PJM ARR and FTR Market

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1 PJM ARR and FTR Market PJM State & Member Training Dept. PJM 2016

2 Objectives Explain the concepts and principles of Auction Revenue Rights and Financial Transmission Rights Describe how to participate in the Annual ARR Allocation and FTR Auctions Calculate the Financial Benefits of FTRs and ARRs PJM

3 Agenda Introduction Overview of Financial Transmission Rights (FTRs) Overview of Auction Revenue Rights (ARRs) Overview of Simultaneous Feasibility Test (SFT) PJM

4 Introduction PJM

5 Financial Transmission Rights and Auction Revenue Rights FTR s and ARR s are important financial instruments used as hedges against congestion charges Market participants that are transferring energy across the RTO are subject to congestion charges The FTR Forfeiture Rule is in place as a financial disincentive to deter the use of virtual bids to enhance the value of a FTR PJM

6 Auction Revenue Rights (ARRs) Auction Revenue Rights are entitlements allocated annually to Firm Transmission Service Customers that entitle the holder to receive an allocation of the revenues (or charges) from the Annual FTR Auction PJM

7 Financial Transmission Rights (FTRs) Financial Transmission Rights are financial instruments awarded to bidders in the FTR Auctions that entitle the holder to a stream of revenues (or charges) based on the hourly Day Ahead congestion price differences across the path DA LMP = System Energy Price Marginal Loss Price + + Congestion Price PJM

8 ARR/FTR Relationship ARRs provide a revenue stream to the firm transmission customers, as a result of the FTR Auction, to hedge against congestion charges Entire PJM System Capability Annual Allocation ARRs allocated (MWs) Auction Revenue Rights Annual FTR Auction FTRs awarded to bidders (MWs & price) Hourly DA & Balancing Congestion revenue $ PJM $ Auction Revenue

9 Overview of Financial Transmission Rights (FTRs) PJM

10 LMP Components - Congestion System Energy Price Transmission Congestion Cost Cost of Marginal Losses Transmission Congestion Cost PJM

11 Why do we need FTRs? Challenge:? LMP exposes PJM Market Participants to price uncertainty for congestion cost charges During constrained conditions, PJM Market collects more from loads than it pays generators Solution: Provides ability to have price certainty FTRs provide hedging mechanism that can be traded separately from transmission service Congestion Revenues shared by FTR holders PJM

12 Characteristics of FTRs The economic value is based on the Day Ahead Congestion Component of LMP Defined from source to sink Financial entitlement, not a physical right Independent of energy delivery PJM

13 How are FTRs Acquired? FTRs are acquired in several market mechanisms Annual FTR Auction Multi-round Entire system capability minus approved Long-Term FTRs Long-Term FTR Auction Multi-round Purchase residual system capability assuming the selfscheduling of ARRs Monthly FTR Auction Single-round Purchase left over capability FTR Secondary Market Bilateral trading PJM

14 Types of FTR Products FTRs can be acquired in two forms FTR Obligations FTR Options PJM

15 What are FTR Obligations Worth? Benefit the hourly congestion value is positive FTR same direction as congested flow Liability the hourly congestion value is negative FTR opposite direction as congested flow PJM

16 What are FTR Options Worth? A Benefit the hourly congestion value is positive FTR same direction as the congested flow Neither a Benefit or a Liability the hourly congestion value is zero FTR opposite direction to the congested flow FTR Option cannot have negative value PJM

17 FTR Credits and Congestion Charges Congestion Charge = MWh * (Day-ahead Sink Congestion Price - Day-ahead Source Congestion Price) FTR Credit = MW * (Day-ahead Sink Congestion Price - Day-ahead Source Congestion Price) PJM

18 FTR Obligation is a Benefit Thermal Limit FTR Obligation = 100 MW Bus A Source (Sending End) Congestion Price = $15 Energy Delivery = 100 MWh Congestion Charge = 100 MWh * ($30-$15) = $1500 Bus B FTR Obligation Credit = 100 MW * ($30-$15) = $1500 Sink (Receiving End) Congestion Price = $30 PJM

