Real-Time Demand Curve For Reserves

NEPOOL Markets Committee Meeting

01/24/2001

M.S. DePillis

Basic Concepts

• Price is determined by intersection of bid supply and demand curve.

• If last bidder lies below demand curve, then P is from demand curve.

• Old ex post market flaws are still there.

Normal Intersection With Bid Supply Curve

Price When Last Bid > D

Q of MW

P of MW

P*

Highest Bidder Less Than Demand Curve

Price When Last Bid < D

Q of MW

P of MW

P*

Some Old Flaws• Still works with designation.

• High bids not designated or paid.

Bidder D not paid

Q of MW

A

B

C

D

P*

Changes to Demand Curve• Change 1: Demand Curve applies

throughout range of TMOR.

• Change 2: "Target" point on Demand Curve changes with UC Conditions.

Demand Curve Throughout

• Solves discontinuity problem.

• Recognizes that bid determined prices in OP-4 are not competitive market prices.

New Demand Curve

1/2 2nd Contingency

Q of MW

P of MW

100

50

Zero TMOR

Full 30 Minute Replacement Reserve

Alternative Solution to Discontinuity Problem

Considered setting OP-4 point to E(ECP)

1/2 2nd Contingency

Old Market Q of MW

Est. ECP1

Est. ECP2

Est. ECP3

Reasons For Rejection

• Over-pricing (by definition always at or close to OP-4 cap).

• Physical real-time withholding is rewarded (raises demand curve).

• Could have TMOR = E(ECP) =$300 at t1 then TMOR=$40 t2 when further into OP-4.

Target Point

• Result of discussions with Operations.

• Represents Unit Commitment practice.

Target Point Adjusted for NY Shared Reserve of 300MW

Q of MW

P of MW

100

50

Zero TMOR

Target Point at 600MW of TMRR

Target Point at 300MW of TMRR

Other Proposal Changes

• No co-optimization before Phase 1.

• Price Cascading of TMOR Only.

No Co-optimization Before Phase 1

• Would only apply for about 8 months.

• Would be major rework of SPD.

• Would require significant testing to reduce risk.

• Risk/Benefit ratio not satisfactory.

Minimal Price Cascading• TMOR price determined by demand

curve is price floor for TMNSR and TMSR.

• TMOR represents willingness to pay for lower quality good.

Problem With Full Reverse Price Cascading

• Current market instances of high TMNSR prices do not represent economic value except by chance.

• Difficult to argue that TMNSR should be cascaded back to TMSR.

Unit Commitment and Demand Curves

• Operations still committed to use a demand curve.

• First Step is Observing Effect of NY Sharing Agreement on Unit Commitment and Target Point.

• Will require that long-term reliability is defined and maintained.

• White paper being developed, first draft.

Proposed New Type of Unit Commitment Analysis

Unit Commitment and Demand Curve, Continued– "Target" of real-time demand curve would

be derived from process described above.

– Must have action plan in place if demand curve results in measurable and significant deterioration of reliability.

– Not yet ready for rule writing.

– Need to revise Unit Commitment System Operating Procedure to reflect changes.

Result of Investigating Price of TMOR during OP-4

• Price calculated as follows:

– All observations have TMOR deficiencies.

– All observations are from 5 minute data since start of markets.

– All observations are capped at the 5 minute energy price.

Result of TMOR Price Study

Approximately Same Revenue Result

1/2 2nd Contingency

Q of MW

P of MW

100

50

Zero TMOR

72.13