# Presentation: 862911

## Module 4a DiscussionReserve Markets Layer 1 Draft – Last Updated on November 1, 2004 

- The Structure Group
- 2000 W. Sam Houston Pkwy. South
- Suite 1600
- Houston, TX 77042

- July 27, 2004

## Contents

- Objectives
- Assumptions
- Challenges & Considerations
- Service Descriptions
- Process Overview
- Timeline
- Key Concepts
- Capability Summary
- Open Issues

***The Reserve Markets discussion will cover the following topics:***

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## Objectives

- Create a market for Grid West to acquire sufficient operating reserves
- Allow certified resources outside the CCA to participate in the reserve markets

***The Reserve Market module has the following objectives:***

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## Assumptions

- Grid West operates the Consolidated Control Area ( CCA)
- Grid West administrators an operating reserves market to meet the reserve requirements of the CCA
- Grid West posts reserve requirements for the CCA
- LSEs within the CCA are required to offer (“bring to the table”) sufficient reserves * to cover their obligations.  However, LSEs can offer this reserve at a price of their choosing.
- Grid West will accept voluntary and certified reserve offers from outside CCA
- Grid West is the buyer for the LSEs participating in the CCA.
- Technical requirements for reserve products will be defined by Grid West
- Market sellers will be required to obtain certification from Grid West before trading
- Existing reserve sharing arrangements administered by NWPP will be maintained

***The Beginning State Reserve Markets discussion assumes the following:***

** This requirement may be  certain reserve types such as regulation and contingency only. *

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## The RRG Services Model

***The following RRG Service Model defines the Grid West services that are to be provided to the Consolidated Control Area and the non-Consolidated Control Areas.***

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## Challenges & Considerations

- The Reserve Market is being developed for the proposed CCA; however, certified suppliers in non-consolidated control areas and outside of Grid West will be able to offer reserves for sale into the market on a voluntary basis
- As the CCA operator, Grid West will pre-certify all sellers of reserve products
- The Grid West Reserve Market includes a “qualified must offer” provision* for LSE’s within the CCA including direct load customers
- Opportunity to self-provide reserve is preserved by submitting “price-taker” bids.

***The Beginning State Reserve Market design must address the following challenges & considerations:***

- * LSEs within the CCA will be required to offer reserve in the market at least equal to  their obligations

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## Reserve Market Basics

- Reserves purchased by Grid West are for CCA reserve needs
- Reserve offers can come from any qualified party (inside and outside the CCA)
- Consolidating parties must offer at least their share of the CCA reserve requirement
- Awards based on lowest cost to provide from all offers
- Existing NWPP reserve sharing arrangements maintained with Grid West (CCA) as a participant

***The Beginning State Reserve Markets design has the following basic characteristics:***

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## Reserve Markets Service Descriptions

***Grid West may provide the following Reserve Markets services:***

- Provider of a day-ahead reserve market service by Grid West for its Consolidated Control Area.  Certified suppliers outside the CCA may offer to sell reserves into the market.

**Day-Ahead Reserve Market Service**

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## Reserve Market Products

***Grid West may support the trading the following reserve products:***

**Regulating Reserves**

- Regulation Up/Down - Generation capacity on Automatic Generation Control (AGC) continuously balancing generation and demand within its control area, thereby maintaining Area Control Error, system frequency and interchange with adjacent  Control Areas within acceptable limits.

**Contingency Reserves**

- Spinning Reserve – Unloaded capacity from synchronized resources responsive to system frequency that can be loaded within ten (10) minutes in response to contingencies on the grid.
- Non-Spinning Reserve – Capacity from resource that can be loaded or made effective within ten (10) minutes in response to contingencies on the grid.

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## Reserve Market Products

***Grid West may support the trading the following reserve products:***

**Replacement**
**Reserve**

- Replacement reserve: generation or other resources that Grid West can use within a sixty (60) minute period in order to maintain adequate reserves in the CCA.

