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3-2
3-3
3-4
3-5
3-6
3-7
3-8
Chapter
3-1
focus on market structure, Part 3 considers alternative designs for the realtime
market, the day-ahead forward markets and the relationship between the two.
It also discusses several controversies, such as the degree of centralization, that
have often plagued the design process. Design elements are considered in just
enough detail to allow comparisons between the main alternative approaches.
While Part 3 moves forward from real-time it does not move past the dayahead market, and it does not consider private bilateral markets that operate
beside the markets organized by the system operator (SO). It focuses only on
those markets that are typically part of an ISO design.
Section 1: Spot Markets, Forward Markets and Settlements.
Forward markets are financial markets while the realtime (spot) market is a
physical market. To the extent power sold in the day-ahead market is not
provided by the seller, the seller can buy replacement power in the spot market.
This is the basis of the two-settlement system that underlies one standard
market design in which the SO conducts both day-ahead and spot energy
markets.
Section 2: Controversies. Three major controversies have beset the
design of power markets. First is the conflict over how decentralized the
market should be. One view holds that both day-ahead and spot markets should
be bilateral energy markets, and the SO should have no dealings that involve
the price of energy but instead sell (or ration) only transmission.
The second conflict arises only if the day-ahead market is to be run by the
system operator (centralized). One view holds that such an auction market
should utilize multi-part bids to solve the unit commitment problem in the
traditional way. Another view holds that bids should specify only an energy
price.
The third conflict concerns the level of detail at which locational prices are
computed. The nodal view typically argues for hundreds or thousands of
locations, while the zonal view typically calls for well under one hundred. This
controversy is less fundamental and is not considered in Part 3.
Section 3: Simplified Locational Pricing. All markets discussed in
Part 3 produce energy prices that are locationally differentiated. The theory of
such prices is not presented until Part 5, so a summary of their properties is
given in Section 3. These prices are competitive and thus independent of the
markets architecture. Because they are competitive they have the normal
properties of competitive prices; they minimize production cost for a given
level of consumption, and they maximize net benefit.
3-1.2 CONTROVERSIES
Three main controversies regarding architecture have beset the design of many
power markets.
1
2
3
curtailments the SO could be kept from making any trades. Of course, its
influence on the market would still be pervasive.
Chapter 3-3 considers the possibility of a centralized spot market in
transmission only. This would allow private bilateral markets to provide the
spot energy market, but because this arrangement makes the realtime balancing
of the system difficult and expensive, it is rejected in favor of an energy spot
market (realtime balancing market) run by the SO.
Chapter 3-5 considers the same question for the DA market, but in this case
the answer is less obvious as the time pressure is far less severe. Here the
answer hinges on the unit commitment problem and the need for coordination.
Although a private bilateral market would cause much less inefficiency, there
appears to be a strong case for at least the minimal central coordination that can
be provided by a pure-energy market run by the system operator.
Exchanges vs. Pools. Unit commitment is the process of deciding which
plants should operate. Integrated utilities have always done this using a
centralized process that takes account of a great deal of information about all
available generation. If this is done incorrectly the wrong set of plants may be
started in advance which can lead to two problems: (1) inefficiency and (2)
reduced reliability. As just noted, a bilateral market solves this problem poorly,
so a centralized DA market is preferred. The second controversy concerns the
extent of central coordination.
There are two polar positions: let generators bid only energy prices (1-part
bidding) or let generators bid all of their costs and limitations (multi-part
bidding). One-part bidding allows the SO to select the amount of generation
to commit in advance but gives it very little information about the generators
costs and limitations. Consequently it can apply none of the usual
optimization procedures, but it can provide some coordination by purchasing
the correct quantity of power a day ahead. With multi-part bids, the SO can
select bids on the basis of the traditional optimization procedure.
Typically, this controversy focuses on comparing the existence, efficiency
and reliability of the market equilibria for 1-part and multi-part auctions.
