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Demand Side Response In An Energy Only Market

Presentation To EILP Task ForceOctober 31, 2006

R.Jones, Dir., Market Design-Texas Power Region, Calpine Corporation

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Observations

Two types of capacity shortfalls: Transient: Sufficient capacity, but unavailable

Ice storms, maintenance outages, etc. Sustained: Insufficient capacity to meet load

requirements during system peak ERCOT needs “tools” to prevent capacity

shortfalls Demand response is ERCOT’s preferred

mechanism

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Key Considerations

Proposed solutions should: Achieve specified reliability goals Maintain/enhance long-term adequacy goals Minimize price distortions Provide appropriate price signals Encourage appropriate behavior

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Fundamentals Of Proposal

Establish flexible demand curve Inadequacy results from supply not meeting

demand Adequacy falls only on supply Demand does not participate

Inelastic demand curve What happens when supply cannot meet demand?

Flexible (elastic) demand curves allow supply and demand to meet at an appropriate market price

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Developing The Flexible Demand Curve Load submits emergency curtailment prices

($/MWh) Based on load’s indirect & direct costs of power interruption

Offers are stacked and become a merit order of curtailment ONLY used in EECP events

A price is selected for firm load shed Proposed “cap” to load offers

$10,000/MWh used in Steven Stoft work1

US dept of energy found the northeast blackout’s cost to customers was $6,530/ MWh

1. Power System Economics, Designing Markets for Electricity, Chapter 2-5, IEEE Press, 2002

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Flexible Demand Curve Development

Production/environment/safety concerns

Flexible Demand Curve

Firm Load Shed

30000

Demand (MWs)

10000

Pric

e ($

/MW

h)

2000

5000

6000

4000

8000

2000010000 15000 25000

High Cost Load Shed

12000

14000

16000

18000

20000

5500035000 40000 45000 50000

Moves with Actual LoadVoluntary Load Shed

6500060000

Verticle Demand Curve

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Operation Of The Market ERCOT will exhaust all available capacity

Including LaaRs EECP declared

Readiness alert sent out to all EILP bidders Voluntary measures sought If additional capacity needed

ERCOT determines quantity Strikes the EILP load stack

MCPE is administratively set at emergency curtailment Price of marginal EILP load deployed

If firm load shed is required MCPE is set at the ECP of firm load

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Curtailment Example

Assume a warmer than expected day in April Actual load is expected to hit 55,000MWs

Including deployment of LaaR RRS Total resources including NSRS deployment is

54,000MWs EECP has been declared Operations expects to need 1,000MWs of

demand response

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Scheduled Resources(NSRS Deployed)

Voluntary Load Shed Offers

Pric

e ($

/MW

h)

MCPE$2500/MWh

2000

40000

Demand (MWs)

45000

4000

BES ExhaustedAt 54,000MWs

Actual Load(LaaR RRS Deployed)

Required Load Shed(1,000MWs)

50000 55000

BES Offers

Curtailment Example

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Benefits Of Plan System reliability enhanced! No cost if there are no stage 3 EECP events! ERCOT is not locked in to interrupting a fixed

amount of capacity procured ERCOT not required to select among a group of

responsive load Trips in merit order established by load’s willingness to

be interrupted Plan does not limit or require participation

Allows additional load participation other than LaaRs

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Benefits Of Plan (Con’t)

Firm load shed price caps exposure Limits market power abuse

Loads/ERCOT not locked into contract Loads can reflect current process conditions

Increase offer during sensitive production periods Withdraw offers during maintenance

MCPE reflects true value of marginal MWh Price signal maintained for generation or load resources Reasonably simple implementation

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Fulfills Goals Plan would:

Aid in achieving the reliability goals specified During transient events During periods of resource inadequacy

Maintain or enhance long term adequacy goals Provide little distortion to the energy and A/S markets Provide more accurate price signals during scarcity

conditions No capacity payment for isolated resource class

suppressing prices for all resources Encourage appropriate behavior

No capacity payment creating perverse incentives for isolated class of resources

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Considerations Compliance measurement criteria for loads

Do they have to be on at all times an active bid is in the stack?

Timeframe to shed load Timeframe to return load (if needed) Monitoring criteria (IDR meter, SCADA?)

