System Operator ANCILLARY SERVICES PROCUREMENT PLAN

Transcription

1 System Operator ANCILLARY SERVICES PROCUREMENT PLAN Ancillary Services Draft Procurement Plan This draft Procurement Plan is provided to the Electricity Commission in accordance with rule 4.1 of Section IV of Part C of the Electricity Governance Regulations and Rules. DISCLAIMER: The information in this document is provided in good faith and represents Transpower s opinion as at the date of publication. Some of the ideas expressed have yet to be tested or agreed as suitable for the current environment. Transpower does not make any representations, warranties or undertakings, either express or implied, about the accuracy or completeness of the information provided; and the act of making the information available does not constitute any representation, warranty or undertaking, either express or implied. This document does not, and is not intended to, create any legal obligations or duty on Transpower. To the extent permitted by law, no liability (whether in negligence or other tort, by contract, under statute or in equity) is accepted by Transpower by reason of, or in connection with, any statement made in this document or by any actual or purported reliance on it by any party. Transpower reserves all rights to alter, in its absolute discretion, any of the information contained in this document Transpower New Zealand Limited

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3 Contents INTRODUCTION AND CONTENT 5 CONDITIONS FOR IMPLEMENTATION 7 DESCRIPTION OF ANCILLARY SERVICES 8 PRINCIPLES APPLIED IN MAKING NET PURCHASE QUANTITY ASSESSMENT 10 PROCESS FOR MAKING A NET PURCHASE QUANTITY ASSESSMENT (RULE 4.2.2) 12 ASSESSMENT OF NET QUANTITIES (RULE 4.2.3) 15 PROPOSED PROCUREMENT PROCESSES (RULE 4.2.4) 17 FINANCIAL INFORMATION RELATING TO PROCUREMENT (4.2.5) 18 TECHNICAL REQUIREMENTS AND KEY CONTRACTING TERMS (4.2.6) 19 ARRANGEMENTS FOR UNANTICIPATED PROCUREMENT OF ANCILLARY SERVICES (4.2.7) 22 COMMENT ON COMPETITIVE COST PRESSURES AND DEGREE OF MARKET INNOVATION INVOLVED (4.2.8) 23 SYSTEM OPERATOR REPORTING TO THE BOARD (4.2.9) 25 APPENDIX A 26 APPENDIX B 42 System Operator Draft Procurement Plan 1 June 04.doc Page 3 of 42

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5 Introduction and Content INTRODUCTION 1. This is the initial Procurement Plan under the Electricity Governance Rules 2003 ("rules"). It commences on 1 November 2004 and is intended to apply for 12 months or until amended or replaced in accordance with the rules. It sets out the process the System Operator will follow in procuring ancillary services during the term of the Procurement Plan. 2. Terms used in this Procurement Plan which are defined terms under the rules have the same meaning as contained in Part A of the rules, otherwise in Appendix B. CONTENT 3. The content and structure of the Procurement Plan is consistent with the content and structure set out in rule 4.2 of Section IV of Part C of the rules and includes: 3.1. a brief description of the types of ancillary services that will be procured by the System Operator; 3.2. the principles the System Operator will apply in making a net purchase quantity assessment (rule 4.2.1); 3.3. the processes the System Operator will apply in making a net purchase quantity assessment (rule 4.2.2) including: determining the requirements for complying with the principal performance obligations (rule ); and determining the requirements for achieving the dispatch objective (rule ); and assessing the contribution that compliance by asset owners with the asset owner performance obligations will make towards the System Operator s compliance with the Principal Performance Obligations (PPOs) (rule ); and assessing the impact that dispensations and alternative ancillary service arrangements held by asset owners will have on the quantity of ancillary services required to be procured by the System Operator to enable the System Operator to comply with its (PPOs) under the rules (rule ); 3.4. an assessment of the net purchase quantities required for the 12- month term provided by this Procurement Plan (rule 4.2.3); 3.5. the proposed procurement process taking into account the matters provided for in rule (rule 4.2.4); 3.6. financial information relating to the administrative costs for each ancillary service proposed (rule 4.2.5); System Operator Draft Procurement Plan 1 June 04.doc Page 5 of 42

