Papers

Transmission Risk Hedging Products: Solutions for the Market and Consequences for the TSOs.” In, 2006.Abstract

Executive Summary

In the framework of the EC Regulation 1228/2003, the goal of this background paper is to provide a description of the different market based solutions available for transmission risk hedging in congestion management. This paper presents three different transmission risk hedging products that can be offered to the market in the field of cross-border trade and congestion management. Due to various facts several price zones exist within the overall European electricity market where the demand of each zone is met in real time by the production of the respective zone and a zone specific market price is found (e.g. on the respective Power Exchange). This raises the question of how a market player wishing to buy electricity in a certain price zone and to sell it in another one can hedge the risk of a price difference emerging between those zones. This paper describes the three main kinds of transmission risk hedging products identified by ETSO: • Physical Transmission Rights (PTRs); • Financial Transmission Rights (FTRs); • Financial Contracts for Differences (CfDs); The paper also provides a first evaluation of the different solutions adopting a markets’ perspective. From a practical perspective, the implementation of forward PTRs only requires a minimum of market infrastructure and contractual arrangements. This is probably the reason for this product to be widely and successfully implemented on most European interconnections. However, Market Splitting or Coupling or co-ordinated implicit auctions would be the main prerequisite towards the implementation of marketbased FTRs and CfDs in Europe. Vice versa, in case Implicit Auctions (Market Splitting or Coupling) are introduced FTRs form a reasonable complement to those schemes for transmission hedging.

ERCOT,The Market Guide: A Guide to How the Electric Reliability Council of Texas (ERCOT) Facilitates the Competitive Power Market.” In, 2005.Abstract

Excerpt from the Introduction:


The ERCOT Independent System Operator (ISO) is the independent, not-for-profit organization responsible for the reliable transmission of electricity across Texas' interconnected 37,000-mile power grid. The ERCOT ISO has the responsibilities of ensuring reliable power grid operations in the ERCOT region jointly with the electrical energy industry organizations that operate within that region, ensuring open access to transmission ERCOT wide and distribution systems in areas permitting competition, ensuring the timely conveyance of market information to market participants, and ensuring accurate accounting of power produced and delivered.
To support these roles the ERCOT ISO focuses on the development, implementation, and ongoing management of reliable market and operating systems, transmission planning, retail mechanics supporting retail choice, accountable and reliable wholesale settlement and billing systems, and financial risk strategies. 4 ERCOT members serve about 85% of the electrical load in Texas, and have an overall generating capacity of approximately 75,000 Megawatts (MW). Because ERCOT is located entirely within Texas, the Public Utility Commission of Texas (PUCT) is the principal regulatory authority. As of January 2005, ERCOT membership consists of 17 Industrial Consumers, 3 Retail/Commercial Consumers, 41 Electric Cooperatives, 16 Independent Generators, 19 Independent Power Marketers, 36 Independent Retail Electric Providers, 8 Investor Owned Utilities, and 19 Municipal Owned Utilities.