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## Locational Characteristics of Reserves

- Grid West needs to forecast the system conditions and decide to what extent, if any, the reserve products are locational (needed within particular congestion regions)
- In order to bid a reserve product into a congestion region, a reserve supplier must be located in the congestion region or have the proper transmission rights to the congestion region

***Reserves will need to be locational when the system is congested:***

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## Ancillary Services Products 

**Seven (7) Ancillary Service Products**

**Black Start Service          **
**Voltage Support Service**

**Regulation Up Service**
**Regulation Down Service**
**Spinning Reserve Service**
**Non-Spinning Reserve Service**
**Replacement Reserve Service**

***Ancillary Services are necessary to support reliable transmission.  Some services will be procured through the market and others will be contract based:***

**Reserve Markets**

- * Note:  If Grid West enters into Reliability Must Run (RMR) agreements, they may be used as a source for Ancillary Services

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## Roles & Responsibilities

- Define reserve requirements
- Certify resources
- Receive and validate reserve offers
- Perform reserve auction and determine market clearing prices
- Post reserve market awards and prices
- Monitor performance
- Allocate reserve costs to users
- Settle for reserve market services

***Grid West will perform all the functions necessary to procure and deliver reserves for the Consolidated Control Area:***

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## Reserve Market Process Flow

**Time**

**Participant**

**Grid West****(CCA Services)**

**1000****Day Ahead**

**Non-Consolidated Control Area**

**Post reserve market information**

**Calculate/Post reserve requirements**

**Submit reserve offers**

**Two Days Before ****Dispatch Day**

**Start of Dispatch Day**

**Conduct reserve auction**

**Post auction results**

**1200**

**Grid West****(Regional Services)**

***Note:  Times shown are illustrative only to provide context. ***

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## Key Concepts

*Key Concepts*

**Reserve Obligations & Offer Requirements**
**Auction Methodology**
**Dynamic Scheduling**
**Interaction with energy schedules**

***The following Reserve Markets***** *****key concepts are explained in additional detail:***

**Reserve Markets**
*Module 4a*

**Day Ahead**

**Pre-Day Ahead**

**Long-Term Planning**

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## Key ConceptsReserve Obligations

*Key Concepts**Reserve Obligations*

**GEN 1**

**GEN 2**

**LSE 1**

**GEN 3**

**GEN 4**

**LSE 2**

**GEN 6**

**LSE 4**

**GEN 5**

**LSE 3**

**Consolidated Control Area****Regulation Reserve Requirement = 1000 MW**

**CA 1**

**CA 2**

**CA 3**

| Entity | In CCA | Load | CCA Load Ratio Share | Obligation |
| --- | --- | --- | --- | --- |
| LSE 1 | Yes | 1000 | 42%
(1000/2400) | 420 MW
(42% of 1000) |
| LSE 2 | Yes | 200 | 8%
(200/2400) | 80 MW
(8% of 1000) |
| LSE 3 | Yes | 400 | 17%
(400/2400) | 167 MW
(17% of 1000) |
| LSE 4 | Yes | 800 | 33%
(800/2400) | 333 MW
(33% of 1000) |
| LSE 5 | No | 500 | 0% | 0 MW |
| LSE 6 | No | 600 | 0% | 0 MW |
| Total for CCA LSE | No | 2400 | 100%
(2400/2400) | 1000 MW
(100% of 1000) |

**GEN 7**

**LSE 5**

**LSE 6**

**CA 4**

***Grid West will calculate the total reserve requirements for the CCA and determine the minimum offer requirement for each LSE:***

**Illustration**

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## Key Concepts Offer Requirements

| Entity | Obligation | MW Offer | Price |
| --- | --- | --- | --- |
| LSE 1 | 420 | 420 MW | $25/MW |
| LSE 2 | 80 | 80 MW | $55/MW |
| LSE 3 | 167 | 200 MW | $30/MW |
| LSE 4 | 333 | 400 MW | $35/MW |
| LSE 5 | 0 | 380 MW | $15/MW |
| LSE 6 | 0 | 0 | N/A |
| TOTALS | 1000
(Obligation) | 1480 MW
(Offers) |  |