6 3.7. the technical requirements and key contract terms to support the Procurement Plan (rule 4.2.6); 3.8. the rights and obligations of the System Operator in relation to the procurement of that ancillary service in circumstances not anticipated by the Procurement Plan and in circumstances where the assumptions made by the System Operator in the Procurement Plan cannot be met (rule 4.2.7); 3.9. an assessment by the System Operator of the competitive cost pressures and the degree of innovation it believes are involved in the procurement process (rule 4.2.8); and an outline of how the System Operator will report to the Board on progress in implementing the Procurement Plan (rule 4.2.9). System Operator Draft Procurement Plan 1 June 04.doc Page 6 of 42

7 Conditions for Implementation 4. The System Operator will use reasonable endeavours to implement this Procurement Plan by entering into ancillary service procurement contracts with ancillary service agents to provide each ancillary service contemplated by this Procurement Plan in accordance with the terms and processes contained in this Procurement Plan. The obligations of the System Operator and the ancillary service agent under any ancillary service procurement contract entered into in relation to the provision of ancillary services will be consistent with the obligations imposed by the rules. (Refer to rule 6 C.IV) 5. The System Operator may depart from the terms and processes outlined in this Procurement Plan if the System Operator reasonably considers that compliance with such terms or processes will result in the System Operator being unable to fully comply with its PPOs of Part C of the rules. (Refer to rule 8 C.IV) 6. The System Operator will provide a report to the Board in respect of any departure by the System Operator from the Procurement Plan as referred to in paragraph 5. This report will contain the features outlined in rule 8.2, section IV of Part C of the rules. (Refer to rule 6 C.IV) 7. Implementation of this Procurement Plan is subject to the ancillary services actually being made available to the System Operator on the terms contained in this Procurement Plan. System Operator Draft Procurement Plan 1 June 04.doc Page 7 of 42

8 Description of Ancillary Services SERVICES TO PURCHASE 8. The System Operator will purchase the following ancillary services from ancillary service agents: Frequency Regulating Reserve (frequency keeping) Instantaneous Reserve Over Frequency Reserve Voltage Support Black Start 9. The rules set out a generic description of the above ancillary services. In the context of this Procurement Plan this generic description is extended (as set out below) to clearly identify the services intended to be procured during the term of this Procurement Plan: Frequency regulating reserve ("frequency keeping") Instantaneous reserve Over frequency reserve Voltage support The provision of spare synchronised capacity with a response time sufficiently fast enough to control the frequency within the normal band of 49.8 to 50.2 Hertz for small changes in frequency. The provision of interruptible load, partly loaded spinning reserve and/or tailwater depressed reserve (in each case as either fast instantaneous reserve or sustained instantaneous reserve) available to counter an under frequency excursion arising from an event identified in the Risk Management Framework of Chapter 1 of Part A of the Policy Statement. The total response being fast enough and quantity being sufficient to arrest the fall in frequency (fast instantaneous reserve), and assist in the recovery of frequency (sustained instantaneous reserve). The provision of equipment that enables an automatic reduction in the level of injection into the power system to arrest an unplanned rise in system frequency arising from an event, the total response being fast enough and quantity being sufficient to ensure that the frequency does not exceed defined levels. Reactive power injection or absorption capability of assets and other reactive power resources provided to maintain voltage at a point of connection to the grid. System Operator Draft Procurement Plan 1 June 04.doc Page 8 of 42

9 Black start Equipment that is made available to enable a generating unit isolated from a grid to be livened and connected to the grid, ready to liven the grid at that grid injection point without any power being obtained from the grid. System Operator Draft Procurement Plan 1 June 04.doc Page 9 of 42

10 Principles applied in making net purchase quantity assessment KEY PRINCIPLES FOR QUANTITY PROCUREMENT (RULE 4.2.1) 10. In determining the quantity of ancillary services to be procured and in assessing the cost effectiveness of such ancillary services, the System Operator will apply the following principles: Ancillary services will be procured on a fixed quantity and fixed price basis where the System Operator assesses there is a requirement for a fixed quantity or a high availability (irrespective of dispatch) of the ancillary service. This type of procurement will be referred to as Firm Quantity Procurement In all other cases, ancillary services will be procured through a short term clearing market process whereby, for each ancillary service, ancillary service agents submit offers to the System Operator. The market for that service is reconciled, priced and settled on a short term basis for such quantities as the System Operator assesses to be practicable and cost-effective to procure. Before an offer can be submitted the ancillary service agent must enter into an ancillary service procurement contract for the particular ancillary service. The ancillary service procurement contract will set out the offer, pricing and settlement mechanisms for the particular ancillary service without stipulating specific offer quantities. This type of procurement will be referred to as Short-term Clearing Market Procurement The System Operator will apply one or a combination of the following pricing components in respect of each ancillary service procured by the System Operator, as reasonably determined by the System Operator to result in the most cost-effective outcome: - Utilisation or Offer Price is the price for the quantity of the service, expressed in $ or $ per unit capacity of the ancillary service over the period for which the quantity used is measured and reconciled. - Availability Price is the price for making the service available, irrespective of dispatch, measured in $ per period of time for which the service is made available; and - Event Price is the price for calling on the ancillary service capacity for a particular event, expressed in $ per event; System Operator Draft Procurement Plan 1 June 04.doc Page 10 of 42

