Back Cast of Interim Solution B+ to Improve Real-Time. Whitepaper

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1 Back Cas of Inerim Soluion B+ o Improve Real-ime Scarciy Pricing Back Cas of Inerim Soluion B+ o Improve Real-Time Scarciy Pricing Whiepaper March 21, 2013 William W. Hogan, Harvard Universiy ERCOT Saff 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved.

2 Table of Conens 1. Execuive Summary Scope Background Summary of Back Cas Resuls Real-Time Co-Opimizaion of Energy and Ancillary Services Inerim Soluion B Mehodology for Implemening Inerim Soluion B Deailed Resuls Appendix Appendix I: Deailed Mehodology for Back Cas Deermining LOLP Deerminaion of Price Adder Deermining Ancillary Service Imbalance Paymen Appendix II: Inerim Soluion B + Theory An Approximaion Foundaion for an ORDC ORDC for Muliple Reserves Endnoe Elecric Reliabiliy Council of Texas, Inc. All righs reserved. i

3 1. Execuive Summary 1.1. Scope The Public Uiliy Commission of Texas (PUCT) has requesed ha ERCOT perform a back cas of an inerim proposal ha will approximae Real-Time co-opimizaion of energy and Ancillary Services (AS). This inerim proposal has been described as he Inerim Soluion B+ and is inended o be a more appropriae mehod of pricing scarciy during condiions of low operaing reserves in Real-Time. This back cas approximaes he pricing oucomes and esimaes wha he marke impacs may have been if Inerim Soluion B+ had been in place for he years 2011 and This analysis builds off of he previous Inerim Soluion B back cas ha was filed by ERCOT on February 13, Background The concep of he Inerim Soluion B+ was iniiaed by a paper by William Hogan, Elecriciy Scarciy Pricing hrough Operaing Reserves: An ERCOT Window of Opporuniy, 1 which was filed wih he PUCT by GDF Suez on November 14, The paper emphasized he imporance of an Operaing Reserve Demand Curve (ORDC) in improving Real-Time scarciy pricing in he ERCOT marke. The proposed approach involves he Real-Time coopimizaion of energy and AS. Preliminary analysis of he imeframe for implemening Real-Time co-opimizaion of energy and AS indicaed ha i could no be done quickly. ERCOT conaced Professor Hogan o deermine he validiy of modifying he exising Energy Offer floors as an inerim soluion. This approach was labeled as Inerim Soluion A. The resuling collaboraion produced a calculaion based on Loss of Load Probabiliy (LOLP), Value of Los Load (VOLL) and he level of available reserves in Real-Time, which was labeled as Inerim Soluion B. Boh inerim soluions were presened and discussed a a PUCT workshop held on January 24, During he January 24, 2013 workshop, concerns were raised abou Inerim Soluion B in erms of negaive marke behavior ha he proposal could incenivize. A modified proposal addressed he incenive issues in an Inerim Soluion B+ approach by adding an AS imbalance selemen o he Inerim Soluion B approach. This whiepaper firs inroduces he concep of Real-Time co-opimizaion of energy and AS wih an ORDC, and hen describes Inerim Soluion B+, which is an approximaion o his concep Summary of Back Cas Resuls The Inerim Soluion B+ is an approximaion o a full Real-Time energy and AS coopimizaion soluion. In his approximaion, a price adder for energy is calculaed on op of he original energy price which is inended o capure he value of he opporuniy cos of reserves. 1 W. Hogan, Elecriciy Scarciy Pricing hrough Operaing Reserves: An ERCOT Window of Opporuniy, Mossavar-Rahmani Cener for Business and Governmen, Harvard Kennedy School, November 1, 2012, available a hp:// Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 1

4 In addiion, here is an AS imbalance selemen which makes Resources indifferen o he uilizaion of heir capaciy for energy or reserves. The back cas resuls vary significanly wih differen parameers for he ORDC and wih he VOLL a differen fuure Sysem-Wide Offer Caps (SWCAPs). Pending he resuls of ongoing sudies o esimae VOLL, he values uilized here reflec he range of generaion offer caps. The back cas analysis of he price adder shows ha he energy-weighed average energy price increases over a range of $7/MWh o $26.08/MWh in 2011 and $1.08/MWh o $4.5/MWh in This range resuls from differen parameer seings ha were used in he back cas. The back cas resuls for he average energy price increase wih minimum coningency levels (X) of 1375 MW and 1750 MW are presened in Table 1. A he minimum coningency level, scarciy prices achieve he maximum allowed value. Table 1 : Energy-weighed average energy price adder (and Online reserve price) ($/MWh) for 2011 & 2012 for differen VOLLs and minimum coningency levels (X) VOLL Energy-weighed average price increase wih X a 1375 MW ($/MWh) & 2012 combined Energy-weighed average price increase wih X a 1750 MW ($/MWh) & 2012 combined $5000/MWh $7000/MWh $9000/MWh Due o he increase in energy prices resuling from he proposal, he poenial impacs on Peaker Ne Margin (PNM) were also analyzed. The addiional PNM from implemening Inerim Soluion B+ is presened in Table 2 for differen VOLLs and minimum coningency levels (X). For he purpose of comparison, a sudy was also performed o deermine he poenial impacs o 2011 and 2012 of simply having he SWCAP se o higher values. Table 3 presens he esimaes of addiional PNM ha may have been observed by solely increasing SWCAP o he differen VOLLs being used in he back cas analysis Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 2