19 FTR Obligation is a Liability Thermal Limit FTR Obligation = 100 MW Bus A Source (Sending End) Congestion Price = $15 Energy Delivery = 100 MWh Bus B Congestion Price = $30 Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Obligation Credit = 100 MW * ($15-$30) = $-1500 Sink (Receiving End) PJM

20 FTR Option is a Benefit Thermal Limit FTR Option= 100 MW Bus A Source (Sending End) Congestion Price = $15 Energy Delivery = 100 MWh Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Option Credit = 100 MW * ($30-$15) = $1500 Bus B Sink (Receiving End) Congestion Price = $30 PJM

21 FTR Option is Neither a Benefit/Liability Bus A Source (Sending End) Thermal Limit FTR Option= 100 MW Energy Delivery = 100 MWh Bus B Congestion Price Congestion Price = $15 = $30 Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Option Credit = 100 MW * ($15-$30) = $-1500 = $0 ***When calculated, the FTR Option Credit is negative, therefore the economic value will equal zero.****** Sink (Receiving End) PJM

22 FTR Revenue Adequacy PJM awards FTRs based on the capability of the transmission system There must be adequate revenue from congestion to fund the FTRs that were awarded Revenue adequacy issues occur when we under-collect congestion revenue to fund FTRs Transmission outages and de-ratings can have a significant impact on FTR revenue adequacy PJM

23 Summary FTRs are financial instruments used to hedge congestion costs FTRs can be acquired in the Annual FTR Auction, Long Term FTR Auction, Monthly FTR Auction, or Secondary Market FTRs can be Obligations or Options Obligation can be benefit or liability Option can be benefit but never liability FTRs must be simultaneously feasible PJM

24 Overview of Auction Revenue Rights (ARRs) PJM

25 Annual ARR Allocation Allocated to Firm Transmission Service Customers annually in a two-stage allocation process First stage protects native load utilization of the transmission system providing long-term certainty Second stage provides flexibility to adjust hedging paths annually Supports retail programs by reassigning ARRs/FTRs as load switches between LSEs within planning period PJM

26 Characteristics of ARRs Economic value based on LMPs from the Annual FTR Auction Defined from source to sink Only available as an obligation obligation can be benefit or liability Financial entitlement, not a physical right Must be simultaneously feasible PJM

27 What Can the Holder Do with the ARR? Self-schedule the ARR into the Annual FTR Auction on the exact same path as ARR Reconfigure the ARR by bidding into the Annual FTR Auction to acquire a FTR on an alternative path or for an alternative product Retain the allocated ARR and receive the associated revenue from the FTR auction PJM

28 Example - ARR Candidates ABC company requests does NOT 100MW 300MW 600MW request an ARR ARR from from Generator A B Generator Interface the load C to at X load for Bus its D at longterm firm point-to-point Bus D transmission service PJM

29 Summary ARRs entitle the holder to receive an allocation of Annual FTR Auction revenues ARRs are allocated to Firm Transmission Service Customers ARRs may be self-scheduled to a FTR before the first round of the Annual FTR Auction ARRs are reassigned on a proportional basis within a zone as load switches between LSEs within the planning period ARRs are only available as an obligation obligation can be a benefit or a liability ARRs must be simultaneously feasible PJM

30 Overview of the Simultaneous Feasibility Test (SFT) PJM

31 What is a Simultaneous Feasibility Test? Test to ensure that all subscribed transmission entitlements are within the capability of the existing transmission system Test to ensure the PJM Energy Market is revenue adequate under normal system conditions NOT a system reliability test NOT intended to model actual system conditions PJM

32 Feasibility of ARRs and FTRs ARRs must be simultaneously feasible to ensure that Annual FTR Auction revenues are sufficient to cover ARR Target Allocations FTRs must be simultaneously feasible to ensure that the total congestion charges collected from the Day Ahead and Balancing Markets are sufficient to cover the FTR Target Allocations PJM

