Wide Open Load Following: Mark Lively’s Approach to Pricing Reactive Power

1. Wide Open Load Following:Mark Lively’s Approach toPricing Reactive Power 2004 December 2 CEIC Luncheon Seminar Carnegie Mellon University Electric Industry Center Mark B. Lively--Utility Economic Engineer--301-428-3618

2. Mandatory Reliability Standards NERC imposes fines each time it identifies problem Offender pays NERC fund Counter-party ??? Market for Unscheduled Flows FERC sets mechanism for metered amounts Offender pays counter-party Counter-party earns revenue Reactive Power Payments Mark B. Lively--Utility Economic Engineer--301-428-3618

3. Reactive Power PricingList of Approaches • Cost of service for generation • Competitive bidding among generators • Tie to providing active power generation • WOLF for unscheduled amounts • Generation • Load • Independent reactive sources • Inter-control area flows Mark B. Lively--Utility Economic Engineer--301-428-3618

4. Reactive Power PricingCost of Service Method • AEP Method (Opinion 440, 1999 July 30) • Annual revenue requirement • Used recently by several IPPs • Big Sandy Peaker Plant, LLC ER04-1103 • Hills Energy, LLC ER04-1102 • PJM has a performance requirement, or else payment is withheld Mark B. Lively--Utility Economic Engineer--301-428-3618

5. Reactive Power Pricing Competitive Bidding • Ancillary service • Bid for capacity availability • Dispatched by system operator • Performance requirement (?) Mark B. Lively--Utility Economic Engineer--301-428-3618

6. Reactive Power Pricing Tie to Providing Active Power • Reactive Capability Related to Active Capability • Perhaps 5 KVAR for 100 KW • .9 Leading (48 kvar) or .95 Lagging (-33 kvar) • Most generators able to produce some reactive under normal conditions • Actual reactive power dispatched centrally • Nonperformance charge (?) Mark B. Lively--Utility Economic Engineer--301-428-3618

7. Reactive Power PricingWOLF for Unscheduled Amounts • Mortar for the brick wall of contracts • Payment for non-performance • Payment for over-performance • Non-participating IPPs, including DG • Loads • Standalone reactive devices • Inter-control area flows Mark B. Lively--Utility Economic Engineer--301-428-3618

8. “People worked harder for a reward, especially one that coincided with patriotism.” Tom Clancy, Without Remorse. “Producers work harder for a reward, especially one that coincides with reliability.” Mark Lively, in explaining WOLF. Wide Open Load Following Mark B. Lively--Utility Economic Engineer--301-428-3618

9. Wide Open Load FollowingBasic Concept Use the quantification of the quality of public goods to set the simultaneous prices of the unscheduled portion of related commodities whose usage impacts the public goods. Note that the unscheduled portion of the commodity can be positive or negative. Mark B. Lively--Utility Economic Engineer--301-428-3618

10. Wide Open Load FollowingPublic Goods • Non-excludability—It is difficult to keep people out—Fireworks display • Non-rivalrous consumption—My usage does not interfere with your usage—Fireworks display • For electricity, electric potential meets this description of a public good • Measured as voltage Mark B. Lively--Utility Economic Engineer--301-428-3618

11. Wide Open Load FollowingReactive Power Power provided and maintained for the explicit purpose of insuring continuous, steady voltage on transmission networks. Reactive power is energy which must be produced for maintenance of the system and is not produced for end-use consumption. Electric motors, electromagnetic generators and alternators used for creating alternating current are all components of the energy delivery chain which require reactive power. Losses incurred in transmission from heat and electromagnetic emissions are included in total reactive power. This power is supplied for many purposes by condensers, capacitors and similar devices which can react to changes in current flow by releasing energy to normalize the flow, and regulating generators may also have this capability. Mark B. Lively--Utility Economic Engineer--301-428-3618

12. Wide Open Load FollowingReactive Power • Power merely absorbed and returned in load due to its reactive properties • Symbolized by the letter Q and is measured in the unit of Volt-Amps-Reactive (VAR) • Mathematical construct Mark B. Lively--Utility Economic Engineer--301-428-3618

13. Wide Open Load FollowingReactive Power • In an alternating current circuit both the current and voltage are sinusoidal. If there is a phase separation between the two quantities, the instantaneous power will have to 'work' harder to produce the equivalent power if they were in phase. • Reactive power is described as the amount of power required to overcome the phase shift between the current and voltage. It is generally regarded as waste power as it is used to 'energize' the circuit to allow it do useful work. • In an alternating current circuit both the current and voltage are sinusoidal and power is expressed as the product of current and voltage. In a simple resistive circuit the voltage and current are in phase, the real power is equal to the apparent power and no reactive power flows. • However when the voltage and current pass through certain types of circuits (inductive or capacitive) the voltage and current become out of phase. This phase separation is usually called the Power factor and the current is said to lag or lead the voltage. • Capacitive circuits generate reactive power and inductive circuits absorb reactive power. If large quantities of reactive power (positive or negative) are present then the overall power factor will be low. Mark B. Lively--Utility Economic Engineer--301-428-3618