Chapter 3-7 demonstrates that both types of markets have equilibria that exist
and that are likely to be very efficient and reliable. If there is a problem, it is
that markets have difficulty in arriving at the equilibrium of a 1-part auction
market when costs are non-convex as they are in power markets. This
difficulty arises from the extensive information requirements of 1-part bidding.
In such an auction, competitive suppliers should not simply bid their marginal
costs but must estimate the market price in advance in order to determine how
to bid. This is a far more difficult task than simply bidding ones own costs as
required by normal competitive markets or by a multi-part bid auction.
Unfortunately, not enough is known about how such markets perform in
practice so no conclusion can be drawn as to which is preferable, though it
seems plausible that a two or three part auction could be designed to capture
3-2
Chapter
of the energy market. In other markets this would be possible. For example the
U.S. Department of Transportation does not buy or sell trucking services, it just
provides highways and charges for their use. This chapter examines the
inefficiencies that would result from keeping the system operator out of the
real-time energy market.
Section 1: No Central Coordination. Imagine an electricity market run as
a system of highways. Every power injection by a generator could be measured
and charged to pay for the cost of the system. Any generator could sell power
to any customer and deliver that power by injecting it at the same time the
customer used it. Unfortunately, there would be no way to prevent theft. With
trading fully decentralized, no one would know who had paid and who had not.
Section 2: Central Coordination without Price. The simplest actual
proposal for a power market suggests that all trades be registered with the
system operator who would accept only sets of trades that did not cause any
reliability problem. This proposal takes the first step towards the enforcement
of reliability and the prevention of power theft, but it does not take the second
step of specifying what happens when traders violate their schedules. In this
system the operator knows nothing of prices, and imposes no penalties.
Chapter
3-3
15
in order to maximize the usefulness of the market, the fastest market should be
used, and that is a centralized energy market. A transmission market can only
sell transmission when two equal but opposite energy trades have been found.
Thus a transmission market is just an energy market with restrictions, and it is
inherently more expensive when great speed is needed.
Of course by spending more on market infrastructure any market can be
made faster. The usual proposal is to impose penalties on bilateral trades that
get out of balance. This appears to keep them in balance cheaply, or even at a
profit. (To stay in balance they must adjust very quickly, so this is method of
speeding up the market.) But penalties simply hide the costs, which must be
born by those with bilateral contracts. It is wiser to use a locational energy
market as the real-time market and leave bilateral trading to forward markets
that can proceed at a more leisurely pace.
Chapter
3-4
23
24
Result 3-4.1
3-5
Chapter
know only their own costs, and no central coordinator is needed. For a power
market to perform efficiently, either it must be centrally coordinated or
suppliers must know a great deal about the market equilibrium price in
advance. The root of the problem is generation costs that fail to satisfy a key
economic assumption used to prove the efficiency of competitive markets.6
Because the proof of efficiency fails, uncoordinated power markets are
often believed to have no equilibrium or only a very inefficient one. In fact
they have equilibria that are extremely efficient but difficult to discover. This
chapter argues that at least a small amount of central coordination is well worth
while and should take the form of a centralized day-ahead market. The
question of whether this market should perform a full centralized unit
commitment is discussed in Chapter 3-7.
In a classic competitive market, suppliers can offer to supply (in a bilateral
market) or to bid (in an auction market) according to their marginal cost curve.
When all do so, the market discovers a perfectly efficient competitive
equilibrium. But with non-convex costs of generation, it becomes necessary
for generators to bid in a more complex manner.
Part 2 focused on the consequences of the far more serious demand-side flaws in
contemporary power markets. Part 3 ignores these and focuses on problems with generation
costs that are very small but unavoidable.
35
One market design allows suppliers to continue bidding their marginal costs
but include other costs and limitations in their multi-part bids. This has the
advantage of allowing suppliers to base their bids on easily obtained
information: their own costs. Another approach can take the form of a
decentralized bilateral market or a centralized market with one-part energy bids.