Market power concerns? Minimum downtime requirements Frequency of bids

Weekly Provides more flexibility for loads

Monthly or yearly Easier for ERCOT to manage

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Considerations (Con’t) Complexity of system changes

May need stepwise process (zonal/nodal) Striking a balance between ERCOT’s needs and load’s

needs is key ERCOT costs ERCOT feasibility Load’s risk (high risk = high prices)

How to manage firm load shed settlement UFE very costly at $10,000/MWh

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Answer the Questions Please!!! Qualifications and requirements:

IDR & SCADA preferred, but not absolutely necessary

Depends on level of direct control desired by ERCOT Operations and desired settlement accuracy

Structure is based on balancing energy eliminating most compliance issues

There is no need to eliminate 4CP, LaaR or other loads from the potential bidders list

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Answer the Questions Please!!! Dispatch and Recall:

Dispatch would occur at “EECP 2b” point Load may be dispatched via communication with

QSEs Direct load control may be desired Recall should be performed at a point when EECP

is being lifted Care should be taken so that Reg Down and BES

Down providers are not harmed Recall can be refined based on load capabilities

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Answer the Questions Please!!! Who gets paid/How are they paid/Who pays?

This proposal moves all payments to the imbalance market and is handled through existing settlements

Those with positive energy imbalance (length) will be paid (load or generation)

Those with negative energy imbalance (short) pay (load or generation)

Process is clean and simple Reduces gaming opportunities/perverse incentives Costs are not assigned to entities whose positions are

covered

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Answer the Questions Please!!! Effect on clearing price:

MCPE would be administratively set at the load curtailment price

Should be allowable as load values are not BES bids and not restricted by BES offer caps

Some value of firm load shed will be required VOLL would be the MCPE used for all imbalance

settlement

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Answer the Questions Please!!! Compliance Issues:

This proposal eliminates most if not all compliance requirements: “it hurts when I do that” principle

Loads could be monitored to make sure instructions followed (artificially low price setting)

However, non compliance should simply extend ERCOT further down the bid stack to a higher price

Big benefit over other proposals

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Answer the Questions Please!!! Coordination with other A/S:

Care must be taken not to penalize Reg Down and BES Down providers if load over responds

“Holy Cow, Look What They’re Doing to Me Now!” factor

Otherwise there is no coordination required with other A/S

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Answer the Questions Please!!! Self Provision:

Proposal uses imbalance, so QSEs can self provide by providing sufficient generation and load response to cover their load

Significant benefit over other proposals as it maintains cost causation assignment rather than general uplift

Uplift discourages forward contracting

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Answer the Questions Please!!! Procurement – Contracting vs. Auction:

Contracting for A/Ss is appropriate for site-specific services

securing the system for the ISO as part of an integrated planning function, ex.: RMR/Exit Strategies, Black-Start,

RMR…unit specific/locational, protect N-1 secure, voltage support

Black-Start…unit specific/locational, strategic transmission corridor/s, displays location specific next-start capabilities,

Contracting is not necessary for system-wide services deliverability of load shed relief is not an issue (1MW in North

looks just like 1MW in South), restores/maintains load-gen balance and is a system-wide

phenomenon, EILP is analogous to NSRS (portfolio based, non-specific), it

is nothing like Black-Start or RMR.

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Answer the Questions Please!!! Procurement - Contract vs. Auction:

Other contract problems More likely to become barrier to entry for smaller load

entities due to less flexibility in annual turnaround planning,

More likely to lead to higher imbedded/guaranteed costs to those paying for it due to ISO’s lack of flexibility in procuring it,

Direct contracting between the ISO and loads stifles price discovery and any chance of competition to exert downward pressure on pricing in the instant period.

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Answer the Questions Please!!! Procurement solution:

Short term auction – prefer daily or weekly allows flexibility for small loads in participating-outage

planning/non-availability of load for EILP, allows ISO to procure as-needed based on

monthly/weekly probabilities (~NSRS), More likely to yield lowest cost to those paying for it, less

likelihood of “rocking chair dollars” being paid, “competitive procurement”(auctions) always preferable to contracting where possible for A/Ss.

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QUESTIONS?