14. Wide Open Load FollowingReactive Power • In alternating currentpower transmission and distribution, reactive power is an abstract quantity used to describe the effects of a load which on the average neither supplies nor consumes power. It is defined as the product of the rms voltage, current, and the sine of the difference in phase angle between the two. Compare to other definitions of power (effective power, apparent power, complex power). Reactive power is usually denoted Q and expressed in volt-amperes reactive, or var (not watts). This is to avoid confusion when specifying the power of a load (var automatically refers to reactive power). • Reactive power is associated with the reactance of a load, and unlike effective power, can be positive or negative. A purely capacitive load is associated with a positive reactive power, whereas a purely inductive load is associated with a negative reactive power. To maintain efficient transmission, it is often necessary to reduce the magnitude of the reactive power in a system. This is known as power factor correction Mark B. Lively--Utility Economic Engineer--301-428-3618

15. Wide Open Load FollowingVoltage and Reactive Power • Leading reactive power raises local voltage—Add capacitors to counteract low voltage conditions • Lagging reactive power lowers local voltage • Add reactors to counteract high voltage conditions • Turn off capacitors Mark B. Lively--Utility Economic Engineer--301-428-3618

16. Wide Open Load FollowingReactive Power Mark B. Lively--Utility Economic Engineer--301-428-3618

17. Wide Open Load FollowingReactive Power Low Voltage Reward Leading Punish Lagging High Voltage Reward Lagging Punish Leading Mark B. Lively--Utility Economic Engineer--301-428-3618

18. Wide Open Load FollowingReactive Power Low Voltage Reward Leading Punish Lagging Q Pricing ($/KVARH) India UI High limit Lower Than Normal Voltages Higher Than Normal Voltages Low limit India UI NOTE: Q is defined to be positive for leading reactive power High Voltage Reward Lagging Punish Leading Mark B. Lively--Utility Economic Engineer--301-428-3618

19. Wide Open Load FollowingReactive Power Low Voltage Reward Leading Punish Lagging Q Pricing ($/KVARH) High limit Lower Than Normal Voltages Higher Than Normal Voltages Low limit NOTE: Q is defined to be positive for leading reactive power High Voltage Reward Lagging Punish Leading Mark B. Lively--Utility Economic Engineer--301-428-3618

20. Wide Open Load FollowingMarginal Cost Pricing • Each participant has incentive to increase production until its marginal cost is equal to the WOLF price • The WOLF price decreases as participants increase production • The WOLF price thus provides an indirect measure of marginal cost Mark B. Lively--Utility Economic Engineer--301-428-3618

21. Wide Open Load Following Dynamic Economic Theory Supply Demand Price ($/MVARH) Equilibrium Price Formula Price Pressure Nominal Price Shortage Reactive Power (MVAR) Mark B. Lively--Utility Economic Engineer--301-428-3618

22. Wide Open Load FollowingAdjusting the Curve • For small voltage excursions, no harm, no foul • Low voltage excursions are more serious than high voltage excursions Voltage Severity of problem Mark B. Lively--Utility Economic Engineer--301-428-3618

23. Wide Open Load FollowingControl Theory target + $ Quantify Power Quality - cost Mark B. Lively--Utility Economic Engineer--301-428-3618

24. Wide Open Load FollowingVariance from Marginal Cost • Large participants can optimize income by producing such that their marginal cost is less than the WOLF price • Set production level so that marginal cost is equal to marginal revenue • Marginal revenue is price plus production times the derivative (which is negative) of price with respect to production Mark B. Lively--Utility Economic Engineer--301-428-3618

25. Mark B. Lively--Utility Economic Engineer--301-428-3618

26. Mark B. Lively--Utility Economic Engineer--301-428-3618

27. Mark B. Lively--Utility Economic Engineer--301-428-3618

28. Mark B. Lively--Utility Economic Engineer--301-428-3618

29. Mark B. Lively--Utility Economic Engineer--301-428-3618

30. Wide Open Load FollowingVariance from Marginal Cost • Incremental cost • Need better definition of cost shape • Integrate under the curve • Price varies with amount of reactive produced Mark B. Lively--Utility Economic Engineer--301-428-3618

31. Wide Open Load FollowingControl Theory target + $ Quantify Power Quality frequency Voltage - cost Mark B. Lively--Utility Economic Engineer--301-428-3618

32. Wide Open Load FollowingSimultaneous Pricing Working in India • Infamous for low frequency Mark B. Lively--Utility Economic Engineer--301-428-3618

33. Wide Open Load FollowingSimultaneous Pricing Working in India • Introduced Reliability Tariff 2003 January 1 • Raised all UI prices about 40% 2004 April 1 Mark B. Lively--Utility Economic Engineer--301-428-3618

34. Mark B. Lively--Utility Economic Engineer--301-428-3618

35. Wide Open Load FollowingSimultaneous Pricing Working in India • Average frequency dramatically improved UI Price =0.0 Max Price =420.0 +42% Mark B. Lively--Utility Economic Engineer--301-428-3618

36. Wide Open Load FollowingSimultaneous Pricing Working in India • Improved Frequency Distribution Mark B. Lively--Utility Economic Engineer--301-428-3618

37. WOLF & Negotiated Contracts • WOLF Pricing provides • Alternative price • Way to determine penalty • Way to determine reward • Assessment of successful contract negotiations • Pricing for affiliates Mark B. Lively--Utility Economic Engineer--301-428-3618

38. WOLF Versus Negotiated Contract WOLF Pricing $/KVAR-Year Negotiated Contract Annual Hours of Operation Mark B. Lively--Utility Economic Engineer--301-428-3618

39. Wide Open Load Following • Provides price for unscheduled reactive power • Leads to marginal cost price discovery • Feedback corrects the price • Works with partial VAR obligation • Related concept a success in India • Supports contract negotiations Mark B. Lively--Utility Economic Engineer--301-428-3618