PSerc - Power Systems Engineering Research Center by mifei


									 Introduction to Rulemaking
and Market Design Elements

        Eric S. Schubert, Ph.D.
       Market Oversight Division

    Presented at the PUCT Public Workshop
 In Project 26376, “Wholesale Market Design”
       Austin, Texas, November 1, 2002

• Reasons for rulemaking
• Measures of an efficient, sustainable
• Architecture of power markets
• Elements of power markets
• Basic economics of congestion
  management and spot markets

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            Reasons for Rulemaking:
        Systematic Review

• ERCOT stakeholders developed a zonal
  model exclusively based on bilaterals.
• Other markets have incorporated a day-
  ahead energy market with nodal pricing.
• Various market participants would like to
  see changes to current ERCOT model.

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             Reasons for Rulemaking:
      Continuity and Change

• ERCOT stakeholders have been
  addressing key market design piecemeal.
• Efforts in response to
  • Order on Rehearing in Docket 23220
  • Stakeholder-driven proposals
  • Frustration and uncertainty has resulted
• Three-year process to make changes

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              Reasons for Rulemaking:
           Local Congestion

• Commission has ordered direct
  assignment of local congestion fees
  • Adds nodal prices when needed
  • Eliminates DEC game
• Stakeholder opposition to MOD proposal
  • Keep current structure with reduced costs
  • Implement a nodal system instead

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            Reasons for Rulemaking:
    Day-Ahead Energy Market

• ERCOT only working wholesale market in
  U.S. without a day-ahead energy market.
• Market participants want increased access
  to electricity market.
• Would build upon a relaxed balanced
  schedule in ERCOT.

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             Reasons for Rulemaking:
  Sustainable Market Structure (1)

• ERCOT stakeholders developed a functioning
  market under a tight deadline.
• Commission has identified chronic problems and
• ERCOT stakeholders have reduced problems in
  a way not fully consistent with Commission
• At times stakeholder compromises have
  overlooked fundamental economic principles.

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             Reasons for Rulemaking:
 Sustainable Market Structure (2)

• Commissioners should make tough policy
• Rule-based market design:
  • Protects against hasty changes in market
  • Market structure readily amended for modest
• Commercial and operational details
  implemented at ERCOT.

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             Reasons for Rulemaking:
  FERC Standard Market Design

• FERC SMD has stimulated debates on
  market design.
• ERCOT is running ahead or parallel with
• Market players involved in other markets
  would like to address issues on a parallel

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     Measures of an Efficient,
       Sustainable Market

• Questions to keep in mind throughout the
• Benchmarks for deciding key market
  design issues.
• Based on widely-accepted market design
  principles consistent with an efficient,
  sustainable wholesale market.

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      Measures of an Efficient, Sustainable Market:
       Economic Efficiency (1)

• Are transmission and generation capacity
  allocated to those parties that are most willing
  to pay for them?
• Does the market structure encourage resource
  owners to submit their resources at marginal
• Do market prices send signals that encourage
  the appropriate amount of new transmission?

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     Measures of an Efficient, Sustainable Market:
      Economic Efficiency (2)

• Do market prices send signals that
  encourage appropriate siting of
  generation and transmission?
• Can parties participate in short-term
  markets to adjust to changing supply and
  demand conditions?
• Does the market structure assist the
  development of innovative new products?

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     Measures of an Efficient, Sustainable Market:
          Price Discovery (1)

• Are energy and transmission prices
• Does the ERCOT wholesale market send
  the proper type of price signals?
• Do electricity users have adequate
  opportunities to adjust their consumption
  in response to price fluctuations?

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     Measures of an Efficient, Sustainable Market:
          Price Discovery (2)

• Is the market sufficiently transparent to
  allow monitoring and detection of market
  power abuse?

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    Measures of an Efficient, Sustainable Market:

• Would a change in market structure
  improve the ability of certain market
  participants to buy and sell power?
• Do the market rules create a level playing
  field for conventional and non-
  conventional resources?

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     Measures of an Efficient, Sustainable Market:
 Subsidizing and Uplifting Costs

• Do the market rules eliminate uplifting of
  costs or, at least, make the uplift so small
  as to deter gaming?
• Do the market rules subsidize market
  participants in a way that is not
  sanctioned by explicit Commission or
  Legislative policy?

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    Measures of an Efficient, Sustainable Market:
       Gaming Opportunities

• Are market rules properly designed to
  encourage compliance with the rules?
• Are the market features design to
  discourage the exercise of market power?
• Are the rules induce market participants
  to bid their true costs and preferences
  (i.e., incentive compatible)?

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    Measures of an Efficient, Sustainable Market:
        Impact on Reliability

• Does any element or combination of
  elements of the market design reduce the
  reliability of the grid?