In both cases, suppliers must account for all of their costs and limitations in
their energy price bid so they do not bid their true marginal costs.7 With this
approach, suppliers must utilized considerable information about the external
market.
This chapter argues that the second approach, with its formidable
information requirements, causes coordination problems that are more severe
in bilateral markets than in a centralized one-part-bid energy auction. It
concludes that the coordination problems in a bilateral market will be
substantial enough that this approach should not be adopted for the day-ahead
market.
If bilateral markets promised some important advantage, their reduction of
efficiency and reliability might be justified. But bilateral markets have higher
transaction costs and are less transparent than a public auction. They are also
impossible to use for settling futures contracts. Finally, adopting a centralized
day-ahead market does not preclude the operation of a bilateral day-ahead
market.
Section 1: When Marginal-Cost Bidding Fails. A cost function is nonconvex if costs increase less than proportionally with output. Startup costs,
no-load costs, and several other components of generation costs contribute to
making them non-convex. Consequently generation costs fail to satisfy the
conditions necessary to guarantee a competitive equilibrium. This does not
necessarily prevent the market from being very efficient, but will cause
competitive suppliers to bid above marginal cost if they cannot bid their startup
and no-load costs directly. The amount they should bid above marginal costs
depends on the outcome of the market which can only be estimated at the time
of bidding.
Section 2: Reliability and Unit Commitment. In a bilateral market,
generators must commit (start running) without knowing which other
Day-ahead bilateral markets could allow very complex contracts but do not because it
would make contracting too expensive.
36
Chapter
3-6
obvious design just prices energy like the real-time market. A different
approach turns the system operator (SO) into a transportation service provider
who knows nothing about the price of energy but instead sells point-to-point
transmission services to energy traders.
Either of these approaches presents generators with a difficult question.
Some generators must engage in a costly startup (commitment) process in order
to produce at all. Consequently, when offering to sell power a day in advance,
a generator needs to know if it will sell enough power at a price high enough
to make commitment worthwhile. Some day-ahead (DA) auctions require
complex bids that describe the generators startup costs and other costs and
constraints and solve this problem for the generators. If the SO determines that
a unit should commit, it insures all its cost will be covered provided the unit
does commit and produces according to the accepted bid. Such insurance
payments are called side payments, and their effect on long-run investment
decisions is considered in Section 3-7.3.
The three approaches just named, energy, transmission and unit
commitment can also be combined into a single auction that allows all three
forms of bid; this is how PJMs day-ahead market works. Generators can offer
complex bids and receive startup-cost insurance if they are selected to run.
Anyone can offer to buy or sell energy with simple energy bids, and traders can
request to buy transmission from point X to point Y without mentioning a price
for energy. PJM considers all of these bids simultaneously and clears the
45
46
Determining Quantities
Auctions must determine the quantities sold and purchased and the price.
Although the two are closely related they are separate problems, and the same
set of bids can yield the same quantities but different prices under different
auction rules. From an economic perspective, it is quantities that determine
efficiency, and prices are important mainly to help induce the right trades.
47
In all four auctions described here, quantities of accepted bids are selected
to maximize total net benefit. This assumes the bids reflect the bidders true
costs and benefits. Although they may not, assuming that they do generally
encourages truthful bidding.
Total net benefit is the sum of customer and supplier net benefit, but it is
also the benefit to customers minus the cost to suppliers. This simplification
helps explain the role of price as well as the economists attitude towards price,
as an example will make clear. If a customer bids 100 MWh at up to
$5,000/MWh, and the bid is accepted, the benefit to the customer is $500,000.
If the market price is $50/MWh, the customers cost is $5,000 and net benefit
is $495,000. Similarly, if a generator bids 100 MW at $20/MWh, its cost is
presumed to be $2000. If the market price is again $50/MWh, its net benefit
will be 100x($50$20), or $3000. Writing this calculation more generally
reveals that the price played no role in determining total net benefit.