5 Table 2 : Esimaed addiional PNM ($/MW) from Inerim Soluion B+ for 2011 & 2012 for differen VOLLs and minimum coningency levels (X) VOLL Toal Addiional PNM under Inerim Soluion B+ wih X a 1375 MW ($/MW) Toal Addiional PNM under Inerim Soluion B+ wih X a 1750 MW ($/MW) $5000/MWh 38,544 7,740 67,892 17,267 $7000/MWh 62,141 11, ,327 24,809 $9000/MWh 85,773 14, ,795 32,362 Table 3 : Esimaed addiional PNM ($/MW) for 2011 and 2012 by only increasing he SWCAP SWCAP Toal Addiional PNM if SWCAP Increased o VOLL ($/MW) $5000/MWh 57,631 2,877 $7000/MWh 114,168 5,883 $9000/MWh 170,706 8,889 As par of he Inerim Soluion B+ proposal, a Real-Time AS imbalance selemen is inroduced. This is inended o accoun for he fac ha Resources may have a differen amoun of reserves available in Real-Time relaive o he amoun ha hey were obligaed o provide based on aciviies in he Day-Ahead Marke (DAM) and Adjusmen Period. This can resul in Qualified Scheduling Eniies (QSEs) needing o purchase reserves in Real-Time o cover hose responsibiliies. The AS imbalance selemen analysis shows a ne refund o loads, which ranges from $60.2M o $218.4M in 2011 and $1.6M o 4.3M in Of he $218.4M in 2011, $214M is from he exreme weaher ha occurred in February and Augus. Table 4 summarizes hese back cas resuls. The posiive sign for he values in he able indicaes a ne charge o Resources Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 3

6 Table 4 : Ne AS imbalance selemen ($) charge o Resources for 2011 & 2012 for differen VOLLs and minimum coningency levels (X) VOLL Ne AS Imbalance Selemen for All Reserves wih X a 1375 MW ($) w/o Feb & Aug Ne AS Imbalance Selemen for All Reserves wih X a 1750 MW ($) 2011 w/o Feb & Aug 2012 $5000/MWh 60,247,604 2,945,245 1,757,030 88,156,738 1,938,250 1,554,245 $7000/MWh 104,970,127 4,380,067 2,902, ,256,516 3,123,633 2,905,054 $9000/MWh 149,692,650 5,814,890 4,048, ,356,295 4,309,015 4,255,863 In summary, he back cas for various VOLLs a each of he fuure SWCAPs ($5000, $7000 and $9000), using weny-four disinc seasonal and ime-of-day specific ORDCs, shows ha here is a posiive addiion o he energy-weighed average price and he AS imbalance selemen calculaion resuls in a ne refund o he loads. As a resul, he change o he oal ne paymen o Resources also needs o be esimaed o beer undersand he overall effec of hese wo resuls. Table 5 presens he addiional ne revenue o Resources aking ino consideraion he impacs of boh he increased energy prices and Real-Time AS imbalance selemen. The negaive sign for he values in he able indicaes a ne addiional paymen o he Resources under all he scenarios ha were sudied. Table 2 : Change in ne (energy + AS) charge o Resources for differen VOLLs and minimum coningency levels (X) VOLL Change in Ne (Energy + AS) Charge o Resources wih X a w/o Feb & Aug Change in Ne (Energy + AS) Charge o Resources wih X a w/o Feb & Aug 2012 $5000/MWh -2,263,748, ,032, ,087,357-3,908,542,492-1,046,569, ,553,251 $7000/MWh -3,637,412, ,986, ,279,661-6,175,394,742-1,487,477,702-1,115,981,451 $9000/MWh -5,011,077, ,940, ,471,967-8,442,246,992-1,928,385,410-1,454,409, Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 4

7 2. Real-Time Co-Opimizaion of Energy and Ancillary Services Real-Time co-opimizaion of energy and AS will resul in he appropriae valuaion of energy during periods when demand is high and operaing reserves are low. This valuaion is accomplished hrough he uilizaion of an ORDC ha resuls in he price of energy reflecing he opporuniy cos of reserve scarciy. The curren ERCOT marke includes co-opimizaion in is organized forward DAM wihou an ORDC, while he Real-Time spo marke does no include co-opimizaion of energy and AS. The Real-Time spo marke only prices energy and does no include he opporuniy cos of operaing reserves. The Real-Time energy and AS co-opimizaion proposal uilizes ORDCs which provide a mechanism of creaing appropriae scarciy prices. Implemening his proposal in Real-Time will require a change o he DAM o incorporae an ORDC in order for he markes o converge. In boh he DAM as well as he Real-Time spo marke, mainaining power balance in he marke clearing process is given he highes prioriy. The curren ERCOT DAM is a volunary marke for buyers (demand) and sellers (supply). Demand is elasic in he DAM and hus, here is a marke based VOLL se by he demand bids. The DAM algorihm will mainain power balance (wih supply equal o demand) such ha he resuling energy and AS prices reflec opporuniy coss and Resources are indifferen o wheher heir capaciy is procured for energy or for AS. In he DAM, during expeced scarciy condiions, demand bids frequenly se he price (a marke based VOLL) and he resulan prices for energy and AS are high. In he curren ERCOT Real-Time spo marke, demand is inelasic and energy and AS coopimizaion is no performed. Resource Energy Offers or he adminisraive Power Balance Penaly Curve (PBPC) can se he price a or near he SWCAP during scarciy condiions. Presenly, he SWCAP is he maximum price ha a Resource can offer for energy. The curren SWCAP was se o $4500/MWh in 2012, and will change o $5000/MWh in 2013, $7000/MWh in 2014, and $9000/MWh in If Real-Time energy and AS co-opimizaion is adoped, hen he use of he SWCAP in Real-Time and is iner-relaion wih he PBPC and VOLL needs o be revisied. The design of he ORDC and he price of reserves under scarciy depend on he inerrelaion beween he PBPC, VOLL, ORDC and SWCAP. There are wo approaches o implemening Real-Time energy and AS co-opimizaion uilizing an ORDC: Approach 1: If we assume ha he SWCAP is he same as VOLL, hen he maximum price on he PBPC would be se o SWCAP + 1. The Real-Time spo marke clearing process uses he Securiy-Consrained Economic Dispach (SCED) applicaion o dispach Resources and se prices. For each execuion of SCED, he marginal offer from Resources providing reserves will be deermined and he ORDC will be consruced as LOLP * (VOLL - Marginal-Offer-From- Resource-Providing-Reserves). Since he las parameer in his equaion is no a fixed value and could vary for each SCED execuion, he Real-Time ORDC could vary for each SCED execuion as well. In his consruc, he DAM will also have o be changed o calculae he marginal offer from virual and physical Resources providing reserves and adjus he ORDC for DAM o LOLP * (VOLL - Marginal-Offer-From-virual-or-physical-Resource-Providing-Reserves), which could possibly be differen for each of he weny-four hours sudies wihin he DAM process. In 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 5

