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Important Concepts in PRR 342: Simultaneous A/S Selection

Important Concepts in PRR 342: Simultaneous A/S Selection. Prepared for ERCOT WMS Meeting October 28, 2002 Julie Gauldin PUCT Market Oversight Division. Introduction.

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Important Concepts in PRR 342: Simultaneous A/S Selection

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  1. Important Concepts in PRR 342: Simultaneous A/S Selection Prepared for ERCOT WMS Meeting October 28, 2002 Julie Gauldin PUCT Market Oversight Division

  2. Introduction • PRR 342 modifies the ancillary service bid selection process so that the selections of Regulation Up, Responsive Reserves and Non-Spinning Reserves occur simultaneously. • PUCT Order in Docket No. 23220 states: “ERCOT shall amend the Protocols such that it will procure ancillary services through use of simultaneous optimization for assignment of resources to A/S products, and will set prices for each ancillary service to the corresponding shadow price.” • Simultaneous selection is also consistent with the FERC NOPR on SMD. PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  3. Simultaneous Optimization Key Concepts • Main objective of simultaneous selection: • Prevent price reversals, whereby the MCPC for a lower quality services is higher than the MCPC for a higher quality service. • Price reversals provide incorrect price signals which provide incentives for inefficient use of resources. • Agreed-upon “quality” ranking: • Regulation Up (RegUp) • Responsive Reserves (RRS) • Non-Spinning Reserves (NSRS) PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  4. Key Changes in PRR from the Version Passed by PRS • MOD would like to understand any potential negative impact of these changes. • Payment to Suppliers • Each selected bid is paid the MCPC of the service for which it was selected or the MCPC of any higher quality service for which it was bid, whichever is higher. • Bid Content: • One offer price • The highest quality service to which the bid applies • “Bid Flow Down” • A bid for a higher quality service will automatically be considered to be used for any lower quality services. PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  5. Linear Program Formulation • Objective Function • Maximize Economic Value  Minimize As Bid Costs • As Bid Costs = ∑(bid price for selected A/S)*(quantity procured for selected A/S) (sum over all struck bids) • Key Constraints • (1) Meet required amount of RegUp • (2) Meet required amount of RRS • (3) Meet required amount of NSRS • (4) Don’t exceed bid amounts • Key Assumption (“Bid Flow Down”) • A bid for a higher quality service will automatically be considered to be used for a lower quality service. PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  6. Linear Program Formulation, cont. • Determination of MCPCs: • MCPC for RegUp will be equal to shadow price of constraint (1) • This represents the cost of procuring another incremental unit of RegUp • MCPC for RRS will be equal to shadow price of constraint (2) • This represents the cost of procuring another incremental unit of RRS • MCPC for NSRS will be equal to shadow price of constraint (3) • This represents the cost of procuring another incremental unit of NSRS • Payment to Suppliers • Each selected bid is paid the MCPC of the service for which it was selected or the MCPC of any higher quality service for which it was bid, whichever is higher. PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  7. Example 1 : Setup • Requirements (Assume no RegUp): • RRS => 500 MW needed • NSRS => 500 MW needed • Bids: • For RRS or NSRS: • 600MW @ $10/MW • 100MW @ $15/MW • 200MW @ $100/MW • For NSRS only: • 200MW @ $5/MW • 300MW @ $20/MW PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  8. Example 1 : Auction Results Under Current ERCOT Procedure • RRS cleared first: • All 500MW procured from $10/MW bid • MCPC for RRS = $10/MW – paid to selected bid • NSRS cleared next (remaining RRS bids can be used here) • 200MW procured from $5/MW bid • 100MW procured from $10/MW bid • 100MW procured from $15/MW bid • 100MW procured from $20/MW bid • MCPC for NSRS = $20/MW – paid to selected bids PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  9. Original bids: For RRS or NSRS: 300MW @ $10/MW 100MW @ $15/MW 200MW @ $100/MW For NSRS only: 200MW @ $5/MW 300MW @ $20/MW Revised bids after observing high NSRS MCPC: For RRS or NSRS: 300MW @ $10/MW 100MW @ $15/MW 200MW @ $100/MW For NSRS only: 200MW @ $5/MW 300MW @ $10/MW 