# Presentation: 798068

## Proposed Market Design for RTO West

**Presentation for **
**WestConnect Parties**
**Steven L. Walton**
**June 24, 2002**

## Overview

**Relationship  between NW Resources and RTO West market design**
**Changes made during Stage 2 Development work**
**Basics of the RTO West market design**
**Defining transmission rights and honoring pre-existing obligations**

## Northwest Resource Inventory

**Overall system is energy constrained – not capacity constrained**
**Highest NWPP actual peak load in January 2000 of 55,986 MW**
**“****Other Thermal” includes nuclear and combined cycle**
**Intermediate and peaking units are less than 5% of capacity**
**Unit commitment has never been a major issue for the Northwest**
- The bulk of the thermal units only off line for maintenance and forced outages
- Hydro units can reach full output start up in minutes

## Hydro Optimization

**Objective Function:  Maximize *****annual firm energy***** production from the coordinated operation of all hydro system projects**
**Constraints:**
- Water availability,  snow pack and rainfall
- Units are not independent, this means water leaving Grand Coulee must pass downstream projects within limited time due to limited downriver storage (pondage)
- Multi-purpose projects (irrigation, flood control, navigation,  fish and wildlife, recreation, municipal and industrial water supply, safety and power production) restrict range operational flexibility
**Result: **
- Incremental cost is difficult to determine for hydro
- Opportunity cost has to include economic loss when departing from long term optimum

## Slide 5

## Historical Bilateral Market

**Bilateral contracts developed to achieve hydro-thermal coordination**
- Centralized optimization would be exceedingly complex
- Forward market serves a surrogate coordinator
**Peak and shaping provided from hydro with off-peak refill **
- Like an idealized “pumped hydro” plant:
*Hydro energy output used on-peak to follow load with stored water*
*Energy returns off-peak allow refill of storage, as if from pumping*
- Implemented through various exchanges, purchase and sales
**Trading hubs at COB and MidC developed to meet the needs of the bilateral trade to enhance hydro-thermal coordination activity**

## Implications for RTO West Market Model

**Nodal prices must be based on voluntary, bid based prices from generators and loads**
**Unit commitment process must be based on self-commitment to keep river operations with the hydro project operators**
**New day-ahead and real-time markets must be consistent with and converge with the existing active bilateral forward market**

## FERC Standard Market Design Basics

**Centralizes both Day-Ahead and Real-Time Energy Markets **
- Allows purchase of supply through unbalanced schedules
- Requires a centralized generation adequacy standard
- Requires Centralized Unit Commitment
- Standard for thermal systems with a mix combination of peaking, intermediate and base load units whose start-up and minimum run costs must be considered
- Hydro self-commitment is treated as an exception.
**Source to Sink Pair Scheduling **
**Locational Marginal Prices are determined by a security constrained dispatch **
- Mandatory bids from all units used to meet generation adequacy test
**Financial Transmission (Obligation) Rights Model**
- Pays the difference in prices between source and sink to the right holder
- When price difference is negative, the right holder pays the RTO
- Converting prior rights: Can grant either new rights or auction revenues

## Moved from Physical Rights, Flowpath Model to Financial Transmission Options
New model accepts all schedules
Right are hedges against congestion costs
Moved from Zonal to Nodal scheduling (Injection/Withdrawal Pairs) 
Eliminated the complex problem of identifying commercially significant flowpaths and residual congestion
Adopted Locational Nodal Prices
Prices are calculated for each Injection and Withdrawal Point which eliminates ambiguity
Adopted Cataloged Transmission Rights to deal with “over allocation” of pre-existing transmission rights

- New model accepts all schedules
- Right are hedges against congestion costs
**Moved from Zonal to Nodal scheduling (Injection/Withdrawal Pairs) **
- Eliminated the complex problem of identifying commercially significant flowpaths and residual congestion
**Adopted Locational Nodal Prices**
- Prices are calculated for each Injection and Withdrawal Point which eliminates ambiguity
**Adopted Cataloged Transmission Rights to deal with “over allocation” of pre-existing transmission rights**

