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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

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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:

    • 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

  • 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

  • Locational Pricing Example w/wo Congestion

  • Internal Bilateral Transaction

  • External Wheel Example

  • Financial Transmission Rights (TCC)

  • Losses

  • Actual 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)

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)

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

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)

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

  • 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


Outline

  • Locational Pricing Example w/wo Congestion

  • Internal Bilateral Transaction

  • External Wheel Example

  • Financial Transmission Rights (TCC)

  • Losses

  • Actual Example


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 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 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

  • 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)

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)

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


Outline

  • Locational Pricing Example w/wo Congestion

  • Internal Bilateral Transaction

  • External Wheel Example

  • Financial Transmission Rights (TCC)

  • Losses

  • Actual Example


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

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

  • 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!!!)


Outline

  • Locational Pricing Example w/wo Congestion

  • Internal Bilateral Transaction

  • External Wheel Example

  • Financial Transmission Rights (TCC)

  • Losses

  • Actual Example


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

  • 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!


Outline

  • Locational Pricing Example w/wo Congestion

  • Internal Bilateral Transaction

  • External Wheel Example

  • Financial Transmission Rights (TCC)

  • Losses

  • Actual Example


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 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.)

  • 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


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

  • 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


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 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 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

  • 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.)

  • 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


Questions???


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