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         Architecture of Power Markets:
 System Operator vs. Marketer

• Real-time market: System Operator
• Forward markets: Marketers
• Main challenge of designing market is
  linking the forward and real-time markets

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           Architecture of Power Markets:
           Real-Time Market

• Real-time market: System Operator
  • Special characteristics of electricity
     • No storage
     • Transmission congestion
     • System stability
  • Physical market
  • Operational efficiency

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          Architecture of Power Markets:
           Forward Markets

• Forward markets: Marketers
  • PGCs, REPs, Aggregators, NOIEs
  • Long-term bilateral contracts
  • Wide range of choices
• Financial markets
• Marketing efficiency
  • Preferences of market participants
  • Not concerned with real-time efficiency

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          Architecture of Power Markets:
Linking Forward & RT Markets

• Tradeoff between the two markets:
  • Tighter coordination of resources
  • Wide variety of bilateral contracts
• Reliance on private market reduces
  discretion of system operator
• Highly evolved market with elaborate
  pricing can achieve needed coordination

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            Elements of Power Markets:

• Need to discuss market design elements
• MOD has reviewed a number of market
• MOD has come the following conclusions:
  • Not all elements are relevant to rulemaking
  • Zonal vs. Nodal is the fundamental market-
    design feature

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            Elements of Power Markets:
Congestion Management: Zonal

• Always prices a few pre-determined
  transmission constraints
• Portfolio bidding and scheduling
• Resource-specific bid premiums
• Current ERCOT zonal model
  • Uplifts local congestion costs
  • Limited price signals for site-specific

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            Elements of Power Markets:
Congestion Management: Nodal

• Always prices all transmission constraints
  and generation nodes
• System operator needs to know each
  • Output level
  • Bid price for every output level
• MOD’s proposal to directly assign local
  congestion fees is a form of nodal pricing

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            Elements of Power Markets:
Grandfathered Transmission Rights

• Both nodal and zonal can accommodate
  grandfathered financial transmission rights
• Flowgate rights under the current zonal model
• Nodal model can have
   • Flowgate rights
   • Point-to-point rights
   • Combination

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          Elements of Power Markets:
          Central Dispatch

• Both zonal and nodal rely on central
  dispatch for some energy.
• ERCOT centrally-dispatches ancillary
  services and balancing energy
• Operational software may redispatch any
  resource with an outstanding balancing
  energy bids

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           Elements of Power Markets:
 Bilateral Contracts in Central Dispatch

• Not specific to market design.
• Zonal and bilateral contracts:
  • Could require INC and DEC bids to cover all
    available generation.
• Nodal and bilateral contracts:
  • NYISO: Central dispatch mandatory
  • PJM: Central dispatch optional

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           Element of Power Markets:
            Resource Plans

• Zonal:
  • Portfolio resource plans (Current ERCOT)
  • Resource-specific resource plans workable
• Nodal:
  • Resource-specific resource plans required
  • Needed to price each transmission line and

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          Elements of Power Markets:
   Day-Ahead Energy Markets

• Can work with either zonal or nodal.
• Central dispatch is not required with a
  day-ahead market.
• Unit commitment may be voluntary or
• May or may not account for transmission

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          Elements of Power Markets:
          Other Elements

• Real-time energy is a physical market.
• Market power may take different forms
  in a zonal market than a nodal market.
• Load resources participation is easier
  with nodal pricing.
• Ancillary services procurement
  unaffected by congestion management

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           Elements of Power Markets:
       Generation Adequacy

• Not affected by zonal / nodal choice.
• Two concerns:
  • Maintaining system reliability
  • Reduce “boom and bust” investment cycles
• Being addressed in Project 24255.
• Not necessary to address in this

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          Elements of Power Markets:
 Market Information Transparency

• Nodal system provides more transparent
  locational energy prices.
• Flowgate rights provide transparent
  pricing of transmission investment.

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           Elements of Power Markets:
       Economic Efficiency

• Current versions of zonal and nodal are
  “second best” expressions of the ideal.
• Data aren’t perfect.
• Manual workarounds are a feature of
  every market.
• Even in nodal, resources don’t respond to
  all prices the system operator generates.

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           Basic Electricity Economics:
    Consensus of the Experts

• White paper presents consensus of
  experts on two issues:
  • Congestion management
  • Day-ahead markets
• Consensus based on accepted principles:
  • Economics
  • Engineering

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          Basic Electricity Economics:
  Congestion Management (1)

• Locational energy prices represent the
  opportunity costs of transmission.
• Congestion charges are based entirely on
• Power takes every possible path between
  two points.
• As a result, a single congested line can
  impact the price at every node.

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            Basic Electricity Economics:
   Congestion Management (2)

• Financial transmission rights reflect
  electrical reality.
• Suppliers can not deliver their power to
  their load
  • Suppliers only inject into “electricity lake”
  • Loads only withdraw from “electricity lake”

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             Basic Electricity Economics:
         Day-Ahead Market (1)

• Different types of energy markets
  •   Forwards
  •   Futures
  •   Centralized exchange (day-ahead)
  •   Real-time
• Real-time market is a physical market
• All other markets are financial markets

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          Basic Electricity Economics:
       Day-Ahead Market (2)

• Two-settlement system: DA and RT
• Generators should be paid day-ahead
  price for power sold in day-ahead market.
• Any real-time deviation from the quantity
  sold in the day-ahead market should
  receive the real-time price.

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• White paper presents overviews of different
  market structures.
  • United States
  • Foreign countries
• Two more detailed presentations by Dr. Oren:
  • Congestion pricing and transmission rights
  • Day-ahead and real-time spot markets
• Questions or comments from panelists.

                  PUCT Market Oversight Division   40

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