11 10.4. The System Operator will consider the following in achieving the appropriate balance between cost and quality for each ancillary service purchased: the technical specification of the plant being offered, including any measuring equipment required; the minimum acceptable service standard; the number of suppliers offering the service and reasons for any limitations; the actual cost of providing the service over the ancillary service procurement contract term; and the liability for providing the service and the potential cost of failure Each ancillary service procurement contract will generally expire upon expiry of the current Procurement Plan unless the System Operator determines that to contract for a longer period would be more costeffective. System Operator Draft Procurement Plan 1 June 04.doc Page 11 of 42

12 Process for Making a Net Purchase Quantity Assessment (rule 4.2.2) THE REQUIREMENTS FOR COMPLYING WITH THE PRINCIPAL PERFORMANCE OBLIGATIONS (PPOS) (RULE ) 11. The System Operator will procure frequency regulating reserve with the objective of controlling frequency and frequency time as required by rule 2.2 of section II of Part C of the rules. 12. The System Operator will procure instantaneous reserves to assist it to achieve the following objectives: avoid the cascade failure of assets leading to a partial or total failure of the power system (rule 2.1 of section II of Part C); ensure that the rate of occurrence of momentary frequency fluctuations experienced in both the North and South Islands of New Zealand does not exceed the statistical equivalent of the levels set out in rules 2.2.3, 3.1.1, and of section II of Part C; prevent the frequency from going outside defined limits for specified contingencies, in order that automatic under frequency load shedding does not operate (rule 2.1, 2.2, and 3 of section II of Part C); and prevent the frequency from going outside of defined minimum limits for more severe defined events, in order to prevent cascade failure of the network, due to the frequency reaching unacceptable levels for generating plant operation (rule 2.1 of section II of Part C). 13. The System Operator will procure over frequency reserves to assist it with the objective of preventing the frequency exceeding the over-frequency limit (rule 2.1, 2.2, and 3.2 of section II of Part C). 14. The System Operator will procure voltage support, where necessary, to supplement the static and dynamic reactive power provided by asset owners in complying with the asset owner performance obligations to limit voltage excursions that may result in cascade failure of assets (rule 2.1 of section II of Part C) and to maintain the requirements set out in Schedule C4 of Part C of the rules. 15. The System Operator will procure black start to ensure that following a grid emergency there is the capability, if required, to re-energise the grid without the use of external power sources (rule 5 of section II of Part C). THE REQUIREMENTS FOR ACHIEVING THE DISPATCH OBJECTIVE (RULE ) 16. The System Operator will use reasonable endeavours to dispatch assets in a manner consistent with the dispatch objective. This will include the dispatch of ancillary services. 17. It is recognised within the rules that the meeting of the dispatch objective is subject to the availability and capability of generation and ancillary services. System Operator Draft Procurement Plan 1 June 04.doc Page 12 of 42