Sotkiewicz, Paul, and Mario Vignolo. “Towards a Cost Causation Based Tariff for Distribution Networks with DG.” In, 2006.Abstract
This paper decomposes the effects of the transition from an average cost distribution tariff to a cost causation based distribution tariff, in terms of time and location, that uses nodal prices to recover losses and an “extent-of-use” method to recover fixed network costs based on use at coincident peak. Our decomposition is designed so that the effects of using coincident peak and location for fixed network charges, as well as using marginal losses under constraints recovering the exact amount of losses, and recovering exactly the cost of network service in total can be isolated and analyzed separately. We apply our tariff transition and decomposition method to an example network with data from Uruguay to isolate the various effects with and without a distributed generation (DG) resource. We show moving to coincident peak charges and to fully charging for marginal losses while rebating the merchandising surplus through the fixed charges have the greatest effects on changes in distribution tariff charges. DG provides countervailing cost changes to distribution tariffs for loads through loss reductions and the implicit “creation” of new network capacity for which it is paid. The interaction of all these effects may lead to outcomes that are counter-intuitive, which further supports the need to decompose the tariff changes to fully understand the reasons for the direction and magnitude of changes in tariff charges in the transition to tariffs based more on cost causation.
Hogan, William W.The Visible Hand in Electricity: Using a Pool to Expand Customer Choice.” In, 1997. Publisher's VersionAbstract
Introduction. The United States is wasting time and effort in a confused debate over the role of an Independent System Operator (ISO) in a pool-based system for introducing competition in the electric sector. Everyone wants to allow for bilateral transactions between generators, marketers and final customers. The pooling approach allows for customer and generator bids to be cleared through a coordinated spot market administered by the ISO. Despite much high rhetoric to the contrary, the two objectives are not necessarily mutually exclusive, or even in conflict. An attractive option is to embrace both, and give market participants the maximum set of choices. The real issue, much obscured by the labels, is the extent to which the market will be efficient, non-discriminatory and open to all. The underlying technical problem is the coordination of short-term network interactions and treatment of transmission congestion.
Hogan, William W.Restructuring the Electricity Market: Institutions for Network Systems.” In, 1999. Publisher's VersionAbstract
Public policy development for electricity restructuring emphasizes institutions for market operations in network systems. The different models present alternatives for the mix of responsibilities of the necessary system operator. Customer flexibility and choice require efficient pricing; inefficient pricing necessarily limits market flexibility. The analysis points to an integrated independent system operator, de jure on its own or de facto within a larger transmission organization, with locational marginal cost pricing rules, as the model most likely to be successful in preserving system reliability while supporting competitive markets with customer choice.
Hogan, William W.Evaluation of Alternatives for Power System Coordination and Pooling in a Competitive Environment.” In, 1996. Publisher's VersionAbstract

The paper defines and classifies essential issues that relate the need for electric power system coordination with the increasing development of competition. Principles are formulated and a coordination model and a market structure are proposed, emphasizing the need for economic dispatch in the wholesale market. A detailed comparison is made of the market and pooling implementations developed in Argentina and Chile, countries that have pioneered the creation of competitive markets in the electric energy sector. An evaluation of strengths and weaknesses of those two implementations is included.

Hogan, William W.Competitive Electricity Market Design: A Wholesale Primer.” In, 1998. Publisher's VersionAbstract
A short-term electricity market coordinated by a system operator provides a foundation for a competitive electricity market. Combined with long-term contracts for generation and transmission congestion, the spot-market and competitive market pricing can support open access to the transmission grid.
Hogan, William W.A Competitive Electricity Market Model.” In, 1994. Publisher's VersionAbstract

Excerpt from the Introduction:

The electricity market is moving towards greater reliance on competition. Changing technology, new entrants in the generation market, and a legislative mandate to provide access to the essential transmission facility have accelerated a process of competition that will require major changes in the institutions and operations of the electricity market. Because of the special features of electricity supply, however, there are natural monopoly elements in electricity markets. Complete laissez faire competition is not desirable, and in the strictest sense would not be technically feasible. Even though increased competition appears inevitable, therefore, the specifics of how to implement an efficient competitive market are neither inevitable nor obvious. This paper outlines such a competitive market model.

Hogan, William W., and Susan L. Pope. “Priorities for the Evolution of an Energy-Only Electricity Market Design in ERCOT.” In, 2017.Abstract

Executive Summary:

Electricity markets employ open access and non‐discrimination to foster competition, market entry, and innovation.    The physical characteristics of the electricity system require explicit consideration of key elements in electricity market design.  Pricing and settlement rules for the real‐time market must provide efficient incentives, both for short‐term operations and long‐run investment. The ERCOT energy‐only market design emphasizes the need to get the real‐time prices right.The recent innovation of the ERCOT Operating Reserve Demand Curve (ORDC) addressed the fundamental problem of inadequate region‐wide scarcity pricing that has plagued other organized markets, which have exhibited inadequate incentives both for reliable operations and efficient investment.  

ERCOT employs an open wholesale electricity market as the basis for short‐term reliable electricity supply as well as for long‐term investments to maintain reliability in the future.  A review of energy price formation in ERCOT leads to two important conclusions: (i) while the ORDC is performing consistently within its design, scarcity price formation is being adversely influenced by factors not contemplated by the ORDC; (ii) other aspects of the ERCOT market design must be improved to better maintain private market response to energy prices as the driver of resource investment, maintenance expenditure and retirement decisions.   

The paper identifies three general issues that have affected ERCOT energy prices in recent years, and recommends policy and price formation improvements consistent with efficient market design. These recommendations cannot reverse the impact of broader economic trends, such as low natural gas prices, or national policies, such as subsidies for investments in renewable resources.  However, the stress of these forces has exposed areas where there is a need for adjustments to pricing rules and policies within ERCOT.  