**GEN 1**

**GEN 2**

**LSE 1**

**GEN 3**

**GEN 4**

**LSE 2**

**GEN 6**

**LSE 4**

**GEN 5**

**LSE 3**

**Consolidated Control Area****Regulation Reserve Requirement = 1000 MW**

**CA 1**

**CA 2**

**CA 3**

**GEN 7**

**LSE 5**

**LSE 6**

**CA 4**

***LSEs within the CCA are required to submit offers to cover their obligation (at a minimum).  Certified resources outside of the CCA can submit reserve offers into the market:***

**In this case, LSE 1, 3, and 5 would be selected to provide reserves to the region.  Marginal Price will be $30/MW-h**

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## Key Concepts Offer Evaluation Options

| Option | Name | Description |
| --- | --- | --- |
| A | “Single Step, Capacity Only” | The offers are ranked for each product and location based on capacity bids only (no energy component)
Last winning bid sets the capacity clearing prices |
| B | “Single Step, Capacity & Energy” | Reserve offers are ranked for each product and location based on the capacity price bid and its weighted energy price bid
Last winning bid sets the capacity clearing prices |
| C | “Multi-Step, Capacity & Energy” | Extension of Option B with multi-buy blocks
Efficiency of multi-product auction (CAISO’s “rational buyer”) |

***The following options are available for evaluating reserve market offers:***

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## Key Concepts Sample Reserve Market Offer

***The following are examples of potential Reserve Market offer:***

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## Reserve Auction MethodologyOption A: Single Step, Capacity Only

- Capacity Only
- Reserve Requirement: 30 MW** **
** **Winning Participants: 1, 2, and 3
-  Clearing Price: $9/MW

***Example of single-step Reserve Market Auction based upon capacity price only.***

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## Reserve Auction MethodologyOption B:  Single Step, Capacity & Energy

***Both capacity price and energy price (based on a probability of dispatch) may be used for offer evaluation.***

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## Reserve Auction MethodologyOption B: Single Step, Capacity & Energy

*Reserve Auction Methodology**Option B: Single Step, Capacity & Energy*

- Simple Capacity and Energy
- Probability factor=0.5  - new ranking below:
-  Winning participants are 1,2 and 4
-  Capacity clearing price is $10/MW

**    **_**Offer**_**	**_**Ranking Probability=.5**_**  **
-  1		20
-  2		17
-  3		24
-  4		19
-  5		24

***Example of single-step Reserve Market Auction based upon both capacity and energy price.***

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## Reserve Auction Methodology Option C: Multi-Step, Capacity & Energy

- Multi-Step Capacity and Energy:
- 1st Step: 10 MW with Probability factor=0.50
- 2st Step: 10 MW with Probability factor=0.25
- 3st Step: 10 MW with Probability factor=0.10

***Example of a multi-step Reserve Market Auction based upon both capacity and energy price.***

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## Auction MethodologyRecommended Option: Option A

- The settlement of energy from reserve products is based on real-time market.
- Grid West may need to settle with external control areas for shared contingency reserves.

***We recommend Option A (“Single Step, Capacity Only”) for evaluating reserve market offers. This option can be further developed to allow the energy output from reserve products to be treated as “price-takers”.***

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## Key Concepts Dynamic Scheduling Overview

- Technical requirement and certification process will be different for dynamic scheduling resources
- Dynamic schedules are implemented with either pseudo-ties (dynamic actuals) or dynamically updated interchange schedules.
- Grid West will require IWR rights at the time of scheduling for resources within Grid West
- Dynamic schedules offered at external ties will not require IWRs (need to discuss)
- Technical challenges
- Telemetering
- Jointly owned units
- Curtailments
- ACE modification within AGC for both CCA and a supplying control area