Total Net Benefit = Qx(VP) + Qx(PC) = Qx(VC),
where Q is the quantity traded, V the customers value, C the suppliers
production cost, and P is the market price. Thus the problem of maximizing
net benefit can be solved independently of any price determination.
In an unconstrained system, net benefit can be maximized by turning the
demand bids into a demand curve and the supply bids into a supply curve and
finding the point of intersection. This gives both the market price and a
complete list of the accepted supply and demand bids. Unfortunately
transmission constraints and constraints on generator output (e.g. ramp-rate
limits) can make this selection of bids infeasible. In this case it is necessary to
try other selections until a set of bids is found that maximizes net benefit and
is feasible. This arduous process is handled by advanced mathematics and
quick computers, but all that matters is finding the set of bids that maximizes
net benefit, and they can almost always be found.
48
Figure 3-6.1
Either marginal cost
or marginal value is
ambiguous.
of $220. Consequently it causes no problem to say that the market price equals
both the marginal cost of supply and the marginal value of demand. [fig]
Consider how net benefit changes when an extra kW is added to the total
supply of power at zero cost. This will shift the supply curve to the right and
will have one of two consequences. Assuming that both curves are step
functions, it will either increase the amount consumed by 1 kW, or not increase
it at all. If consumption is increased, the benefit of that consumption will be the
market price, and the cost of supply (the added kWh) will be zero. The net
benefit per kW is the market price. If consumption is not increased, some
supply with a cost equal to the market price will be displaced by the new zerocost kWh. This leaves benefit unchanged and reduces cost, so again the net
benefit per kW is the market price. If the supply and demand curves were
smooth, the result would have been the same except there would have been a
contribution from both increasing benefit and decreasing cost. Similarly the
reduction in net benefit from extracting a kW from the system is also given by
the market price. Thus, no matter how you compute it, the marginal value of
power to the system sets the market price.
Contrary to popular belief, auctions are not designed to determine who sells
and who buys by comparing bids to the price determined by marginal-cost.
Marginal cost pricing is not a goal, it is a byproduct. Auctions determine which
set of trades is the most valuable possible (feasible) set of trades, and selects
this set. Once they have been selected, the market price at each location is set
to the marginal value or marginal cost of supply to the system at that location.12
The market price, MP, determined in this way has two properties. First, at
every location, the MP falls on the dividing line between bids that are accepted
and those that are not. If some bids are partially accepted then MP is equal to
their price. Second, given the first property, the difference between the total
12
The net benefit should be in $/h.. A kW, rather than a MW, is used to indicate that only
a marginal change is being made. Technically one should use calculus, but this is of no
practical significance.
49
Market 2: Transmission
The transmission auction is equally simple for the system operator but requires
a complex pre-market step for market participants. Buyers and sellers must
find each other and make provisional energy trades that depend on whether or
50
QD
QA
MPX, MPXY
MP0, Q0
X, Y
Cstart
Startup cost.
Cost
Benefit
{}
51
Format (supply):
Format (demand):
Non-decreasing PS(Q)
Non-increasing PD(Q) or QD
Different supply and demand bids allowed for each hour.
Settlement Rules:
Supply:
Demand:
Pay:
Charge:
Both:
Comments:
QA x MP + (Q0 QA ) x MP0
QA x MP + (Q0 QA ) x MP0
Q0 is the quantity actually produced or
consumed. MP0 is the real-time price.
Because generators cannot bid their startup costs, it is generally believed they need to
submit different price bids in different hours. Loads, whose usage is largely unrelated to
price, must do the same. {QA} represents the set of accepted bid quantities, one for each
supplier and each demander; a different one in every hour.