Hogan, William W.Comments on the California ISO MRTU LMP Market Design.” In, 2005. Publisher's VersionAbstract

Excerpt from the Executive SummaryL

The California Independent System Operator (Cal ISO) proposal for its electricity Market Redesign and Technology Upgrade (MRTU) builds on basic principles of efficient use of electric networks and the associated locational marginal pricing (LMP). The present report reviews the details of the still evolving design to compare it against related features of other markets, identifies potential problems or internal inconsistencies, and suggests directions for future modifications. In addition to a review of the documents identified below, there has been extensive discussion with the CAISO as the design evolution has continued. The comments here reflect the MRTU design as specified in the documents we reviewed, as clarified in discussions with ISO staff.

The starting principles of the MRTU embrace the essential foundations of a successful electricity market design including bid-based, security-constrained, economic dispatch with locational prices, license plate access charges, bilateral schedules, financial transmission rights, a consistent network model for commercial transactions recognizing actual physical conditions, consistent day-ahead and real-time markets, unit commitment with simultaneous optimization of energy and ancillary services, and a multi-settlement system. The MRTU will be a major and important reform needed to address the difficulties inherent in the original market design that is to be replaced. The MRTU is also a complex package with many interconnected details developed through a lengthy process of analysis and interaction with stakeholders. The present report highlights problematic features of several of these details, ranging from serious matters that require immediate attention to improvements that should be considered for future implementation. The critical problems can be fixed to produce a highly effective market design.

Importantly, this evaluation is limited to the LMP market design and has not reviewed operational elements of the MRTU. In addition, this evaluation is limited to the conceptual description of the LMP market design and has not reviewed the proposed implementation of this market design.

Hogan, William W.An Efficient Bilateral Market Needs a Pool. .” In, 1994. Publisher's VersionAbstract
Excerpt from the Summary:

The Commission through its "Blue Book" proposals has launched a process moving with breathtaking speed to completely restructure the electricity industry. The call to mark "the end of one era and the beginning of another" has been heard, and the participants are fully engaged in looking ahead and rethinking the most fundamental aspects of the structure of the market. The Commission can observe the remarkable impact of its initiative. For example, the idea of customer choice and direct access is now conventional wisdom, with the debate already having moved from policy to implementation. The focus of this hearing on the operation of the wholesale market addresses a central part of the puzzle. Here too there has been a stunning innovation. The Poolco proposals offered by San Diego and Edison mark a major break with the past of vertically integrated, cost-ofservice regulated utilities. As of yet, there is still a great deal of misunderstanding about the scope and fundamentals of this revolution. However, as the process unfolds, and if there is a serious attempt to evaluate these and competing proposals on their merits, Californians will come to appreciate that the innovations set a new world standard for both speed of development and strength of concept. The "level playing field" has become the goal of the incumbents as good policy and to avoid the cost-shifting that would otherwise occur. Faced with the requests of third parties and new entrants for true open access to the essential facilities, the strategy of the incumbents is to "just say yes."
Brown, Ashley. “Regulatory Commissions and the Development of Competitive Wholesale Electric Markets.” In, 1994.Abstract

The passage of the Energy Policy Act in 1992 ushered in a new competitve era in the U.S. electricity industry. The task ahead for both state and federal regulators is to make the regulatory changes that are a necessary part of these changes in a coherent fashion.

  • There is no way to achieve coherence in transmission policy without formal cooperation between federal and state regulators. The Commission should take steps to begin this collaborative process, in order to address issues of transmission pricing, unbundling of services, siting, access, and planning.
  • Who should bear the rists of a transition to a more competitive industry? This is clearly a question of policy, and should be treated as such. As a matter of policy, the jusrisdiction which is responsible for creating stranded assets should be the one which deals with its consequences. I applaud the California and Michigan commissions for dealing with this issue explicitly as part of their proposals. the FERC has done the same in its recent NOPR, but has left unclear the issue of possible preemption of state jurisdiction. 
  • The failure of Congress to codify the Pike County doctrine has created a number of regulatory difficulties which make retail competition more attractive, IRP less attractive, and potentially diminishes the richness of wholesale markets. 

The FERC and the state commissions mist exercise the statesmanship on these issues, rather than continuing to engage in bureaucratic turf battles.

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