The Role of Transmission Rights in Electricity Markets

1. The Role of Transmission Rights in Electricity Markets Minghai Liu University of Illinois at Urbana-Champaign 05/11/2001

2. Objectives • Review some important concepts in electricity markets • Explain transmission congestion and management • Illustrate the purposes and properties of transmission rights • Discuss the issuance, trading and settlement of Firm Transmission Rights (FTRs) • Briefly introduce the concept of Flowgate Rights (FGRs) • Discuss future work

3. $/MW $/MW p=15+3q/80 p=80-4q/50 MW $/MW p=25+q/5 MW MW An Illustrative system • Lines are lossless with x=1.0pu for each line • Each line has a thermal limitation as indicated • The bidding (offering) curves are shown • p: price q: real power quantity G1 1 300 MW ISO 100 MW 3 220 MW G2 L3 2

4. 1 1 MW 1/3 MW 1 2/3 MW 3 1/3 MW 3 1/3 MW 2/3 MW 1/3 MW 1 MW 1 MW 2 1 MW 2 An Illustrative system • The DC power flow model sets up the current division rule:

5. OPF for the Example • Optimal Power Flow (OPF) is an optimization problem which maximizes the social surplus • In the system, the OPF is stated as:

6. Local Marginal Price • Local Marginal Price (LMP) is the marginal cost of generation at a node, i.e., the sensitivity of the objective function to the injection (withdrawal) of an additional unit at each node:

7. The OPF Solution 400 MW 1 $30 /MWh 300 MW congested 3 100 MW congested 200 MW $40/MWh 100 MW 500 MW 2 $45 /MWh

8. optimal solution with the constraints optimal solution without the constraints Result Interpretation q ($ /MWh) 80 40 34.5 34.25 25 15 p (MW) 267 500 568

9. · · · The Feasible Region Nomogram q2 optimal solution with the constraints B · 2->1 320 MW X · · 300 MW 2->3 A optimal solution without the constraints Y C 1->3 D 100 MW 47.5 MW 1->2 E · 0 q1 520 MW 300 MW 400 MW 20 MW

10. Dominant and Counter Flows • Assume the physical flow direction on a line is known, we define: • dominant flow: a flow in the same direction as the physical flow • counter flow: a flow in the opposite direction of the physical flow

11. 1 100 MW 3 2 Counter Flow in the Example 400 MW Physical flow 500 MW 100 MW superposition Counter flow 400 MW 1 1 Dominant flow 133 MW 33 MW 3 3 100 MW 100 MW 400 MW 2 2

12. Bilateral Transactions • Bilateral transactions indicate balanced energy trading contracts • we denote each bilateral transaction by: • we use the protocol in our examples that each seller is responsible for delivery of the energy to the buyer • In the example, the two transactions are injection node quantity withdrawal node

13. Bilateral Transactions • While each transaction may be feasible (infeasible), undertaking all the proposed transactions simultaneously may results in infeasibility (feasibility) • In pool model, the ISO collect the LMP differences and use this revenue to compensate the transmission owners and encourage the new investement. In bilateral model, the ISO no longer collects the LMP differences, transmission owners cannot be compensated. Consequently, we need some mechanism for ensuring transmission services

14. Congestion Charges • Charges or compensation on each MW of each transaction equal to the LMP difference between the sink and source nodes of the flow • for a transaction , the congestion charge may be calculated as:

15. Transmission Rights • Objectives • facilitate congestion management • facilitate efficient use of the transmission network • provide risk management tools for transmission customers • Basic attributes • physical: priority to use the transmission services • financial: right to get financial compensation

16. Firm Transmission Rights (FTRs) • Definition: right or obligation to the LMP difference on each MW of balanced transaction between two specific nodes • Key aspects: • Financial: provides the holder protection from the congestion charges for transfer of power from to in an amount up to • Physical: FTR holder has the priority to be scheduled for the transfer from node to node from node quantity to node

17. FTR Attributes • Point to point rights • path independent: independent of the physical path of the flow • direction dependent: • FTR prices may be positive, negative or zero • Option v.s. Obligation • FTR holder who bought the FTR for a nonnegative price has options to use the FTR • FTR holder who bought the FTR for a negative price has the obligation to ensure the transfer of power is present

18. Issuance and Trading of FTRs • Only the ISO can sell FTRs • the ISO runs a forward FTR market • sellers and/or buyers use this market to meet their needs • the ISO collects the bids and run an OPF which maximizes its revenue subject to the “simultaneous feasibilities” to issue the FTRs and decide the dispatching schedule • Revenues of the ISO are allocated among transmission owners on some negotiated basis

19. Settlement of FTRs • FTRs are settled after real-time operations • The amount of payment associated with FTR may be calculated as: • As long as , the FTR holder is fully protected from the congestion charges; any flow above the limit is not hedged the actual flow from node ik to node jk

20. FTR Time Line Year- Day- Hour- Days Real-time t congestion charges energy forward market energy spot market FTR forward market real-time operations FTR settlement

21. 400MW 1 1 G1 3 3 400MW G2 100MW 2 2 100MW FTRs in the Example FTR requirement

22. FTRs in the Example • FTR forward market • G1 bids for • G2 bids for • the ISO runs the OPF and determine the price schedule of the FTRs FTR buy / sell situation

23. FTRs in the Example FTR settlement LMP based congestion charges G1 G1 ($40-$30)*400MW=$4000/h ($40-$30)*400MW=$4000/h ISO ISO G2 ($40-$45)*100= -$500/h ($40-$45)*100= -$500/h G2 result: If the real-time operating point is identical to the FTR results, FTR holders are fully hedged

24. Pros and Cons of FTRs • Pros: • are conceptually easy for transmission users • fully insure holders against changes in the PTDFs • Cons: • the transfer capability between any two points in a network changes as the system condition changes • centrally managed frequent reconfiguration auctions needed • the necessity of negative prices increases the complexity of the FTR settlement

25. Flowgates • A flowgate is a set of elements connecting two distinct areas of a transmission system, these elements may be transmission lines or transformers • Each flowgate has a direction and a well-defined capacity limit ( limit of the power that can flow across it ) • Denote as mn from area to area

26. Examples of Flowgates

27. FGRs • Definition: the FGR gives the holder a priority to access and the right be protected from the congestion charges on flowgate • Key aspects • financial: provides the holder protection from the congestion charges for introducing a flow on for a amount up to • physical: the FGR grant the holder a capacity reservation and scheduling priority for using flowgate

28. FGR Attributes • FGR is defined on physical flowgate • FGRs are path and direction dependent • the FGR holder has the right to use any element of the specified flowgate but not any other flowgates • FGRs cannot be withdrawn • the FGR holder can use the right by scheduling power transactions; otherwise, the scheduling priority expires and the right reverts to the ISO • the ISO can take full advantage of the unused flowgate capacity for real-time dispatch

29. Future Work • Assessment of the impact of uncertainty • Simulation of large-case studies • FGRs: analysis of the impacts of the PTDFs on the definition, usage and money value of rights • FTRs and FGRs: can these two scheme coexist in one system?

30. Future Work • Assessment of the impact of uncertainty • Simulation of large-case studies • Analysis of the impacts of the PTDFs on the definition, usage and money value of the Transmission Rights