8 shor, his approach is needed wih he curren rules in order o ensure ha power balance is given he highes prioriy. This approach, which uses a modified ORDC for each SCED execuion and for each hour of he DAM, can resul in a reserve price ha is near zero and an energy price near SWCAP under scarciy condiions. Approach 2: In his approach SWCAP is only applicable o he PBPC. Resources can only offer up o a new, smaller offer cap value (SWCAP_NEW). The maximum price on he PBPC will sill be se o SWCAP + 1, bu he ORDC will be calculaed based on LOLP * (SWCAP SWCAP_NEW). Under his approach, scarciy prices will reach SWCAP and he reserve prices will no need o be decreased under scarciy condiions as hey are under Approach 1. This approach allows he ORDCs for DAM and Real-Time o be predefined for each ime period of he day raher han for each SCED execuion or each hour of he DAM. I also ensures ha he prices for reserves are always increasing as hey are depleed. In his approach, under scarciy condiions, reserve prices approach (SWCAP SWCAP_NEW) and he price for energy approaches SWCAP. Though hese wo approaches creae he same Real-Time energy prices, hey creae differen reserve prices and have differen sysem change requiremens. In addiion, Approach 2 is a simpler implemenaion and has he effec of aking he scarciy componen ou of he Resource Energy Offers. Real-Time co-opimizaion requires AS providers in he DAM o buy back he AS a he Real- Time price if hey are no provided in Real-Time; hus, a Real-Time AS imbalance selemen srucure for reserves is a par of Real-Time energy and AS co-opimizaion soluion. 3. Inerim Soluion B+ Inerim Soluion B+ is inended o be a close approximaion of Real-Time energy and AS coopimizaion. Approach 1, as described above, has been uilized in he back cas analysis performed for 2011 and 2012 wih he assumpion ha he original marginal energy price remained unchanged. In addiion, he original energy price plus he price adder is allowed o reach a maximum value of he VOLL. Preliminary analysis of he imeframe for implemening Real-Time co-opimizaion of energy and AS indicaed ha i could no be done in he near-erm. In order o provide a more gradual increase in he energy price, leading up o he SWCAP as condiions become scarce in Real- Time, wo alernaive approaches were proposed, Inerim Soluion A and Inerim Soluion B. These approaches were filed wih he PUCT on January 24, 2013 under Case [iem# 369]. The Inerim Soluion B proposal removes he exising Energy Offer floor requiremens from Generaors for AS, and incorporaes he ORDC ino he deerminaion of Real-Time prices for energy. The proposal inroduces a price adder o he sysem wide energy price based on he ORDC which is an increasing funcion ha values he remaining reserves as a funcion of he oal generaion in he sysem. While boh approaches indicaed above should creae he desired effec of having a more gradual increase in he energy price as condiions become scarce in Real Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 6

9 Time, Inerim Soluion B should provide a more accurae approximaion of full Real-Time coopimizaion of energy and AS and will include prices for boh energy and Real-Time reserves. During he January 24, 2014 workshop, concerns were raised abou Inerim Soluion B. These concerns were focused on negaive marke behavior ha he proposal could incenivize due o he inconsisency beween he increased prices and he dispach from he Real-Time marke. These concerns included: 1. Resources ignoring dispach insrucions o chase he higher energy prices; 2. Eniies reducing Real-Time Energy Offers o values below coss in order o offse possible inconsisencies wih he DAM; and 3. Eniies needing o buy back DAM energy awards in Real-Time a a higher cos due o he poenial inconsisencies. The uilizaion of an AS imbalance selemen was developed o address hese negaive incenives. The Inerim Soluion B combined wih he AS imbalance selemen is wha is being referred o as Inerim Soluion B+. There are wo key values ha are par of Inerim Soluion B+. The firs value is a price for Real-Time reserves from Load Resources providing Responsive Reserve Service (RRS) and Resources ha are paricipaing in SCED. This price serves as he price adder for he Real-Time energy price. In order o address price inconsisency beween he dispach and he final price, he remaining reserves provided by Resources minus heir AS obligaion are paid his price adder as well. The second value is he price calculaed and used in he AS imbalance selemen for Real- Time reserves ha are being provided by Offline Resources. These are Resources ha are no currenly available for dispach by SECD bu could be made available o SCED in 30 minues. The AS imbalance selemen will ensure ha Resources are indifferen beween providing energy and reserves in Real-Time. This addresses he earlier discussed incenive concerns. While he incenive concerns were originally raised in regards o Inerim Soluion B, i is imporan o recognize ha similar concerns also exis wih he Energy Offer floors currenly in place and modified as par of Inerim Soluion A. This is specifically rue for hose Resources which are providing Online Non-Spinning Reserve Service (NSRS) in Real-Time ha have a marginal cos lower han $120/MWh. Such a Resource has he incenive o ignore dispach insrucions in order o chase he higher energy price whenever he price is greaer han heir marginal cos. However, an AS imbalance selemen process may be less feasible under an Energy Offer floor approach due o here no being an explici price for Real-Time reserves. 4. Mehodology for Implemening Inerim Soluion B+ Deermining he following values is a major par of implemening Inerim Soluion B+: 1. VOLL; 2. LOLP; 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 7