13 Accordingly, the System Operator will dispatch ancillary services according to the dispatch objective provided there is sufficient availability of ancillary services. 18. The Policy Statement contained in Schedule C4 of Part C of the rules sets out the policies used by the System Operator in scheduling and dispatching ancillary services to assist it in planning to comply and complying with its dispatch objective. ASSET OWNER CONTRIBUTION (RULE ) 19. The System Operator will assess the net purchase quantity of ancillary services required to achieve compliance with its PPOs, taking into account its assessment of the contribution that asset owners provide in achieving the PPOs through compliance with the asset owner performance obligations and Technical Codes set out in Part C of the rules. 20. The System Operator's assessment of the contribution provided by asset owners will rely on the following: that asset owners will at all times comply with the asset owner performance obligations contained in the rules, including any dispensation or equivalence arrangement in respect of these obligations that has been granted by the System Operator pursuant to the rules; that information contained in the asset capability statements provided by asset owners is correct; the contribution provided by asset owners in meeting the relevant asset owner performance obligations will be provided at no additional procurement cost when dispatched for energy; the existence of any contracts of the type and nature set out in rule 2 of section II of Part I of the rules; the existence of any contracts of the type set out in or otherwise specified in rule 2 of section V of Part I of the rules. IMPACT OF DISPENSATIONS, ALTERNATIVE ANCILLARY SERVICE ARRANGEMENTS AND LOCAL QUALITY AGREEMENTS HELD BY ASSET OWNERS Dispensations 21. The System Operator will take into account all known interim dispensations from compliance with an asset owner performance obligation or Technical Code contained in Part C of the rules when determining the net quantity of procurement required for each ancillary service. 22. The costs of these dispensations will be paid for by the asset owner as a condition of the dispensation. 23. The allocable cost to be paid by ancillary service payers excludes the readily identifiable and quantifiable costs resulting from granting dispensations. Any System Operator Draft Procurement Plan 1 June 04.doc Page 13 of 42

14 dispensations awarded during the Procurement Plan period may affect the net quantity of procurement for each ancillary service but the cost to ancillary service payers will not be changed as the cost for the dispensation will be borne by the asset owner with the dispensation. Alternative Ancillary Service Arrangements 24. At the time of the preparation of this Procurement Plan, no alternative ancillary service arrangements were in place. Local Quality Agreements 25. In assessing the net quantities of procurement, the System Operator will take account of: any existing contracts for higher levels of common quality that the System Operator has entered into under rule 2 of section II of Part I. These are referred to as local quality agreements; and any existing ancillary service arrangements under contracts that the System Operator has entered into under rule 1 of section V of Part I. These contracts will be deemed to be validly made under this Procurement Plan. System Operator Draft Procurement Plan 1 June 04.doc Page 14 of 42

15 Assessment of Net Quantities (rule 4.2.3) 26. Quantity assessments for each ancillary service for the term of the Procurement Plan are set out in Appendix A. 27. Set out below is a summary of the methodology used to make a net purchase quantity assessment for each ancillary service to be procured by the System Operator. ASSESSMENT METHODOLOGY FOR INSTANTANEOUS RESERVES 28. All parties that can offer instantaneous reserves compliant with the System Operator s technical requirements and the rules and who are prepared to enter into a standard form of ancillary service procurement contract with the System Operator to provide instantaneous reserves on a Short-Term Clearing Market procurement basis will be contracted by the System Operator for provision of instantaneous reserves on that basis. Each such ancillary service procurement contract will be a contract to provide reserve offers for the purposes of rule 6.1 of section II of Part G. 29. The System Operator will assess the net purchase quantity of instantaneous reserves for each trading period in accordance with the policies and measures specified in Schedule G6 and the Security Policy set out in Schedule C4 of the rules. ASSESSMENT METHODOLOGY FOR FREQUENCY REGULATING RESERVES 30. All parties that can and do offer frequency regulating reserves compliant with the System Operator s technical requirements and the rules and who are prepared to enter into a standard form of ancillary service procurement contract with the System Operator to provide a frequency regulating service on a short term Clearing Market procurement basis will be contracted by the System Operator for provision of frequency regulating reserves on that basis. Each such ancillary services procurement contract will be a contract to provide frequency regulating reserves for the purposes of rule A of section III of Part G. 31. The System Operator's determination of the net purchase quantity of frequency regulating reserve will be based on the extent to which the frequency regulating reserves currently procured contribute to the System Operator s ability to achieve its objectives set out in rule 2.2 of section II of Part C. 32. The System Operator will assess the net purchase quantity of frequency regulating reserves for each trading period in accordance with the policies and measures specified in the Security Policy set out in Schedule C4 of the rules. ASSESSMENT METHODOLOGY FOR OVER-FREQUENCY RESERVES 33. The System Operator will model the integrated performance of the assets connected to, or forming part of, the grid, taking into account the asset owner performance obligations and any approved dispensations, equivalence, or System Operator Draft Procurement Plan 1 June 04.doc Page 15 of 42