To determine which bids are accepted, the auction first finds the set of supply and
demand bids which, if accepted, would maximize total net benefits, NB, to all market
participants. Then market price at each location is determined by asking how much NB
would be increased by making another kWh available at no cost at that location. After
introducing the free kWh, the optimal accepted bids are again determined, and this
determines a slightly higher NB. That is the value of the kWh and that value sets the price
per kWh at that location. The increase in value can come from either more consumption or
less production cost. A kWh is specified to mimic a marginal change which is normally
computed by taking a derivative.
A day-ahead market is a forward market, and the forward price holds if suppliers deliver
and customers take delivery of the DA quantity. Participants know they sometime cannot
make or take delivery exactly, so strategy in the day-ahead auction will depend on what
happens in the real-time market. New York, for instance, imposes a penalty of exactly (Q0
QA ) x MP0 on generators, completely cancelling real-time payments for extra production.
This is perhaps the greatest penalty in any current ISO market.
[box]]
52
Format:
Format:
Acceptance Problem:
Restrictions:
Constraints:
Settlement Rules:
QA x MP + (Q0 QA ) x MP0
Charge:
Where Q0 is the quantity actually transmitted from X to Y,
and MP0 is the real-time price from X to Y.
Comments:
Note that PT and MPXY are prices for transmission, not energy. Even if every MPXY is
known, it is not possible to compute energy prices from transmission prices. If there are 10
locations there will be 90 pairs of locations and consequently 90 transmission prices. But
MPXY = MPYX. Also, MPXY + MPYZ = MPXZ. All of these prices can be determined from
10 locational energy prices. Adding the same constant to these ten prices does not change
their differences and so leaves the transmission prices the same. The apparent complexity
of transmission prices masks an underlying simplicity of energy prices.
The net benefit of the transmission sold in the auction is the sum of the accepted
quantities times the price bid. This gives the value placed on the transactions by the bidders.
The extra value added by expanding the transmission capacity from X to Y by 1 kW for an
hour is called the shadow price of the line form X to Y. Setting MPXY equal to this price
makes it satisfy the two restrictions on MPXY. In addition, this price minimizes the charges
for transmission given these restrictions and gives competitive bidders an incentive to bid
their true values.
Allowing fixed-quantity bids creates difficulties, so it is probably best not to allow them.
Any rights that are purchased and not used are most likely still valuable as can be seen from
the settlement rules. If Q0 = 0, i.e. none of the rights are used, then the purchaser receives
a payment of QA x MP0 from the real-time market. This may be more or less than the cost
of the rights, QA x MP, but on average arbitrage should keep these nearly equal.
box]
53
Supply Format:
Demand Format:
Format (supply):
Format (for both):
Acceptance Problem:
Constraints:
Commitment:
Yes / No
{MPX} and {QA} for each hour.
Maximize total NB = (Benefit Cost).
MPX = Net Benefit, NB, of a costless kWh injected at X.
MPX is computed with the selected units committed.
Transmission security, ramp-rate limits, etc.
Settlement Rules:
Supply:
Supply:
Demand:
Pay:
Provide:
Charge:
R = QA x MP + (Q0 QA ) x MP0
Startup insurance if: Commitment = Yes
QA x MP + (Q0 QA ) x MP0 + uplift
Comments:
54
Format (supply):
Format (demand):
Format (transmission):
Formats (virtual):
Format (supply):
Format (both):
Acceptance Problem:
Constraints:
Commitment:
Yes / No
{MPX} and {QA} for each hour.
Maximize total NB = (Benefit Cost)
MPX = Net Benefit, NB, of a costless kWh injected at X.
Transmission security, ramp-rate limits, etc.
Settlement Rules:
Supply:
Supply:
Demand:
Pay:
Provide:
Charge:
R = QA x MP + (Q0 QA ) x MP0
Startup insurance if: Commitment = Yes
QA x MP + (Q0 QA ) x MP0 + uplift
Comments:
* This description is still simplified as it leaves out PJMs daily capacity market,
various other markets, and near-markets for ancillary services and all of the
accompanying uplift charges. However this formulation captures the central
characteristics of a flexible market containing the described Pool which uses complex
bids.