10 3. The Real-Time price for remaining reserves in he sysem; and 4. The AS imbalance selemens Pending resuls of oher sudies esimaing he VOLL, he back cas uilizes a range. VOLL was assumed a each of he fuure SWCAPs ($5000, $7000 and $9000) for he back cas. Marke paricipan submissions and sysem condiions from 2011 and 2012 were uilized assuming ha marke behavior did no change. The key par for back casing of Inerim Soluion B+ is he deerminaion of LOLP. LOLP depends on many facors, including he probabiliy of forced ouages, probabiliy of load forecas error and probabiliy of wind forecas error. I could also be differen for differen imes of he day and for differen monhs of he year. LOLP a a given reserve level can be inerpreed as he probabiliy of he occurrence of an even wih a magniude greaer han ha reserve level. A minimum coningency level (X) is chosen in order o send an appropriae scarciy price signal o mainain reliabiliy and sabiliy of he sysem. The LOLP for reserve levels below he minimum coningency level (X) will be se o one. In addiion, since ERCOT is a a higher risk of shedding firm load when reserves fall near or below he minimum coningency reserve level, he LOLP curve is shifed o he righ by he minimum coningency level (X) amoun. The LOLP curve for a given reserve level (R) will be given as follows:, 0 1, 0 LOLP is deermined by analyzing hisoric evens, where an even is defined as he difference beween he hour-ahead forecased reserves and he reserves ha were available during he Operaing Hour. These evens were spli ino weny-four groups, comprising of four seasons and six ime-of-day blocks. These groups were used o deermine weny-four disinc normal probabiliy disribuions. Seasonal and ime-of-day specific curves were creaed o capure he poenial differences beween he differen ime periods and risk levels ha occur hroughou he year. Once LOLP is deermined, he nex sep is he calculaion of he price (P S ) for reserves ha are being provided by Load Resources providing RRS and Resources paricipaing in SCED, and he price (P NS ) for he reserves being provided by Offline Resources no currenly available o SCED bu could be made available o SCED in 30 minues. P S and P NS are funcions of he LOLP a various levels of Real-Time reserves, he ne value of load curailmen, and he ime duraion during which he reserves could be available. In his proposal, P S and P NS are deermined as follows: Wihin hese formulae, v represens he ne value of load curailmen and is calculaed as he VOLL minus he marginal cos of energy. The marginal cos of energy is subraced from he VOLL o ensure ha he final cos of energy does no go above he SWCAP Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 8

11 This approach separaes he Operaing Hour ino wo disinc ime inervals, each having a lengh of 30 minues (or 0.5 hours). During he firs 30 minue inerval only he Online reserves (R S ) are able o help preven a loss-of-load even. In his proposal, R S is approximaed as he sum of Load Resources providing RRS and unloaded capaciy up o he High Susainable Limi (HSL) of Resources paricipaing in SCED. For he second 30 minue period, boh he Online and Offline Resources ha could be made available o SCED in 30 minues are able o help preven a firm load shed even. In his proposal, R SNS is approximaed as he sum of Load Resources providing RRS, unloaded capaciy up o HSL of Resources paricipaing in SCED and Offline Resources no paricipaing in SCED ha are providing NSRS or have a cold sar ime less han or equal o 30 minues. Separae LOLP curves ( & are deermined for hese wo disinc ime inervals wihin he hour by using he hisorically observed errors in he esimaed reserves based on season and ime-of-day block. For each SCED inerval, he price adder for energy is hen deermined using he LOLP curves ( &, Online Reserves (R S ), Offline Reserves (R NS ), VOLL and he curren marginal cos of energy. The average price adder for a given year is hen calculaed as he energy-weighed average of he SCED inerval price adders in he year. The AS imbalance is calculaed for each QSE by comparing he ne AS Supply Responsibiliy of he QSE going ino he hour and he ne AS available from he QSE in Real-Time. The AS Supply Responsibiliy of he QSE is based on he QSE s Self-Scheduled AS, DAM AS awards, ne AS rade, AS failures and replacemens and Supplemenal Ancillary Service Marke (SASM) awards. If he QSE is shor on AS in Real-Time, hen hey will be charged he price adder for he shor amoun and if he QSE is long on AS in Real-Time, hen hey will be paid he price adder for he long amoun. 5. Deailed Resuls The back cas for various VOLLs a each of he fuure SWCAPs ($5000, $7000 and $9000) and using he weny-four disinc seasonal and ime-of-day specific ORDCs, shows ha here is a posiive addiion o he energy-weighed average price. An energy-weighed average price of $3.45/MWh occurs in 2012 wih a VOLL of $7000/MWh and a minimum coningency level of 1750MW. In addiion, he back cas also shows a $2.9M refund o loads from he AS imbalance selemen and $1.12B in addiional paymens for energy. The poenial increase in PNM is $24,809/MW. Increasing he SWCAP from $3000/MWh o $7000/MWh and no applying inerim soluion B+, would yield a PNM increase of $5,883/MW. In shor, he back cas resuls show ha he marke impacs of Inerim Soluion B+ depends on he parameers for he ORDC. Table 6 provides he summary of P S for differen values of VOLL and minimum coningency levels (X) Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 9

12 Table 3 : Energy-weighed average energy price adder (and Online reserve price) P S ($/MWh) for 2011 & 2012 wih differen VOLLs and minimum coningency levels (X) VOLL Energy-weighed average Ps wih X a 1375 ($/MWh) & 2012 combined Energy-weighed average Ps wih X a 1750 ($/MWh) & 2012 combined $5000/MWh $7000/MWh $9000/MWh Table 7 provides he summary of he Offline reserve price (P NS ) for differen values of VOLL and minimum coningency levels (X). Table 4 : Energy-weighed average price of Offline reserves P NS ($/MWh) for 2011 & 2012 wih differen VOLLs and minimum coningency levels (X) VOLL Energy-weighed average P NS wih X a 1375($/MWh) & 2012 combined Energy-weighed average P NS wih X a 1750 ($/MWh) & 2012 combined $5000/MWh $7000/MWh $9000/MWh Due o he increase in energy prices resuling from he proposal, he poenial impacs on PNM were also analyzed. Table 8 shows he addiional PNM from he approach being presened. In addiion, a sudy was also performed o deermine wha he poenial PNM impacs o 2011 and 2012 may have been if he Real-Time marke simply had a higher SWCAP during hose sudy years. Table 9 shows wha he addiional PNM would have been by solely increasing he SWCAP o he various values of VOLL being evaluaed as par of he back cas. The acual PNM for 2011 and 2012 was $125,001/MW and $33,952/MW, respecively Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 10

