System Total
10 Min Reserves $850/MWh, System 30 Min $100/MWh, Local 30 Min - $50/MWh)
LMP = Marginal Unit’s Offer Price + Re-dispatch
cost to produce additional 1 MW of reserve
16
SP in ERCOT
SP Trigger: Based on the supply demand
conditions
SP is based on the Australian model. At the
beginning of the Resource Adequacy Cycle the
offer cap is set to $1500/MWh (High Cap) but if the
Peaker Net Margin [the sum of all positive
differences between the clearing price and
estimated marginal cost of a hypothetical peaker
with 10 Heat Rate] exceeds $175,000 per MW then
the offer cap is reset to a lower level (Low Cap) to
$500/MWh or $500 per MW per hr. for the
remainder of that annual resource adequacy cycle.
17
2005-6 Instances of SP Trigger
Year PJM
MISO NYISO
ISONE
CAISO
2005
July 26 –
5h
July 27 –
4.5 h
None
Aug 27 –
4h
None
NA
2006
None
In 2007
ARC
June 1515m
June 20
– 30 m
July 18 – 9h
July 19 – 9h
Aug 1 – 5h
Aug 2 – 11h
Aug 3 – 6h
Aug 1 –
40 m
Aug 2 –
4 h 45 m
NA
ERCOT
In 2007 on
April 3 – 7
fifteen
minute
intervals
18
Methodology
• Scarcity pricing defined as heat rates over 25,000
Btu/kWh. Only the most inefficient gas plants run at this
level.
– For example, AES Redondo Beach in California is rated at or
above 25,000 Btu/kWh in 2006.
– This is not a magical heat rate, but just one that attempts to
capture just the scarcity periods.
• Hourly real time electricity prices from the RTO/ISOs
were compared to the daily day-ahead Gas Daily price.
– While scarcity can be approximated in day-ahead markets, the
system events occur in real time.
– Though gas prices may vary during the day, the daily price is a
reasonable approximation of average variable fuel costs.
– O&M costs were not factored into this analysis.
19
Implied heat rates were calculated
for every hour from 2004 to 2006
C alifornia IS O S P -15 H ourly Im plied H eat R ates
(2004 - 2006)
120,000
100,000
Heat Rate (Btu/kWh)
80,000
60,000
40,000
20,000
0
0
5000
10000
15000
20000
25000
30000
-20,000
H ourls
Hours
20
Implied heat rates over 25,000
Btu/kWh were considered scarcity
California ISO SP-15 Hours where Implied Heat Rate was Greater than 25,000
Btu/kWh
(2004 - 2006)
105,000
215 hours in SP-15 in 3 years were over 25
95,000
85,000
Btu/kWh
75,000
65,000
55,000
45,000
35,000
25,000
0
50
100
150
Hours
200
250
300
21
Off-peak shortage conditions
• Off-peak shortage can be related to issues with
ramping, scheduling (i.e. day-ahead forecast
accuracy) and system events (e.g. outages) but
not system capacity scarcity.
• Off-peak shortage as a percentage of total
observed scarcity ranged as follows for zones
and hubs covered in this analysis:
–
–
–
–
–
–
ISONE:
NYISO:
PJM:
MISO:
CAISO:
ERCOT:
No instances
1% to 4%
0% to 4%
3% to 25%
25% to 36%
4% to 6%
22
Scarcity prices a function of missed
load forecast
New York ISO Hudson Valley (Zone G) Hourly Real Time Price
5/30/06
$1,000
Scarcity Pricing
Hours
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour Ending
Data source: Derived from NYISO real time hourly prices.
http://www.nyiso.com/public/market_data/pricing_data.jsp
23
Ramping can cause scarcity
conditions
California ISO Count of Scarcity Hours
(2004-2006)
18
16
NP15
Ramping Hours
Count of Observations
14
12
10
8
6
4
2
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour Ending
Data source: Derived from CAISO prices and Platts Gas Daily prices.
http://oasis.caiso.com
24
As load and units come off in the
evening, ramping scarcity exists
CAISO Systemwide Real Time Price
9/20/06
$300
As units come off
from schedules,
ramping scarcity
causes spike.
$250
$200
$150
$100
$50
$1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour Ending
Data source: Derived from CAISO prices.
http://oasis.caiso.com
25
As load and units come off in the
evening, ramping scarcity exists
9/20/06 5-Minute
Interval Prices
SP15
400
350
300
250
200
CNGS_ZONE
SP15
150
100
50
0
123
456
789
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
1212
345
678
9
10
11
12
-50
Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of Sum of
HE01 HE02 HE03 HE04 HE05 HE06 HE07 HE08 HE09 HE10 HE11 HE12 HE13 HE14 HE15 HE16 HE17 HE18 HE19 HE20 HE21 HE22 HE23 HE24
9/20/06
OPR_DT Data RT_INTERVAL
Data source: Derived from CAISO prices.
http://oasis.caiso.com
26
Ramping causes scarcity prices to
trigger in New York ISO
New York ISO Hudson Valley (Zone G) Hourly Real Time Price
10/18/06
$250
Morning ramping spike
with heat rates exceeding
25,000 Btus/kWh
$200
$150
$100
$50
$0
1
2
3
4
5
6
7
8
9
10 11 12
13 14 15 16 17 18 19 20 21 22 23 24
Hour Ending
Data source: Derived from NYISO real time hourly prices.
http://www.nyiso.com/public/market_data/pricing_data.jsp
27
Scarcity pricing events in RTO/ISO
markets from 2004 - 2006
Scarcity Events in RTO/ISO Markets
400
NYISO
PJM
ISONE
CAISO
MISO
ERCOT
Count of Observations
350
2004
300
2005
250
2006
200
150
100
50
Hub
Houston
West
Northeast
South
North
SP15
NP15
Minn Hub
Mich Hub
Ill Hub
Cin Hub
FE Hub
CT Zone
Mass Hub
NI Hub
West Hub
NJ Hub
BGE
West
NYC
Long Island
Hud Vly
0
Note: All electricity prices are from real time markets. PJM NI Hub did not start till May 2004. NYISO SMD2 market redesign occurred in Feb. 2005.28
MISO started market operation on April 2005. First Energy Hub (FE) did not start till Sep. 2005. CAISO software changes were implemented in 2006.
Average heat rates during scarcity
events differ by region
Average Heat Rate During Scarcity Events in RTO/ISO Markets
Avg. Heat Rate Btu/kWh
85,000
NYISO
PJM
ISONE
CAISO
MISO
ERCOT
75,000
2004
65,000
2005
2006
55,000
45,000
35,000
Hub
Houston
West
Northeast
South
North
SP15
NP15
Minn Hub
Mich Hub
Ill Hub
Cin Hub
FE Hub
CT Zone
Mass Hub
NI Hub
West Hub
NJ Hub
BGE
West
NYC
Long Island
Hud Vly
25,000
Note: All electricity prices are from real time markets. PJM NI Hub did not start till May 2004. NYISO SMD2 market redesign occurred in Feb. 2005. 29
MISO started market operation on April 2005. First Energy Hub (FE) did not start till Sep. 2005. CAISO software changes were implemented in 2006.
Conclusion
• Scarcity Pricing plays a different role based on
whether it is implemented in an energy only
market or a capacity market
• There can be shortage conditions even when
there is no “scarcity” in a traditional sense
• Increased prices under scarcity conditions send
the right price signals to active Demand
Response programs
• Market manipulation under SP and Performance
metrics for generation investment should be
addressed
• Next step is to isolate off-peak hour shortage
conditions by shortage types
30