**RTO West Changes ****During Stage 2**

## Day-Ahead Market - I

**Based on bilateral trading with balanced schedules**
- Provides for Voluntary Unit Commitment
- Recognizes hydro impact and  leaves river operations with project operators and subject to existing coordination agreements.
- Generation adequacy remains the responsibility of the party serving load in conjunction with State regulation
**Balanced Schedules are made via Scheduling Coordinators **
- Schedules are made between Injection and Withdrawal Points
*Submitted in the Day Ahead for each Hour of the Schedule Day*
*All Balanced Schedules are Accepted*

## Day-Ahead Market – II

**Locational prices derived from voluntary bids for congestion re-dispatch**
- Security constrained, least cost re-dispatch used to clear congestion
- Generation (and DSM) re-dispatched based voluntarily bid prices
- Nodal prices at each injection and withdrawal bus are calculated from inc./dec. bids exercised for redispatch
- Nodal prices may be aggregated into hub or load zones prices
**Cost of congestion is the (positive) price spread between nodes multiplied by the size of the schedule**
**Schedules must pay the congestion costs (if any) unless hedged**
- Uncovered schedules may opt between paying actual congestion cost or paying up to a limit value

## Day-Ahead Market - III

**Two types of hedges are available**
- Financial Transmission Options
*Provide a credit against congestion charges*
*Tradable*
- Cataloged Transmission Rights
*Exempt a schedule from congestion charges*
*Non-Tradable*
**Day-Ahead Congestion clearing will be settled as a separate market from Real-Time**
- Schedule modifications after Day Ahead are subject to additional resulting congestion costs if any in Real-Time Market
**RTO West will have Market Monitoring and Provisions for Market Power Mitigation**

## Real-Time Market

**Congestion clearing**
- Review actual schedules & re-analyze congestion
- Order selected generation to re-dispatch
- Charge for congestion created by schedule modifications
**Imbalance market will correct deviations from balanced schedules and over actual losses**
- Same locational prices apply to real-time congestion clearing and imbalance
- Real-time will be settled as a separate market from Day-ahead

## Existing Transmission Rights

**Defined by injection-withdrawal rights from specific points in the network**
- Point-Point – from PORs to PODs include individual buses and trading hubs (COB & Mid-C)
- Network – from network resources to load buses
**Service is shaped and has optionality**
- Network service followed load
- Alternate and mutually exclusive PORs and PODs
- Recognition of diversity provided additional services
- Scheduling flexibility up to real-time

## Financial Transmission Options (FTOs)

**FTOs are congestion cost hedges**
- Defined as source-sink pairs in a given direction
- Not required to schedule, all schedules accepted but must pay congestion cost if uncovered
- Value of an FTO equals the price spread between named nodes
*FTOs have positive value when congestion is in the same direction*
*When congestion is in the opposite direction their value is zero.*
- FTOs pay up to the cost of right holders congestion cost, but no more.
*In settlement, a Scheduling Coordinators full portfolio of FTOs is applied to its total congestion cost obligation (fungible value)*
*The value of excess FTOs is obtained by sales in the secondary market by the FTO holder*
**Existing rights may be converted to FTOs **
- Conversion is voluntary
- A fixed strips of rights is issued

## Problems in Converting Existing Rights

**The easy part -- mapping locational characteristics**
- From POD, POR, network resources, area loads
- To injections and withdrawals at nodes, hubs, load zones.
**The hard part – matching optionality characteristics**
- Over commitment occurs if existing rights are converted as  full strips of financial rights
*Occurs because seasonal and load diversity is ignored*
*Use of pro rata reductions to resolve over commitment causes a cost shift due to altered protection for unchanged usage*
- Yet the physical system is able to accommodate the use of existing rights without substantial congestion cost
*An approach needed which takes advantage of diversity *

## Catalogued Transmission Rights (CTRs)

**The RTO West pools unconverted existing rights as Cataloged Transmission Rights (CTRs)**
- A Catalogue prepared codifying existing rights:
*Obligations:  (1) injection and withdrawal points, (2) limits on simultaneous usage (3) timing restrictions*
*Assets:  Provided by PTOs to honor issued rights such as remedial action schemes, redispatch calls, etc. *
- Obligations versus assets tested to see if system capacity plus provided assets is adequate to honor the aggregate of existing commitments
**RTO West releases additional system capacity as Financial Transmission Options**
- CTRs use diversity of pre-existing commitments
- Allows RTO West to maximize FTO release