13 Table 5 : Esimaed addiional PNM (in $/MW) from Inerim Soluion B+ for 2011 & 2012 wih differen VOLLs and minimum coningency levels (X) VOLL Toal Addiional PNM under Inerim Soluion B+ wih X a 1375 ($/MW) Toal Addiional PNM under Inerim Soluion B+ wih X a 1750 ($/MW) $5000/MWh 38,544 7,740 67,892 17,267 $7000/MWh 62,141 11, ,327 24,809 $9000/MWh 85,773 14, ,795 32,362 Table 6 : Esimaed addiional PNM ($/MW) for 2011 and 2012 by only increasing he SWCAP SWCAP Toal Addiional PNM if SWCAP Increased o VOLL ($/MW) $5000/MWh 57,631 2,877 $7000/MWh 114,168 5,883 $9000/MWh 170,706 8,889 As par of he Inerim Soluion B+ proposal, a Real-Time AS imbalance selemen is also inroduced. This is inended o accoun for he fac ha Resources may have a differen amoun of reserves available in Real-Time relaive o he amoun ha hey were obligaed o provide based on aciviies in he Day-Ahead Marke (DAM) and Adjusmen Period. This can resul in QSEs needing o purchase reserves in Real-Time o cover hose obligaions. Due o he differen prices for Online and Offline reserves, he AS imbalance selemen analysis is spli up o look a each of he wo reserve caegories individually. Table 10 and Table 11 presen he AS imbalance selemen subdivided ino Online and Offline imbalance selemens for 2011 & 2012 wih differen VOLL and minimum coningency levels (X). Table 12 hen presens he ne of he Online and Offline AS imbalance selemens aking all ypes of reserves ino consideraion. A posiive sign for he values in hese hree ables represen a charge o Resources and i can be seen in Table 12 ha he ne resul is a refund o he loads for he AS imbalance selemen Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 11

14 Table 7 : Ne AS imbalance selemen ($) charge o Resources for 2011 & 2012 wih differen VOLLs and a minimum coningency level (X) of 1375 MW VOLL Ne AS Imbalance Selemen for Online Reserves ($) w/o Feb & Aug Ne AS Imbalance Selemen for Offline Reserves ($) 2011 w/o Feb & Aug 2012 $5000/MWh 60,770,786 3,314,157 2,094, , , ,821 $7000/MWh 105,722,935 4,902,316 3,381, , , ,712 $9000/MWh 150,675,084 6,490,475 4,668, , , ,604 Table 8 : Ne AS imbalance selemen ($) charge o Resources for 2011 & 2012 wih differen VOLLs and a minimum coningency level (X) of 1750 MW VOLL Ne AS Imbalance Selemen for Online Reserves ($) w/o Feb & Aug Ne AS Imbalance Selemen for Offline Reserves ($) 2011 w/o Feb & Aug 2012 $5000/MWh 89,248,751 2,745,065 2,329,604-1,092, , ,359 $7000/MWh 154,818,072 4,263,919 4,000,690-1,561,556-1,140,286-1,095,636 $9000/MWh 220,387,394 5,782,772 5,671,775-2,031,099-1,473,757-1,415,912 Table 9 : Ne AS imbalance selemen ($) charge o Resources for 2011 & 2012 wih differen VOLLs and minimum coningency levels (X) VOLL Ne AS Imbalance Selemen for All Reserves wih X a 1375MW ($) w/o Feb & Aug Ne AS Imbalance Selemen for All Reserves wih X a 1750MW ($) 2011 w/o Feb & Aug 2012 $5000/MWh 60,247,604 2,945,245 1,757,030 88,156,738 1,938,250 1,554,245 $7000/MWh 104,970,127 4,380,067 2,902, ,256,516 3,123,633 2,905,054 $9000/MWh 149,692,650 5,814,890 4,048, ,356,295 4,309,015 4,255, Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 12

15 In summary, he back cas for various VOLLs a each of he fuure SWCAPs ($5000, $7000 and $9000), using weny-four disinc seasonal and ime-of-day specific ORDCs, shows ha here is a posiive addiion o he energy-weighed average price and he AS imbalance selemen calculaion resuling in a ne refund o he loads. As a resul, he change o he oal ne paymen o Resources also needs o be esimaed o beer undersand he overall effec of hese wo resuls. Table 13 presens he addiional ne revenue o Resources aking ino consideraion he impacs of boh he increased energy prices and Real-Time AS imbalance selemen. The negaive sign for he values in he able indicaes a ne addiional paymen o he Resources under all he scenarios ha were sudied as par of he back cas. Table 10 : Change in Ne (energy + AS) charge o Resources wih minimum coningency levels of 1375 MW and 1750 MW VOLL Change in Ne (Energy + AS) Charge o Resources wih X a w/o Feb & Aug Change in Ne (Energy + AS) Charge o Resources wih X a w/o Feb & Aug 2012 $5000/MWh -2,263,748, ,032, ,087,357-3,908,542,492-1,046,569, ,553,251 $7000/MWh -3,637,412, ,986, ,279,661-6,175,394,742-1,487,477,702-1,115,981,451 $9000/MWh -5,011,077, ,940, ,471,967-8,442,246,992-1,928,385,410-1,454,409, Appendix The following secions provide addiional deail o he mehodology used in back casing he Inerim Soluion B+ proposal and provide he derivaion of how he proposal approximaes Real-Time co-opimizaion of energy and AS Appendix I: Deailed Mehodology for Back Cas Deermining he following values is a major par of implemening Inerim Soluion B+: 1. VOLL; 2. LOLP; 3. The price for remaining reserves in he sysem; and 4. The AS imbalance selemens. For back casing, VOLL is assumed o be a each of he fuure values of SWCAP ($5000, $7000 and $9000) Deermining LOLP For back casing, LOLP is deermined by analyzing hisoric evens defined as he difference beween he hour-ahead forecased reserves wih he reserves ha were available in Real-Time during he Operaing Hour. These evens were spli ino weny-four groups, comprising of four seasons and six ime-of-day blocks per day. These groups were used o deermine weny-four 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 13

