Business Architecture and Technology Initial Presentation and Discussion LMP Calculator Replacement Main Points of Todays Presentation The ISO is Proposing to change the LMP Calculator algorithm ID: 929775
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DECEMBER 9/10, 2014
Ronald Coutu
Business Architecture and Technology
Initial Presentation and Discussion
LMP Calculator Replacement
Slide2Main Points of Today’s Presentation
The ISO is Proposing to change the LMP Calculator algorithmThis change is consistent with recent IMM and EMM recommendations
There are two main drivers for this changeFrequency of price corrections caused by the current LMP CalculatorReal-Time inconsistencies between dispatch prices and settlement prices (as our Market Monitors have identified)
The following slides explain the drivers in more detailProposed Market Rule revisions to accommodate this change will be presented at the January MC
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Slide3Objectives of Today’s Presentation
Explain the original concept of the LMP CalculatorExplain the issues with the Current LMP Calculator solution
Explain the proposed replacement LMP Calculator based on Nodal Dispatch RatesIndicative Estimates of historical LMPs based on Nodal Dispatch RatesSchedule for this change at the committee
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Slide4Current LMP Calculator
The initial implementation of two-settlement locational markets (SMD) instituted a special “pricing run” to calculate RT LMPs with specific rules around the inputs
This software is called the LMP CalculatorThis software runs on a automated process, every five minutes
The inputs to this software are:A Dispatch solution applicable to the same timeframe
The most current “state of the system” (state estimator solution)
Energy Offers (adjusted for fast-start resources)
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Slide5Current LMP Calculator - Concept
The initial “concept” behind the LMP Calculator was that it would create an additional incentive for the generators being dispatched to follow those dispatch instructions
Assumption being if your marginal unit is not allowed to set the price, due to your unit not following dispatch instructions, something cheaper would set the price and therefore the marginal unit would have lower revenue than if it followed dispatchOur External Market Monitor has concluded that this “concept” is not effective in practice, and can actually harm resources that are following dispatch instruction
(Potomac Economics - 2013 Assessment of the ISO New England Electricity Markets – Page 104)
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Slide6Current LMP Calculator
- Process
LMP Calculator runs a “limited optimization” allowing only units that were being dispatched and were within a tolerance of their dispatch points to be ‘dispatchable’ for pricing purposes.
This is NOT the same algorithm this is used in the ISO’s actual security-constrained economic dispatch optimization.Instead, the pricing dispatch is run with the actual load but only allows the software to “redispatch” the units by a very small amount to determine the marginal units and therefore determine all prices
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Slide77
RT LMP Process
LMPs
for all
locations
State Estimator
RT Data
Metered Generation
Metered Loads
Dispatch
Rates and MW
System Conditions
Forecasted
Demand
Generator MW
UDS
Binding Transmission Constraints
Generator Offers
LMP Calculator
Slide8Current LMP Calculator - inputs
Approved dispatch solution inputs to LMP CalculatorDetermines where units were being dispatched
Determines initial reserve designations for unitsSource of reserve prices Source of the binding constraintsState Estimator inputs to the LMP Calculator
Actual generation of unitsCurrent status of units (Unit Control Modes)Fast start resources offers are changed to “real-time offer prices”
Includes fixed costs (startup,
noload
) in certain intervals
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Slide9Current LMP Calculator - Issues
Issues with the current LMP Calculator can be broken into two different issues:Price Corrections
Consequences of Price Corrections
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Slide10Current LMP Calculator – Price Correction Issues
LMP Calculator has issues with certain cases
Certain combinations of reserve and transmission constraints binding Under these circumstances incorrect prices are calculatedSometimes shows as Reserve Constraints not showing in Energy LMPs so Reserve Clearing Prices are greater than LMPs
Requires price correction prior to finalizing RT prices for settlementsThese issues are one of the biggest causes of price correction.
Vendor’s experts indicate
no permanent fix can be assured
that retains the current “limited optimization” algorithm in LMP calculator
Note: Current method of price correction
is
similar to the new LMP Calculator based on Nodal Dispatch Rates being proposed
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Slide11Current LMP Calculator – Consequences of Price Correction Issues
The
current LMP Calculator algorithm may not always meet the goal of the providing the conceptually “correct” priceThe IMM has been recommending fixes to the LMP Calculator since 2010:
“One purpose of the LMP calculator is to prevent resource owners from using underperforming resources to raise prices. However, when resources operate at less than their desired dispatch point, the LMP calculator may produce LMPs that do not reflect scarcity when reserves are insufficient to meet operating reserve requirements.”