The acceptance problem solved by PJM differs from the one in Market 4 in that only
cost-savings from generation counts towards net benefit. In other words, a demand bid
can not set the price, only a supply bid can.
Ramp-rate limit is meant as a proxy for this and various other constraints on the
operation of generators, such as minimum down time. Startup cost, Cstart, is also meant as
a proxy for other costs that are not captured in the supply function PS(Q), such as no-load
cost.
[box]
Chapter
3-7
allow multi-part bids so generators can specify, start-up costs, no-load costs,
ramp-rate limits and many other costs and parameters, then have a system
operator make the traditional calculation. Traditionally, utilities have used a
great deal of information about each generator and in recent years have
performed sophisticated calculations to decide which units to commit. Some
power markets, such as those in California, Alberta and Australia, abandon
this approach with little apparent degradation of the dispatch.14
Chapter 3-5 considered whether the unit-commitment problem should be
solved with the aid of a centralized auction market or a decentralized bilateral
market and concluded that the auction market is preferable. Chapter 3-6
described four auction designs two of which will be analyzed in this chapter.
Market design #1, a pure energy market allows generators only 1-part bids
that specify a price of energy which depends on their level of output, and
market design #3, a unit-commitment (UC) market allows generators to
specify a long list of parameters describing their costs and physical limits.
Utilities use huge quantities of data, sophisticated software, and advanced
mathematics to determine which units to commit in advance and how long to
keep them committed. In a pure-energy auction, all of this is replaced by a
14
Quite possibly, these systems still rely on much of the data that is no longer collected but
which operators are well aware of; this would include ramp rates.
59
simple rule that says, use the cheapest power first.15 That this works at all is
testimony to the coordinating powers of a market, but there are a number of
unanswered questions. This chapter investigates how a market performs this
coordination and what problems it may encounter.
Section 1: How Big is the Unit Commitment Problem? Startup costs are
one of the more significant costs contributing to the unit commitment problem.
Typically, these amount to less than 1% of retail costs. More than half of these
are covered by normal marginal cost pricing. If the inefficiency caused by the
remaining startup costs were as high as 50%, the total loss from poor unitcommitment would be less than 1/4% of total electricity costs. Quite plausibly,
actual inefficiencies caused by even the pure-energy auction may be an order
of magnitude smaller.
Fixed cost must be covered by marginal cost pricing and they are much
greater than startup costs. As they are taken out of infra-marginal rents before
fixed costs, startup costs usually are covered by energy revenues except in the
case of generators that provide only reserves.
Section 2: Market Design #1, A Pure Energy Auction. Sometimes an
efficient dispatch and marginal-cost pricing do not cover startup costs.
Example 2 considers this situation from four perspectives. Case A
demonstrates that there is no competitive equilibrium in the classic sense.
Case B demonstrates that an auction without startup-cost bids or side payments
can have an efficient competitive Nash equilibrium in spite of lacking a classic
competitive equilibrium. Case C considers a 1-part, pure-energy auction. This
produces an inefficient but competitive equilibrium. Case D includes the
possibility of de-commitment, i.e. failing to generate the power sold in the dayahead market. This possibility leads to greater over-commitment in the dayahead market and then de-commits to the point of an efficient dispatch.
Section 3: Design #3, a Unit-Commitment Market. A unit-commitment
market insures generators dispatched in the day-ahead market against failing
to cover their startup costs. If all generators bid honestly, and the dispatch is
always efficient, these insurance payments will interfere with long-run
efficiency by providing inappropriately large investment incentives to
generators with especially large startup costs. Because insurance payments are
15
This chapter ignores the transmission congestion problem in order to focus on the classic
unit-commitment problem which assumes a unified market.