16 disinc normal probabiliy disribuions of he evens which will deermine he LOLP for he corresponding season and ime block. The deail logic used for deermining LOLP is described as below: 1) For each Operaing Hour in he sudy period, calculae he sysem-wide Hour-Ahead (HA) reserve using he snapsho of las HRUC for he Operaing Hour (a he end of Adjusmen Period): 2) For each SCED inerval in he sudy period, calculae he sysem-wide available SCED reserve using SCED elemery and soluion as: 3) For each Operaing Hour in he sudy period, calculae he hourly average sysem-wide SCED reserve by averaging he inerval SCED reserve in sep 2). 4) For each Operaing Hour in he sudy period, calculae he sysem wide Reserve Error as: 5) For each Operaing Hour in he sudy period, allocae i o he corresponding season and ime block. So all he hours will be spli ino 24 disribuion groups developed for he analysis based on he Season and he ime of day: 4 Seasons of Winer, Spring, Summer and Fall 6 ime-of-day blocks each consising of 4 hours 6) Calculae he mean ( and sandard deviaion ( for each of he weny-four disinc LOLP disribuions using he calculaed Reserve Error in sep 4). The deail resuls are illusraed in Table 11. This hourly error is normally disribued and hence for a given value can be calculaed:,, 1,, Where is he Cumulaive Disribuion Funcion of he normal disribuion wih mean and sandard deviaion Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 14

17 Table 11 : LOLP disribuions by season and ime-of-day block Season For Hours μ σ Winer (Monh 12, 1, 2) Spring (Monh 3,4,5) Summer (Monh 6,7,8) Fall (Monh 9, 10,11) 1-2 and and and and Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 15

18 Calculaion of and is he reserves from Resources paricipaing in SCED plus he RRS from Load Resources. is equal o plus he reserves from Resources ha are no currenly available o SCED bu could be made available in 30 minues. 1) is calculaed based on SCED elemery and soluion as: 1 Where is he discoun applied o he real-ime HSLs of Generaors. For his analysis, a DF of 0.01 or 1% is assumed. and are he sysem oal SCED online HSL and base poin respecively. and are he sysem oal SCED online HSL of wind and nuclear Resources respecively. and are he sysem oal SCED Online base poin of wind and nuclear Resources respecively. is he sysem oal SCED RRS schedules from Load Resources. 2) is calculaed based on SCED elemery and soluion as 1 Where is he sysem oal HSL of Offline Generaors providing Non-spin is he sysem oal HSL of Offline and available Generaors ha can be sared from a cold emperaure sae in 30 minues Calculaion of and and are funcions ha describe he Loss of Load Probabiliy (LOLP) a various reserve levels. 1) Calculaion of : is a funcion of he Real-Time reserves ha should be available in he firs 30 minues of he hour and is inended o capure he LOLP for ha level of reserves. The general equaion for is:, 0 1, 0 Where X in his equaion is a minimum coningency level and represens a level of reserves a which ERCOT may need o begin o shed firm load Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 16

19 is he funcion for he spinning reserve. is differen from he 60 minues in Table 11 which is calculaed based on he hourly error analysis. The reserves are classified ino wo caegories; hose ha are being provided by Resources in SCED and Load Resources providing RRS and hose ha are being providing by Resources ha are no currenly available o SCED bu could be made available wihin 30 minues. Since he firs reserve ype is available immediaely, hose reserves are he only ones considered o be available o respond o any even ha happens in he firs 30 minues of he hour. All reserve ypes are hen considered o be available o respond o evens ha happen in he second 30 minues of he hour. From he hourly error analysis, a mean ( and sandard deviaion ( for he 60 minue are deermined for each of he differen seasons and ime blocks. Because he error analysis is hourly, o capure he evens wihin he firs 30 minues for, he and needs o be scaled o reflec he 30 minue imeframe, wih 0.5 hours : So he can be calculaed based on he 60 minue as follows:,,=0.5, 0.707, =10.5, 0.707, For simplificaion and ease of implemenaion, a piecewise linear approximaion is used for he nonlinear curve as given below: For beween 0 and X, se equal o 1 For, se equal o For, se equal o For, se equal o Oher breakpoins for as he LOLP approaches zero Linearly inerpolae he values beween hese poins The breakpoins used in his analysis are X, 1900, 3300, 4800, 6000 and 8000 MW and 1750 MW are analyzed as poenial values of X. 24 curves are developed for he analysis based on he season and he ime of day. One example of he curve is shown in Figure Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 17

20 Figure 1 2) Calculaion of : is a funcion of all he Real-Time reserves ha can be expeced o be available wih he hour and is inended o capure he LOLP for ha level of reserves based on evens ha happen in an hour. The general equaion for is:, 0 1, 0 This is similar o bu he key differences here are he ypes of reserves considered and he and ha are used in calculaing LOLP for he various breakpoins The oal online and offline applies for he full change in ne load over he hour and here is no scaling adjusmens needed for and in he calculaions Again, X in his equaion is a minimum coningency level Like, weny-four individual piecewise linear approximaions are creaed for using he same MW breakpoins Deerminaion of Price Adder Once LOLP is deermined, he nex sep is he calculaion of he price for reserves ha are being provided by Load Resources providing Responsive Reserve and Generaors paricipaing in SCED and he price for he reserves being provided by offline Generaors no currenly available o SCED bu could be made available o SCED in 30 minues. and are funcions of he LOLP a various levels of Real-Time reserves, he ne value of load curailmen, and ime duraion during which he reserves are available. In his proposal, and are deermined as follows: Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 18