## FTOs versus CTRs

**Characteristics**
- Creation
*FTOs made available by RTO West using available transmission capacity, diversity, and netting of schedules *
*CTRs arise from pre-existing agreements and obligations*
- Fungibility
*FTOs can be applied any schedule (“Fungibility”)*
*CTRs only apply to the catalogued IP / WPs*
- Tradability
*FTOs are tradable *
*CTRs are not tradable, although an release provision is provided*
**Voluntary Conversion of CTRs to FTOs**
- A party with a pre-existing agreement may convert to direct RTO West service and transform its CTRs to a set of FTOs
- CTRs are transformed to FTOs the user naming a set of feasible dispatches (i.e., exercising a more limited optionality)

## CTRs and Diversity

**The “system” currently works with minimal congestion cost because PTOs take advantage of the diversity of transmission use.**
- If all CTR rights were implemented simultaneously as full strips, the system would be overloaded and/or overcommitted.
- PTOs use of the CTRs will continue to reflect diversity of use when they submit their catalogues and receive CTRs.
**Once the catalogue is approved, RTO West take on the obligations to meet these pre-existing obligations.**
**Operationally, RTO West will be using the diversity and netting of transmission use to make good on pre-existing contract service and to issue FTOs. **

## CTR Voluntary Early Scheduling

**Some pre-existing agreements allow schedule changes after Day-Ahead pre-schedule**
- RTO West must limit FTO issuance to insure that it can cover the cost of  congestion re-dispatch if the schedule is changed prior to real-time
- If a right holder’s use were known ahead of time, more FTOs could be issued
**RTO West will facilitate an Early Scheduling procedure (“Early Lock Down”) **
- A right holder may commit to limit the use of its scheduling rights (i.e. give up its optionality prior to pre-schedule) in exchange for revenues derived from the sale of additional FTOs.
- If the right holder makes this commitment, it then becomes responsible for congestion cost if it must change its schedule after the commitment is made.
- RTO West is able to auction additional FTOs based on the capacity released by the early scheduling.

## CTRs are used by RTO West to honor the pre-existing load service and obligations of the PTOs
The catalogue represents pre-existing transmission commitments that RTO West must fulfill as well as an inventory of transmission assets and tools
RTO West will be able to access these assets to in order to honor the pre-existing commitments
So long as each PTO’s assets are greater than or equal to its obligations, RTO West will be able to satisfy pre-existing obligations

- The catalogue represents pre-existing transmission commitments that RTO West must fulfill as well as an inventory of transmission assets and tools
- RTO West will be able to access these assets to in order to honor the pre-existing commitments
**So long as each PTO’s assets are greater than or equal to its obligations, RTO West will be able to satisfy pre-existing obligations**

**Cataloguing ****Pre-Existing Rights**

## CTRs -- Balancing Obligations & Assets

**PTOs will identify the range of allowable transmission use for each pre-existing transmission contract or **_**obligation**_
- Injection and withdrawal rights in terms of magnitude and location
- Injections and withdrawals need not balance but should represent the range of permissive use
- Optionality of pre-existing right
- Ancillary services are not covered in the catalogue
**PTOs will identify the **_**assets**_** that RTO West must control to meet the aggregate of the PTO’s pre-existing obligations**
- The starting point is including all RTO West Controlled Facilities
- PTO adds other assets as needed to adequately serve the aggregate set of obligations
- Other assets may include redispatch, schedule restrictions, RAS, and other equipment (phase shifters)

## Catalogue Sufficiency 

**The PTO submits its catalogue whenever there is a material change in the underlying obligations or assets**
- RTO West uses simultaneous feasible dispatches in a power flow analysis to check that the assets are sufficient
- If the catalogue is found insufficient, the PTO adjusts its obligations or assets to correct the insufficiency
**Once a PTOs catalogue is found sufficient, RTO West will evaluate the aggregate of all PTOs’ catalogs for sufficiency**
- If the aggregate is insufficient, the PTOs shall collectively determine the corrections and how any costs should be shared
- Once the aggregate test has been passed the PTO’s catalogue will be “deemed” sufficient for meeting all transmission use within CTR