Report on real-time markets and operations

Dear Colleague:

The Edison Electric Institute just published a report I wrote on Real-Time
Balancing Operations and Markets: Key to Competitive Wholesale Electricity
Markets. The report is available from the Publications page of my website,
www.EHirst.com. Here is a summary of the report:

Electricity production and consumption must occur at essentially the same
time. Therefore, real-time (minute-to-minute) operations and the associated
markets and prices are essential ingredients of a competitive wholesale
electricity industry. In addition, these intrahour markets are the foundation
of all forward markets and contracts, including hour- and day-ahead markets,
monthly futures, and bilateral contracts. Finally, these intrahour operations
maintain system reliability by ensuring that enough and the right kinds of
supply and demand resources are available when needed.

Because of various load, generation, and transmission factors, balancing
generation to load on a minute-to-minute basis is complicated. Loads are
volatile, both from hour to hour and from minute to minute during the morning
rampup and evening dropoff. Generators differ substantially in their costs of
electricity production. In addition, generators have various idiosyncratic
characteristics, such as maximum and minimum output levels and maximum
ramprates, that limit their ability to respond rapidly to changes in system
load or generation. Finally, transmission characteristics affect the
real-time balancing function because of congestion and sudden transmission
outages. These factors can lead to dramatic and rapid changes in electricity
prices, including occasional negative prices when generators pay someone to
take their output.

The early years of operations by independent system operators (ISOs), based
on the experiences in New England, New York, and California, show how
difficult it is to translate the theory and initial design of competitive
markets into ones that work efficiently. These ISOs have been plagued with
various startup problems that artificially raise electricity costs to
consumers, implicitly encourage strategic bidding by some generators, do not
sufficiently discipline generator market power, sometimes yield insufficient
resources, and impair reliability. Fortunately, the ISOs have been quick to
identify and remedy flaws in their initial market designs. On the other hand,
the ISOs have done a poor job of documenting these problems and their
resolutions.

This report is primarily a primer on how such intrahour operations and
markets should work. It demonstrates these principles through several
examples. These examples deal with generator ramprate limits, low-operating
limits, startup costs, and other generator characteristics. Other examples
show how energy-limited (e.g., hydro) units differ in their bidding and
operations from capacity-constrained (e.g., thermal) units, how the
consideration of multiple time intervals affects operations and pricing, how
generators located outside the control area are treated differently from
those within the control-area boundary, how interval pricing combined with
hourly settlements can encourage generators to ignore dispatch signals, and
how intermittent resources (such as wind) affect control-area operations.

Although U.S. wholesale competitive markets today suffer from a variety of
problems, there is reason to be optimistic. Ultimately, the ISOs (and, later
on, RTOs) will identify and fix the problems within their market structures,
and they will adequately document their problems and the associated
resolutions so that their market participants and the designers of other
systems can learn from past mistakes. Ultimately, efficient real-time markets
should allow reliability councils and system operators to largely replace
command-and-control rules with market signals (i.e., prices that vary rapidly
in response to changes in system security). These changes should lower the
costs of maintaining reliability; deploy supply and demand resources more
efficiently; and guide investments in new generation, transmission, and
demand-side resources.

Eric
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Eric Hirst
Consulting in Electric-Industry Restructuring
106 Capital Circle
Oak Ridge, TN 37830
865-482-5470 (phone & fax)??? Eric@EHirst.com
http://www.EHirst.com