21 Where v represens he ne value of load curailmen and is calculaed as he VOLL minus he marginal cos of energy. Marginal cos of energy is subraced from VOLL o reflec he scarciy value of he marginal dispach capaciy and o ensure ha he final cos of energy does no go above he SWCAP. As discussed in previous secion, and can be calculaed for each SCED inerval. Each SCED inerval can also be mapped o one of he 24 and curves respecively. So he and can be calculaed using he inerpolaion on he curve. Le us use as an example. The same logic can be applied o he calculaion of. For,, he breakpoin on he curve ( is he probabiliy value and is he MW value) he logic can be illusraed as follows: Deermine he segmen of he piecewise linear curve in which will fall : assume hen is beween break poin and 1 Calculae he slope for his segmen as Calculae as Once and are calculaed, and can be calculaed for each SCED inerval using he formulaion a he beginning of his secion. The energy-weighed average and can be calculaed based on all he SCED inervals in he sudy period: For his equaion, SCED Lengh is equal o he duraion of he SCED inerval in hours Deermining Ancillary Service Imbalance Paymen Once he prices for he reserves are calculaed he AS imbalance is calculaed for each QSE by deermining he ne AS Supply Responsibiliy of he QSE going ino he hour and he ne AS available from he QSE in Real-Time. The AS Supply Responsibiliy of he QSE is based on QSEs Self-Schedule AS, DAM AS awards, ne AS rade, AS failures and replacemens and SASM awards. If he QSE is shor on AS in Real-Time hen hey will be charged he price adder for he shor amoun and if he QSE is long on AS in Real-Time hen hey will be paid he price adder for he long amoun. The AS Responsibiliy for each AS ype (Reg-Up/RRS/Non-Spin) for each hour for each QSE can be calculaed as follows: 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 19

22 In his sudy, he Hour-ahead (HA) AS Responsibiliy is used as he final AS Responsibiliy for he QSE, i.e. AS Responsibiliy a he end of Adjusmen Period. The Hour-ahead Online reserve is calculaed as he sum of Reg-Up, RRS and Online Non-Spin: Since he Non-spin responsibiliy doesn differeniae Online and Offline Non-spin, he Hourahead Offline Non-spin can be assumed he same as Real-Time Offline Non-spin. So he Hourahead Online Non-Spin can be calculaed as: _ The Real-Time Online reserve imbalance in MW for each SCED inerval for each QSE can be calculaed as: _ The Real-Time Offline reserve imbalance in MW for each SCED inerval for each QSE can be calculaed as: The paymen or charge in dollars for he AS imbalance for each SCED inerval for each QSE is hen calculaed as: 1 1 _ 1 1 For he dollar amoun, a negaive value indicaes an ERCOT paymen o a QSE and a posiive value indicaes an ERCOT charge o he QSE. The sysem oal paymen or charge for AS imbalance for each SCED inerval is he sum of he QSE specific AS imbalance amouns for all he QSEs for he paricular SCED inerval. Since and are a he sysem level, he QSE specific AS imbalance formulaion will hold rue for he sysem oal AS imbalance, excep he, _ and will be sum up o he sysem level. In addiion, he energy paymen for he price adder for each QSE for each SCED inerval can be calculaed as: 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 20

23 1 The ne paymen o he QSE including boh he energy paymen and AS imbalance amoun (online and offline) can be calculaed as: The sysem oal ne paymen can be summed across all he QSEs using he equaion above Appendix II: Inerim Soluion B + Theory An Approximaion Foundaion for an ORDC This secion summarizes a series of seps o approximae he full Real-Time energy and AS coopimizaion ORDC and be explici abou he inclusion of he coss of generaion and reserves o produce he implied scarciy price. Here he focus is on responsive reserves. The various variables and funcions include: d : Vecor of locaional demands gr : Vecor of locaional responsive generaion rr : Vecor of locaional responsive reserves gnr : Vecor of locaional generaion no providing reserves Bd: Benefi funcion for demand Ck gk: Cos funcion for generaion offers Kk : Generaion Capaciy f x: Probabiliy for ne load change equal o x Hb, : Transmission Consrain Parameers i : Vecor of ones. Assume ha uni commimen is deermined. The sylized economic dispach model includes an explici descripion of he expeced value of he use of reserves. This reserve descripion allows for a one dimensional change in aggregae ne load, x, and an asymmeric response where posiive ne load changes are cosly and me wih reserves and negaive changes in ne load are ignored. This model is oo difficul o implemen bu i provides an inerpreaion of a se of assumpions ha leads o an approximae ORDC. Here we ignore minimum reserve requiremens o focus on he expeced cos of he reserve dispach. The cenral formulaion reas ne load change x and use of reserve, x, o avoid involunary VOLL i C g C g and curailmen. This produces a benefi minus cos of x R R x R R 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 21

24 his is weighed by he probabiliy non-negaive values of x. The basic formulaion includes: f x. This erm eners he objecive funcion summed for all (1) Max B d C g C g VOLLi C g C g f x R R NR NR x R R x R R dg, R, gnr, rr, x0; y x0 d g g y R NR Ne Loads iy0 Load Balance R R R Transmission Limis Responsive Capaciy i x, x Responsive Uilizaion x Hy b g r K x r, x g R K Responsive Limi Generaion Only Capaciy. NR NR NR R x x This model accouns for all he uncerain ne load changes weighed by he probabiliy of oucome and allows for he opimal uilizaion of reserve dispach in each insance. This problem could produce scarciy prices ha could differ across locaions. To approach he assessmen of how o approximae reserves wih a common scarciy price across he sysem, we need o furher simplify his basic problem as follows: 1. Trea he uilizaion of reserves as a one-dimensional aggregae variable. 2. Replace he responsive reserve limi vecor wih a corresponding aggregae consrain on oal reserves. 3. Uilize an approximaion of he cos funcion, Ĉ, for he aggregae uilizaion of reserves, and furher approximae he change in coss wih he derivaive of cos imes he uilizaion of reserves. This se of assumpions produces a represenaion for he use of a single aggregae level of reserves for he sysem: ˆ Max B d C g C g VOLL C i g f x (2) R R NR NR x R R x dg, R, gnr, rr, x0; y x0 d gr gnr y Ne Loads iy0 Hy b Load Balance Transmission Limis gr rr KR Responsive Capaciy R x x, x Responsive Uilizaion x, Responsi x irr x ve Limi x 0 rr, Explici Sign Consrain R g K Generaion Only Capaciy. NR NR NR 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 22