16 Alternative Ancillary Services Arrangements to assess the net purchase quantity of over-frequency reserves required ASSESSMENT METHODOLOGY FOR VOLTAGE SUPPORT 34. The System Operator will procure voltage support services as required from time to time from ancillary service agents who are prepared to enter into an ancillary service procurement contract with the System Operator for the provision of voltage support services. The System Operator may only give dispatch instructions pursuant to Part G of the rules to ancillary service agents of voltage support services who have a valid and enforceable ancillary service procurement contract with the System Operator and the dispatch instruction is consistent with that contract, except where the dispatch instruction is given for the purposes set out in Part G, rule (Part G, section III, rules and 4.6.6). The System Operator purchases such services from one party for currently identified needs. 35. The System Operator acknowledges that additional voltage support services are likely to be required and may need to be purchased during the term of this Procurement Plan. 36. At the date of publication of this draft Procurement Plan, the System Operator is engaged in planning studies, expected to be completed in 2004, to identify existing and future voltage support requirements. Where these planning studies identify additional voltage support requirements, then the System Operator will procure such services in accordance with this Procurement Plan. ASSESSMENT METHODOLOGY FOR BLACK START SERVICES 37. The System Operator will determine the net purchase quantity of black start services from historic performance of the power system, including (but not limited to) information about previous events on the system and the System Operator s reasonable opinion about the risk and location of future events. System Operator Draft Procurement Plan 1 June 04.doc Page 16 of 42

17 Proposed Procurement Processes (Rule 4.2.4) TENDERING PROCESS Invitation to Tender 38. The System Operator will, prior to inviting tenders for ancillary services, inform existing and potential ancillary service agents of the type of ancillary services sought and contact details for further information regarding the tender process. Information Disclosure 39. Unless otherwise required by the rules, the System Operator Service Provider Contract, or by law, the System Operator will only disclose any information received during the tender process referred to above to the Board (if so required by the Board). Contracting Process 40. The System Operator will enter into ancillary service procurement contracts with providers who can and do offer the required service compliant with the System Operator s technical requirements and the rules and who are prepared to contract with the System Operator to provide an ancillary service on the terms contained in this Procurement Plan, subject to the System Operator s net purchase quantity assessment for each ancillary service which is the subject of an ancillary service procurement contract. Market Mechanisms 41. The proposed mechanisms for procuring the quantities of each of the ancillary services required to meet the PPOs and the dispatch objective for each trading period are identified in Appendix A. 42. The System Operator has determined that it is uneconomic to procure black start, over-frequency reserves, and voltage support services during the term of this Procurement Plan using Short-Term Clearing Markets. For these ancillary services the System Operator will use its reasonable endeavours to procure the required quantity to achieve what, in the reasonable opinion of the System Operator, is the most cost-effective outcome. 43. Where there is only one potential supplier for an ancillary service, the System Operator will use reasonable endeavours to negotiate directly with that ancillary service agent to reach an outcome consistent with achieving the dispatch objective. The System Operator will report to the Board if such a situation should arise. System Operator Draft Procurement Plan 1 June 04.doc Page 17 of 42

18 Financial Information Relating to Procurement (4.2.5) 44. The costs associated with the procurement of ancillary services are: the administrative costs associated with establishing procurement processes, tendering, and entering into ancillary service procurement contracts; and the purchase cost of the ancillary services, as paid to ancillary service agents by the System Operator. ADMINISTRATIVE COSTS 45. Identifiable administrative costs are those significant costs incurred by the System Operator as a direct consequence of implementing the Procurement Plan and that are specifically attributable to an ancillary service and that have been agreed to by the Board and the System Operator. The System Operator will be entitled to recover these costs as an allocable cost in accordance with the ancillary service cost recovery methodology set out in rule 11 of section IV of Part C of the rules. 46. The administrative costs will be incurred at the standard charge out rate agreed with the Board. System Operator Draft Procurement Plan 1 June 04.doc Page 18 of 42