(2010 IMM AMR – page 26-27)
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Slide12Current LMP Calculator – Consequences (continued)
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The IMM also points out that the LMP Calculator does not produce price differences very often: “While the LMP calculator may understate the value of reserves, it provides little, if any, change in prices from the UDS solutions, even under normal operating conditions. This is illustrated in Table 2-3, which compares the LMP calculator and UDS prices for all pricing nodes in 2013 and shows that the LMP calculator and UDS prices are often very close. The table shows the percentage of time the LMP calculator price was within a given percentage of the UDS price.
Slide13Current LMP Calculator – Consequences (continued)
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The IMM in the 2013 AMR clearly stated their recommendation for the LMP Calculator:
“Recommendation. The IMM recommends that the ISO discontinue or replace the LMP calculator for calculating real-time prices.“
The External Market Monitor also identified issues with the current LMP Calculator:
“The primary benefit of ex post pricing is that it allows the ISO to correct the real-time prices when the ex ante prices are affected by corrupt data or communication failures. Given that ex post prices are sometimes set at inefficient levels, particularly when the system is under shortage conditions,
we recommend that the ISO consider discontinuing the current ex post pricing model and set prices consistent with its ex ante pricing.”
(Potomac Economics - 2013 Assessment of the ISO New England Electricity Markets – Page 107)
Slide14Proposed LMP Calculator Replacement
LMP Calculator is Real-time only, no changes to DA LMPs
No changes to the Dispatch solution software and process for sending Dispatch MW and Nodal Dispatch Rates ($/MWh)LMP Calculator will still run automatically every five minutes
RT LMPs will be calculated using the same security-constrained economic dispatch solution software, rather than the ‘limited optimization’ algorithm that occasionally produces incorrect initial prices (generally during reserve shortages)
This change to use nodal dispatch rate pricing for RT LMP mirrors the approach currently in use in other ISO/RTOs (PJM, NYISO, MISO)
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Slide15Proposed LMP Calculator Replacement
New Process: Run a Dispatch solution every five minutes (same as the security-constrained economic dispatch) for the purposes of calculating LMPs
Automated processProduces Nodal Dispatch $/MWh
that are equivalent to the Nodal Dispatch $/MWh that are sent to the generators through the dispatch (In EMM terminology the “ex ante” RT LMPs)
These Nodal Dispatch $/
MWh
will be used as the final 5-minute LMPs that are the basis for the hourly integrated LMPs for settlements
Also produces Reserve Market Clearing Prices and Reserve Designations based on this dispatch solution for the 5-minute pricing intervals, which are then integrated for hourly settlements
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Slide16Proposed LMP Calculator Replacement – Impact
Estimates Using Historical Data
The change to the LMP calculation algorithm may result in slightly different average RT LMPs Following slides provide indicative
estimates. Basic approach:The ISO analyzed the difference between the Nodal Dispatch Rate (“ex ante”) prices and the current LMP Calculator (“ex post”) prices using historical data
Analysis examines 8583 hours from 10/1/2013 to 9/30/2014 (excludes price corrected hours and hours with less than 12 price observations)
The following slides use the term “Proposed Nodal Dispatch Rate” since it is using historical nodal dispatch price as a proxy for the new LMP Calculator values
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Slide17Indicative Estimates of Nodal Dispatch Rate based LMPs
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Slide18Indicative Estimates of Nodal Dispatch Rate based LMPs (Continued)
The causes of these changes have been identified in the EMM report (page 102-103 of 2013 report), in the report the EMM also discusses the reasons for the persistent upward bias of the Current LMP Calculator
The difference in this analysis ($0.16) are similar to the differences that the EMM identified ($0.17) for the whole of 2013
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10-1-2013
to 9-30-2014
Average
Proposed Nodal Dispatch Rate
$63.78
Current
LMP Calculator
$63.94
Delta
-$0.16
Slide19Indicative Estimates of Nodal Dispatch Rate based LMPs (Continued)
For the hours examined, the following table gives the count of hours in which the Proposed Nodal Dispatch Rate results in a lower price than the current, post-correction LMP.
It is close to, but not quite, a 50/50 split: Approximately half the time the nodal dispatch rates are higher than current LMP Calculator’s price, and approx. half the time the opposite.
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Hours with Proposed NDR < Current LMP
Hours with Proposed NDR >= Current LMP
4468
4115
52%
48%
Slide20Conclusion
New LMP Calculator will use the same software as ISO’s actual security-constrained economic dispatch solution
Dispatch Nodal Rates and LMP Calculator price result will be consistentWill reduce frequency of RT LMP price corrections, which cannot be resolved using the existing LMP Calculator algorithmResponds to the recommendations of the IMM and EMM to address these LMP Calculator issues
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Slide21Schedule for this change
Date
Committee
ActionDec 9-10, 2014
Markets Committee
Discuss Proposal
Jan 13-14, 2015
Markets Committee
Market Rules
Feb, 2015
Markets Committee
Vote
Rules
May, 2015
Planned Effective Date
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