25 This formulaion provides a reasonably ransparen inerpreaion of he implied prices. Focusing on an inerior soluion for all he variables excep r R, we would have locaional prices relaed o he marginal benefis of load: (3) Bd. The same locaional prices connec o he sysem lambda and he cos of congesion for he binding ransmission consrains. (4) i H. The locaional prices equae wih he marginal cos of generaion-only plus he cos of scarciy when his generaion is a capaciy, which appears in he usual form. (5) C g. NR NR NR The locaional prices equae wih he marginal cos of responsive generaion and display he impac of reserve scarciy. Firs, he impac of changing he base dispach of responsive generaion implies: 2 C g Cˆ i g i f x. R R R R x R x0 The second order erm capures he effec of he base dispach of responsive dispach on he expeced cos of meeing he reserve uilizaion. This erm is likely o be small. For example, if we assume ha he derivaive CˆR is consan, hen he second order erm is zero. When we accoun for he base dispach of reserves, we have: i. R x R x0 When accouning for uilizaion of he reserves, we have: Le ˆ VOLL C i g f x. x x R R r i r R. Then for xr, 0; xr, 0. Hence, x x ˆ 1 i VOLLC i g F r i. R x R R R R xr Combining hese, we can rewrie he locaional price as: 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 23

26 2 (6) C g Cˆ i g i f x VOLLCˆ i g 1 F r i. R R R R x R R R x0 Equaions (3) hru (6) capure our approximaing model for aggregae responsive reserves. Here 1F r LOLP r. The erm ˆ VOLL CRi gr1 F r in (6) is he scarciy price of he ORDC. If he second order erms in (6) are dropped, hen he scarciy price is he only change from he convenional generaion only model. In pracice, we would have o updae his model o accoun for minimum reserve levels, non-spin, and so on, bu hese changes would be he same as he discussion where we included an esimae of c CˆR in defining he ne value of operaing reserves vvoll c. Noe ha under hese assumpions he scarciy price is se according o he opporuniy cos using Ĉ for he marginal responsive Generaor in he base dispach. Depending on he accuracy of he esimae in Ĉ, his seeks o mainain ha he energy price plus scarciy price never exceeds he value of los load. Providing a reasonable esimae for Ĉ could be done eiher as an (i) exogenous consan, (ii) hrough a wo pass procedure, or (iii) approximaely in he dispach. For example, a possible procedure would define he approximaing cos funcion as he leas unconsrained cos, ˆ C gˆ Min C g gˆ i g. R R R R This informaion would be easy o evaluae before he dispach. The purpose of models (1) and (2) above is no o design an implemenaion. The purpose is o illusrae a se of assumpions ha would produce a simplified ORDC and how o selec he parameers of he model ORDC for Muliple Reserves The ERCOT pracice disinguishes several ypes of reserves. Seing aside regulaion, he principal disincion is beween responsive reserves (R) and non-spin reserves (NS). The ORDC framework can be adaped o include muliple reserves. This secion summarizes one such modeling approach and relaes i o he co-opimizaion examples above. The main disincion is ha responsive reserves are spinning and have a quick reacion ime. These reserves would be available almos immediaely and could provide energy o mee increases in ne load over he whole of he operaing reserve period. By comparison, non-spin reserves are slower o respond and would no be available for he enire period. The proposed model of operaing reserves approximaes he complex dynamics by assuming ha he uncerainy abou he unprediced change in ne load is revealed afer he basic dispach is deermined. The probabiliy disribuion of change in ne load is inerpreed as applying he 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 24

27 change over he uncerain reserve period, say he nex hour, divided ino wo inervals. Over he firs inerval, of duraion ( ), only he responsive reserves can avoid curailmens. Over he second inerval of duraion (1- ), boh he responsive and non-spin reserves can avoid involunary load shedding. This formulaion produces differen values for he responsive and non-spin reserves. Le v be he ne value of load curailmen, defined as he value of los load less he avoided cos of energy dispach offer for he marginal reserve. The inerpreaion of he prices of reserves, PR and P NS, is he marginal impac on he load curailmen imes Lolp, he probabiliy of he ne change in load being greaer ha he level of reserves, rr and r NS. This marginal value differs for he wo inervals, as shown in he following able: Marginal Reserve Values Inerval I Inerval II Duraion 1- R vlolp r r P vlolp r R R NS P 0 NS vlolp r r This formulaion lends iself o he inerpreaion of Figure 2 where here are wo periods wih differen demand curves and he models are nesed. In oher words, responsive reserves r R can mee he needs in boh inervals and he non-spin reserves r NS can only mee he needs for he second inerval. The resuling prices saisfy: R NS (7) 1. P v Lolp r 1 Lolp r r v Lolp r P, R R R NS R NS P v Lolp r r NS R NS This formulaion lends iself o a relaively easy implemenaion in he co-opimizaion model Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 25

28 Figure 2 As shown laer, he inroducion of muliple ypes of ORDCs does no much affec he economic dispach model for real ime. The same properies apply o he inerpreaion of he effec of ramping limis. If here are no ramping limis, hen he energy dispach and energy prices of he co-opimized model would also be opimal for he model ha excludes reserves and simply opimizes he energy dispach wih he scarciy price for reserves added as a consan o all he generaion offers. Bu inroducion of binding ramping limis would undo his simpliciy. One way o implemen he wo-sep approximaion is o assume differen random draws for he wo inervals from he disribuion of ne load change. Suppose ha here are wo variables yi, yii represening he incremenal ne load change in he wo inervals. Furher assume ha he wo variables have a common underlying disribuion for a variable z bu are proporional o he size of he inerval. Then, assuming independence and wih x he ne load change over he full wo inervals, we have: 2013 Elecric Reliabiliy Council of Texas, Inc. All righs reserved. 26