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The Financial Model. An Introduction to Locational Based Marginal Pricing Concepts Dean Chapman New York Independent System Operator. Financial Model. Addresses operation of power system through financial incentives/disincentives Elements of Financial Model:

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the financial model

The Financial Model

An Introduction to Locational Based Marginal Pricing Concepts

Dean Chapman

New York

Independent System Operator

financial model
Financial Model
  • Addresses operation of power system through financial incentives/disincentives
  • Elements of Financial Model:
    • Congestion Management accomplished by Redispatch with locational pricing
    • Transmission Service is implied, not specifically reserved or purchased
      • Congestion charges may apply
      • Financial hedging instruments available
    • Balancing Market integral part of model
      • Two settlement market typically employed
        • Day-ahead by hour and real-time spot market
locational pricing is key to understanding financial model
Locational Pricing is Key to understanding Financial Model
  • We will discuss:
    • Security-constrained dispatch with locational pricing
    • Spot market and bilateral transactions
    • Imports, exports and wheels
    • Losses
  • Use NY as example
    • Pure financial model, automated
    • Development was driven by early IPP development in NY, NYPP experience
outline
Outline
  • Locational Pricing Example w/wo Congestion
  • Internal Bilateral Transaction
  • External Wheel Example
  • Financial Transmission Rights (TCC)
  • Losses
  • Actual Example
start with simple example
Start with simple example
  • Assume isolated control area with west and east region
  • Assume single transmission path between west & east
  • East load is typically higher than west
simple example no congestion
Simple Example(No congestion)

Interface Limit = 400

200

Gen2=600

Load2=800

Gen1=400

Load1=200

West

East

30

LBMP =30

LBMP =30

30

400

600

rto balance sheet unconstrained pure spot mkt
RTO Balance Sheet(unconstrained – pure spot Mkt)

Income

W. Load 200x$30 = $6,000

E Load 800x$30 = $24,000

total = $30,000

Payout

W. Gen. 400x$30 = $12,000

E. Gen 600x$30 = $18,000

total = $30,000

transmission congestion
Transmission Congestion

Interface Limit = 400100

200100

Gen2=600 700

Load2=800

Gen1=400 300

Load1=200

West

East

40

LBMP =20

LBMP =40

20

300

700

rto balance sheet constrained pure spot mkt
RTO Balance Sheet(constrained – pure spot Mkt)

Income

W. Load 200x$20 = $4,000

E Load 800x$40 = $32,000

total = $36,000

Payout

W. Gen. 300x$20 = $6,000

E. Gen 700x$40 = $28,000 TCC Pmt @ (40-20)

100x$20 = $2,000

total = $36,000

locational pricing
Locational Pricing
  • Generators selling into market get paid LBMP
    • Load buys from market, pays LBMP
  • Generation more valuable in east ($40 vs $20)
    • It can serve heavy load without contributing to congestion
    • Incentive is to build generation in east (or build more transmission)
    • Load in east is “dis-incented”
  • Curves are bid by generators
    • Will be paid LBMP as long as bid is lower or equal to LBMP
    • Can bid any price but will not be dispatched if bid>lbmp
outline11
Outline
  • Locational Pricing Example w/wo Congestion
  • Internal Bilateral Transaction
  • External Wheel Example
  • Financial Transmission Rights (TCC)
  • Losses
  • Actual Example
internal bilateral transaction
Internal Bilateral Transaction
  • Suppose Generator in west wants to sell 50 MW to load in east
    • Parties agree on sale price in private (say $30)
  • Generator may or may not change bid curve
    • No reason to do so
  • If not, Dispatch does not change!
bilateral transaction for 50 mw from west to east with congestion
Bilateral Transactionfor 50 MW from west to eastwith Congestion