33 SFT Example #1 A Net Flow = 480 MW B 180 MW 300 MW 500 MW Rating 180 MW 300 MW FTR 1: 300 MW Obligation from A to B FTR 2: 180 MW Obligation from A to B Net Flow on Line A-B = 480 MW Line A-B Flow = Line A-B Rating therefore both FTRs are simultaneously feasible PJM

34 SFT Example #2 A Net Flow = 600 MW B 300MW 300 MW 500 MW Rating 300 MW 300 MW FTR 1: 300 MW Obligation from A to B FTR 2: 300 MW Obligation from A to B Net Flow on Line A-B = 600 MW Line A-B Flow > Line A-B Rating therefore both FTRs are NOT simultaneously feasible PJM

35 Revenue Adequacy using SFT Examples Congestion Price = $10 A Day Ahead Market Energy Flow = 500 MW 500 MW Rating B Congestion Price = $20 Day-Ahead Congestion Charge = 500 MW ($20 - $10) = $5,000 FTR Target Allocation (Using SFT Example 1 FTRs) Total FTR Target Allocation = 480 MW ($20 - $10) = $4,800 FTR Target Allocation (Using SFT Example 2 FTRs) Total FTR Target Allocation = 600 MW ($20 - $10) = $6,000 PJM

36 SFT Example #3 A Net Flow = 500 MW B 1000 MW 500 MW 500 MW Rating 1000 MW FTR 1: 500 MW Obligation from B to A FTR 2: 1000 MW Obligation from A to B Net Flow on Line A-B = 500 MW Line A-B Flow = Line A-B Rating therefore both FTRs are simultaneously feasible PJM

37 SFT Example #4 A Net Flow = 500 MW or 1000 MW B 1000 MW 500 MW 500 MW Rating 1000 MW 500 MW FTR 1: 500 MW Option from B to A FTR 2: 1000 MW Obligation from A to B Net Flow on Line A-B = 500 MW or Net Flow on Line A-B = 1000 MW (must ignore counterflow created by Option) Line A-B Flow > Line A-B Rating therefore both FTRs are NOT simultaneously feasible PJM

38 Revenue Adequacy using SFT Examples Congestion Price = $10 A Day Ahead Market Energy Flow = 500 MW 500 MW Rating B Congestion Price = $20 Day-Ahead Congestion Charge = 500 MW ($20 - $10) = $5,000 FTR Target Allocation (using SFT Example 3 FTRs): FTR 1 Target Allocation = 500 MW ($10 - $20) = -$5,000 FTR 2 Target Allocation = 1000 MW ($20 - $10) = $10,000 Total FTR Target Allocation = $5,000 FTR Target Allocation (using SFT Example 4 FTRs): FTR 1 Target Allocation = 500 MW ($10 - $20) = 0 FTR 2 Target Allocation = 1000 MW ($20 - $10) = $10,000 Total FTR Target Allocation = $10,000 PJM

39 FTR Revenue Adequacy Exercise (Assuming FTRs are Obligations and No Balancing Congestion) Source LMP = $27 System Energy = $30 Congestion = ($2) Marginal Loss = ($1) 80 MW Energy Flow FTR1: 100 MW FTR2: 20 MW Sink LMP = $43 System Energy = $30 Congestion = $10 Marginal Loss = $3 What are the FTR values? How much congestion revenue is collected? Is this system revenue adequate? PJM

40 Summary The Simultaneous Feasibility Test: FTRs like ARRs must pass the Simultaneous Feasibility Test For revenue adequacy - collect enough congestion charges to pay the FTR holders Can t award more than the capability of the transmission path Counter flow positions allow for awarding additional prevailing flow FTR s PJM

41 PJM Client Management & Services Telephone: (610) Toll Free Telephone: Website: The Member Community is PJM s self-service portal for members to search for answers to their questions or to track and/or open cases with Client Management & Services PJM

42 Questions? PJM

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