60
Conclusion
If generators cannot bid certain cost components and physical limits, they will
find ways to include these cost in prices they can bid, and they will find ways
to compensate for their limitations. These adjustments will typically be
imperfect, but if the problem is fairly small to begin with, the adjustments
usually will be more than adequate. In spite of this optimistic view, there are
no guarantees, and it makes sense to investigate the performance of markets
with known imperfections. It also makes sense to avoid rigid restrictions such
as a restriction to 1-part bids. Because markets are good at taking advantage
of whatever flexibility is available, adding a second part to the bid may
significantly improve the outcome. By the same token, adding 20 parts to the
bid is almost surely overkill.
Units
Startup costs are measured in $ per MW
of capacity started. For a unit that is
started once per day, the cost flow is
most conveniently measured in $/MWday.
For comparability, energy and fixed costs
will also be converted to $/MWday in
many of the examples.
Chapter
3-8
23
This value can be improved by the generator owner, and markets may lead to such
improvements.
75
ramping down. Sometimes generators are given credit for spin when they are
ramping up at full speed to keep up with the morning ramp. While these may
meet the letter of the definition, they do not meet its spirit because they could
not help to meet an contingency such as another generator dropping off line.
Typically the spinning reserve requirement of a system is roughly equal to the
largest loss of power that could occur due to a single line or generator failure,
a single contingency.
Providing spin from generators that would not otherwise run is costly for
several reasons. Most importantly, generators usually have a minimum
generation limit below which they cannot operate and remain stable. If this
limit requires a generator to produce at least 60 MW, and its marginal cost is
$10/MWh above the market price, and it can provide 30 MW of spin, this spin
costs $20/MWh. In addition there would be a no-load cost due to power
usage by the generator that is unrelated to its output. Startup costs should also
be included.
Providing spin from infra-marginal generators, ones with marginal costs
below the market price, is also expensive. If a cheap generator has been backed
down slightly from full output, its marginal cost may be only $20/MWh while
the competitive price is $30/MWh. In this case, backing it down one MW will
save $20 of production cost but will require that an extra MW be produced at
$30/MWh. The MW of spin provided costs $10/MWh. Sometimes it is
necessary to provide spin in this manner because too little is available from
marginal and extra-marginal generators. This is typically the case when the
market price reaches $100/MWh.
The three operating reserve markets are tightly coupled to each other and
to the energy market. California demonstrated the folly of pretending
differently and managed to pay $9,999/MWh hour for a class of reserves lower
than 30-minute non-spin at times when the highest quality reserves were selling
for under $50/MWh.24 This chapter will not consider the problem of how the
markets should be coupled, although the most straightforward answer indicates
they should be cleared simultaneously using a single set of bids that can be
applied to any of the markets.
Section 1: Scoring by Expected Cost. One approach to conducting a
market for spin is to have suppliers submit two-part bids, a capacity price, R,
24
The root of this problem was a market separation ideology, although several peculiar
rules played a role as did FERC.
76
25
This approach was developed by Robert Wilson for the California ISO, and is explained
along with the problems of expected-cost bidding in (Chao and Wilson, 2001).
77
raises some of the same gaming issues as two-part bid evaluation. These
remain to be investigated.
C + hMC
R, P
R + HP
R + hP
R + hP (C + hMC )
The lowest score wins. Say the bidder wants to achieve a score of S. It
must choose R = S HP, where it is free to choose any energy price, P. With
this choice, profit will be:
profit = (S HP ) + hP (C + hMC ), or
profit = S (C + hMC ) + (h H ) P.
S (C + hMC ) is unaffected by the bidders choice of P, so profit is controlled
by the term (h H) P. For any given score, S, the bidder can achieve any profit
level by choosing the correct P ! The choice of P will determine the bidders
choice for R, as described, but together P and R will produce any desired level
of profit and any desired score. This depends on the bidder knowing h, and the
system operator choosing H h . If H < h, then the bidder should bid an
extremely high price for energy and a low cost for capacity. If H > h, the