Interface Limit =400100

200

100

Gen2=600

Load2=750+50

700

Gen1=350250+50

Load1=200

West

East

LBMP =20

LBMP =40

internal bilateral transaction with congestion
Internal Bilateral Transactionwith congestion
  • Difference between pure spot market and bilateral transaction is ONLY in the way it is billed! Two ways to accomplish Transaction
    • Contract for Differences – ISO not involved
      • Generator sells 50 at his bus for $20/MW.
      • Load buys 50 at his bus for $40/MW.
      • Generator makes up difference by paying load $10/MW.
      • Gen nets $10 (does it cover his cost?)
    • Register with ISO –
      • Generator withdraws 50 from spot mkt. Sale
      • Load does not pay ISO for 50
      • Load pays gen. $30/MW.
      • Tx customer pays ISO difference in LBMPs ($20/MW) as congestion charge.
      • Net to gen. is $10 (same result)
hedging against congestion charges
Hedging against Congestion Charges
  • Suppose generator owns 50 MW of TCCs (Transm. Congestion Contract or FTR) on this interface
    • For every hour there is congestion, he gets paid 50 x difference in LBMPs
  • In this example, payment would exactly cancel $20 cong. charge he would have paid
  • He buys TCC on auction or in secondary market
    • Must judge purchase price against hourly exposure to congestion
    • (More about TCCs later)
rto balance sheet constrained internal transaction
RTO Balance Sheet(constrained – Internal Transaction)

Income

W. Load 200x$20 = $4,000

E Load 750x$40 = $30,000

Cong. Chg 50x$20 = $1000

total = $35,000

Payout

W. Gen. 250x$20 = $5,000

E. Gen 700x$40 = $28,000 TCC Pmt @ (40-20)

100x$20 = $2,000

total = $35,000

gen balance sheet constrained internal transaction
Gen. Balance Sheet(constrained – Internal Transaction)

Income

Sale 50 x $30 = $1,500

TCC Income 50x$20= $1,000

total = $2,500

Less payout = $2,139

Net = $361

Payout

Cost of gen 50x$20= $1,000

Cong chg 50x$20 = $1,000

TCC Purch1 = $ 139

total = $2,139

1Assume TCC cost $100,000 for 50 MW for 30 days, 24 hr/day

Per hour cost = $100,000/ (30*24)= $139

outline18
Outline
  • Locational Pricing Example w/wo Congestion
  • Internal Bilateral Transaction
  • External Wheel Example
  • Financial Transmission Rights (TCC)
  • Losses
  • Actual Example
external transactions
External Transactions
  • External entity can bid generation into market, buy energy from market
    • Delivers to or takes delivery from pseudo-bus at border
  • Also possible to wheel energy through market
  • Next example shows 150 MW west-to-east wheel
wheel with transmission congestion
Wheel with Transmission Congestion