300MW @ $20/MW The Effect of Price Reversals: Over Time, Bids “Flee” to Lower Quality Services New MCPC for RRS: $100, for NSRS: $10 Price reversals incentivize inefficient use of resources PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  10. Example 1 : Auction Results Under Simultaneous Optimization • RRS procurements: • 400MW procured from $10/MW bid • 100MW procured from $15/MW bid • MCPC for RRS = $20/MW – paid to selected bids • NSRS procurements: • 200MW procured from $5/MW bid • 200MW procured from $10/MW bid • 100MW procured from $20/MW bid • MCPC for NSRS = $20/MW – paid to selected bids Simultaneous selection provides incentives for efficient use of resources PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  11. Requirements RegUp => 150 MW needed RRS => 400 MW needed NSRS => 300 MW needed Bids: For RegUp, RRS, or NSRS: 150MW @ $30/MW 150MW @ $25/MW 100MW @ $10/MW 80MW @ $5/MW Bids, cont: For RRS or NSRS: 110MW @ $20/MW 50MW @ $15/MW 50MW @ $10/MW 75MW @ $9/MW For NSRS only: 100MW @ $14/MW 75MW @ $13/MW 75MW @ $10/MW 75MW @ $5/MW Example 2 : Setup PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  12. Example 2 : Solution PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  13. Example 2: Solution, cont. • MWs awards are actually the same using either sequential or simultaneous selection • MCPCs under sequential selection: • RegUp = $10/MW • RRS = $25/MW • NSRS = $14/MW • MCPCs under simultaneous selection: • RegUp = $25/MW • RRS = $25/MW • NSRS = $14/MW PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  14. Questions on Simultaneous Optimization? PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  15. Application of Competitive Solution Method • The steps & logic used to apply the Competitive Solution Method would be unchanged from those proposed for the current A/S selection procedure. • The mechanisms for applying each step are revised to fit with simultaneous selection. PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  16. Pass Competitive Suff. Test now? Step 1a: Test the sufficiency of the bid stacks Application of Competitive Solution Method Step 2: Post Indicative MCP & Extend Day-ahead Market < 115% ? Step 3: Compute MCP Limit yes no Competitive Sufficiency Test no STOP: Set Mitigated MCP = min [MCP Limit, Unmitigated MCP] Step 1b: Test the impact of pivotal bidders yes yes Pivotal bidders impact MCPC? (This diagram doesn’t show the OOM mechanism used for cases of insufficient bid stack.) no STOP: No mitigation needed PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  17. Application of Competitive Solution Method • Step 1a: Test the sufficiency of the bid stacks: • Is RegUp Bid Stack < 1.15*(RegUp Requirement)? • Is (RegUp+RRS) Bid Stack (net of RegUp Requirement) < 1.15*(RRS Requirement)? • Is (RegUp+RRS+NSRS) Bid Stack (net of RegUp+RRS Requirement) < 1.15*(NSRS Requirement)? • If any of these is true, then the 115% test fails. PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  18. Application of Competitive Solution Method • Step 1b: Determination of Pivotal Bidders • Will removal of all offers from a single bidder result in a deficiency in RegUp, (RegUp+RRS), or (RegUp+RRS+NSPR)? • Step 1b: Test the impact of pivotal bidders • Remove offers of pivotal bidder(s) and subtract pivotal bidders’ awards from corresponding requirements. • Re-solve optimization. • If MCP(s) change from the original values, then pivotal bidders do impact the MCPC. PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  19. Competitive Solution Method • Step 3: Compute MCP Limits • Remove offers of pivotal bidder and subtract pivotal bidders’ awards from corresponding requirements. • Remove highest priced 5% from remaining bids • Re-solve simultaneous optimization and determine MCP limits = 1.5*(shadow prices for modified problem) PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  20. Pass Competitive Suff. Test now? Step 1a: Test the sufficiency of the bid stacks Application of Competitive Solution Method Step 2: Post Indicative MCP & Extend Day-ahead Market < 115% ? Step 3: Compute MCP Limit yes no Competitive Sufficiency Test no STOP: Set Mitigated MCP = min [MCP Limit, Unmitigated MCP] Step 1b: Test the impact of pivotal bidders yes yes Pivotal bidders impact MCPC? (This diagram doesn’t show the OOM mechanism used for cases of insufficient bid stack.) no STOP: No mitigation needed PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

  21. Questions? PRR 342 - Prepared for ERCOT WMS Meeting October 28, 2002

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