***Certified resources outside the CCA can offer into the markets.  If awarded, these reserves can be dynamic scheduled into the CCA:***

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## Key Concepts Interactions with Energy Schedules

- Reserve requirements are directly impacted by the “energy picture”
- Regulation offers need to be validated against capacity ratings and energy schedules
- Suppliers outside CCA may need IWRs, depending on system conditions, to participate in the Reserve Markets
- IWRs must account for both energy and reserve uses
- Schedules must account for both energy and reserves
- Minimum Offer Reserve Obligations can be met through contract with a certified third party

***Reserve markets are NOT standalone. They are highly interrelated with energy schedules:***

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## Capability Design Summary Reserve Auction Market

| Reserve Market Administration Service |  |
| --- | --- |
| Description of Function | Provide an auction marketplace for acquiring the needed reserve services for the CCA |
| Timing & Frequency | Daily, as a part of the Day-Ahead process.   |
| Grid West Responsibilities |  Certify reserve resources
 Post reserve requirements
 Forecast system condition and determine congestion regions, if any
 Receive reserve offers
 Validate reserve offers
 Administer the reserve auction 
 Post auction awards and prices |
| Transmission Owners Responsibilities |  Supply certification
 |
| Consolidated Control Area (LSEs) |  Submit offers and parameters for minimum requirements to Grid West (Self-provision may be accomplished by a price taker offer).
 Deployment of reserves
 Submit  voluntary additional offers, as desired |
| Participant (Seller) Responsibilities |  Obtain reserve certification through Grid West
 Submit voluntary reserve offers to Grid West, as desired |
| Methodology |  Simultaneous clearing auction for all reserve products for CCA
 Determine market clearing prices (and quantities) for each reserve product |
| ISO / RTO Benchmarks | Close to standard reserve markets with some minor exceptions - mature auction solutions exist today. |

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##  Review

***The following matrix summarizes the Beginning State design for CCA Reserve Market Service:***

| Description | Current Practice | Proposed Change | Opportunities/ Value |
| --- | --- | --- | --- |
| Reserve Markets | No central market exists for reserves.
 | Voluntary auction market for required CCA reserves. | New market for participants to sell  reserves.
Economic optimization of reserve costs. |
| Contingency Reserve Sharing | Many participants in the region are members of the NWPP. | Non-CCA participants will remain direct members of the NWPP.
Grid West will become a new member of the NWPP for the CCA.
NWPP will coordinate with Grid West during contingency events. |  Maintenance of existing reserve sharing program.
Regional coordination of contingency events. |
| Reserve Margins
(Regulating Reserves) | Each control area must meet its reserve requirements. | Control Area consolidation will allow consolidated participants to pool regulating reserves. |  Capacity savings resulting from pooling regulating reserve margins and use of RTEM. |

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## Open Issues

***The following issues have been identified during the initial round of design:***

**Dynamic Scheduling**– What are the transmission interactions for dynamic scheduling?
**Reserve Offers **– How will energy prices be accounted for in bid evaluation, if at all?
**Congestion & Reserves **– How will “locational markets” be implemented in the presence of congestion, if at all?
**Long-term Resource Adequacy **– How will Grid West ensure long-term resource adequacy? (e.g., ICAP, etc.)
**Reserve Market Power **– How will market power issues related to reserves be dealt with?
**Replacement Reserve Service **– Should LSEs within the CCA will be required to “bring to the table” sufficient replacement reserves?
**Reserve sharing settlement **– The current NWPP reserve sharing between CAs is financially settled with index price while the CCA settles with its providers based on market clearing prices.

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## Contents

- Objectives
- Assumptions
- Challenges & Considerations
- Service Descriptions
- Process Overview
- Timeline
- Key Concepts
- Capability Summary
- Open Issues

***Today we covered the following topics:***

- July 27, 2004