Interface Limit = 400100

150

200100

150

Gen2=600 700

Load2=800

Gen1=400 300

Load1=200

850

150

West

East

45

LBMP =20

LBMP =40

15

45

15

150

850

wheel with congestion
Wheel with Congestion
  • Note that interface flow does not change
    • Wheel is for greater than interface limit!
    • ATC would have been zero before scheduling this transaction!
  • Congestion charge is now $45-$15=$30 !
    • Financial congestion increases
    • Additional wheels can be accepted until west generation down to minimum or east generation hits max (or price becomes prohibitive!!!)
outline22
Outline
  • Locational Pricing Example w/wo Congestion
  • Internal Bilateral Transaction
  • External Wheel Example
  • Financial Transmission Rights (TCC)
  • Losses
  • Actual Example
financial transmission rights
Financial Transmission Rights
  • Total Capacity on this interface is 100 MW
    • In old world, reservations only available for 100 MW
    • In financial system, set of awarded TCCs must form feasible case observing all limits, therefore only 100 MW of TCCs available also!
    • TCC owner does NOT have to schedule transactions to get paid
    • Transmission customer does NOT have to own TCCs to use transmission
  • Scheduling of energy does not have to consider who owns what transmission rights. All have equal access but may be exposed to congestion charges
observations
Observations
  • All internal transactions are automatically accepted, never curtailed
    • Redispatch to control congestion
    • Externals accepted up to physical limit of redispatch
  • Rules allow bilateral transactions to be ignored when dispatching system
    • Generator does not have to actually generate – can buy at local LBMP
    • Load can use less, sell excess into market
  • Congestion Management (i.e. re-dispatch) and Bilateral Market are effectively decoupled!
outline25
Outline
  • Locational Pricing Example w/wo Congestion
  • Internal Bilateral Transaction
  • External Wheel Example
  • Financial Transmission Rights (TCC)
  • Losses
  • Actual Example
losses
Losses
  • ISO dispatches to total load + losses
  • Pays generators, collects from loads but generation exceeds load by amt of losses
  • Cost of losses built into LBMP
  • LBMP adjusted by loss factor
    • Adjustment equal to difference between Incremental cost of supplying 1 MW to reference bus at that bus and delivering it to the reference bus from the actual generator bus
adjustment in lbmp for losses
Adjustment in LBMPfor Losses

200+1+

200-1-

Ref Bus

(1 MW)

Gen2=600+1-

Load2=800

Gen1=400+1+

Load1=200

West

East

LBMP =30-D1

LBMP =30+D2

losses cont
Losses (cont.)
  • Delivering 1 MW from west increases system losses and therefore detracts from price
  • Deliver from east reduces system losses and is therefore more valuable, price higher
  • West to east transmission charge is ($30+D2) – (30-D1) = D1 + D2
    • East-west transaction gets PAID D1 + D2 because it is counterflow
    • Charging at marginal rate results in over-collection which is paid back
outline29
Outline
  • Locational Pricing Example w/wo Congestion
  • Internal Bilateral Transaction
  • External Wheel Example
  • Financial Transmission Rights (TCC)
  • Losses
  • Actual Example
example of r t lbmp in ny
Example of R/T LBMP in NY
  • Security-constrained dispatch runs every 5 min (actually dispatches generators!)
  • Incremental loss component calculated in real time
  • Predominant flow from west to east, north to south
  • Unit that is ramp-limited cannot determine LBMP
    • Spikes as LBMP shifts to next highest-priced unit
slide31

Example from March 2000

C/E i/f

L.I. Cable

NYC Load Pickup

L.I. Cable Congestion

Central/East Congestion

Diff. Due to

Losses

two settlement market day ahead
Two Settlement MarketDay-Ahead
  • Generators bid into day-ahead market (DAM)
  • Loads do forecast, bid percentage of load into DAM
  • Security-Constrained Unit Commitment commits generation, determines hourly prices, locks Gen & Load into forward contracts
  • This includes bilaterals and externals as well
  • SCUC optimizes for energy, reserves, and regulation, all of which are bid in
  • About 90-95% of market is conducted in day-ahead, half of that is bilateral
two settlement market real time
Two Settlement MarketReal-Time
  • Balancing Market takes place in real time using bids left over from DAM plus new hourly bids
  • R-T market more volatile because of operational events, inaccurate forecasts, and natural fluctuations in load
  • Net Real-time energy to be billed is total MW less amount contracted in DAM less amount due to bilaterals.
    • Can be + or – for generator or load
summary
Summary
  • Locational price varies to account for effect of congestion and losses
    • Priced to encourage movement toward reduction of congestion and/or losses
  • Transmission charge for bilaterals difference between loc. Prices at sink, source
    • Comprised of congestion, losses components
    • Can be + or –
    • Congestion cost can be hedged up to limit of interface
  • Transactions can be scheduled “independent” of congested interfaces
summary cont
Summary (cont.)
  • For Internal Transactions:
    • No Transmission Reservations needed
    • No Tags Needed
      • No TLR so do not need info on source & sink to do schedule or to operate
    • No ATC postings needed
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