19 Technical Requirements and Key Contracting Terms (4.2.6) TECHNICAL REQUIREMENTS 47. The key technical requirements for each ancillary service are set out in Appendix A. ANCILLARY SERVICE PROCUREMENT CONTRACT TERMS 48. The System Operator will enter into ancillary service procurement contracts with ancillary service agents for the provision of ancillary services. These ancillary service procurement contracts will include technical requirements and general contracting terms. The System Operator will determine in its discretion the appropriate general contracting terms to be included in the ancillary service procurement contract, however such terms will include, and will not be inconsistent with, the key contracting terms listed below. 49. The System Operator will amend the key contracting terms only as required to ensure appropriate legal drafting of such terms. Such amendments may only be undertaken by the System Operator where the intention of these key contracting clauses is not altered. 50. The System Operator will include the types of general contracting provisions contained in Part A2 of Transpower s standard ancillary service procurement contract immediately prior to the commencement date of the rules where it considers it appropriate to do so and where they are not inconsistent with the key contracting terms. The System Operator will necessarily amend such terms to take account of the rules, the Electricity Governance Regulations 2003 ("Regulations") and the relationship of the Board with the System Operator. 51. The key contracting terms are as follows: Disputes 52. In the event of a dispute on the terms of the ancillary service procurement contract, the parties can agree to mediate and the process for mediation is to be set out in the contract. In the event that mediation is not agreed, or where mediation is unsuccessful, the dispute will be referred to the Rulings Panel for determination under Part 7 of the Regulations. Both parties to the ancillary service procurement contract will agree to submit to the jurisdiction of the Rulings Panel and will agree to be bound by the decision of the Ruling Panel. System Operator Draft Procurement Plan 1 June 04.doc Page 19 of 42

20 Rule/Regulation Obligations 53. The ancillary service procurement contracts will include a list of the obligations in Part G of the rules (as at the date of the execution of the contract) that the ancillary service agents must meet. Nothing in the ancillary service procurement contract will limit any obligation of the ancillary service agent or the System Operator to comply with the rules or Regulations or limit any liabilities arising due to the breach of such rules or Regulations by an ancillary service agent or the System Operator. Right to Terminate 54. A party will have the right to terminate an ancillary service procurement contract (or parts of such a contract) where a party reasonably believes that changes to the rules or the Procurement Plan that occur during the term of the ancillary service procurement contract materially change the obligations of the party to the contract from those applying at the date of execution of the contract. Whether such change is material is to be decided by independent dispute resolution where the parties cannot agree. Payment and Invoicing 55. The payment and invoicing contract terms will recognise and be consistent with the obligations of the parties under the rules in respect of payment and invoicing. Limitation of Liability 56. The liability of the System Operator and ancillary service agents to the other party under an ancillary service procurement contract (other than for those obligations that are also contained within the rules and Regulations, in which case neither party will have any liability to the other for breach of such obligations under the contract and any liability (including limits on liability) will only apply as provided in the rules and Regulations) is as set out below. 57. The System Operator's liability to ancillary service agents under the ancillary service procurement contract is limited to situations where the System Operator has breached the provisions of the ancillary service procurement contract. For the avoidance of doubt, the ancillary service agent will have no claim against the System Operator for failing to follow the Procurement Plan in any respect. 58. The System Operator will only be liable to ancillary service agents for direct loss suffered by an ancillary service agent and caused by the System Operator for a breach of the ancillary service procurement contract. The System Operator will not be liable for loss of use, revenue or profit, any third party damages, and third party settlement or any costs associated with such items, even where such losses may be direct losses. 59. The ancillary service agent's liability to ancillary service agents under the ancillary service procurement contract is limited to situations where the ancillary service agent has breached the provisions of the ancillary service procurement contract. System Operator Draft Procurement Plan 1 June 04.doc Page 20 of 42

21 60. The maximum liability to ancillary service agents of each party under an ancillary service procurement contract will be as follows: $100,000 in any 12 month period in respect of all defaults of obligations contained in the general contracting terms irrespective of the number of defaults; and In respect of all other terms agreed in respect of a particular ancillary service to be provided to the System Operator by an ancillary service agent: Force Majeure the combined maximum liability for any single event or related series of events will be the lesser of 5% of the total amount of the expected annual fees payable for that particular ancillary service (such total to be set by the System Operator prior to the execution of the ancillary service procurement contract) or $100,000; and the combined maximum liability in any 12 month period will be the lesser of 20% of the total amount of the expected annual fees payable for that particular ancillary service (to be set by the System Operator prior to the execution of the contract) or $300,000, irrespective of the number of events. 61. The parties will be able to rely on force majeure in certain circumstances to limit any liability under the ancillary service procurement contract for a breach of the provisions contained in that contract. The following situations will be included in the definition of force majeure within the contract: any event or circumstance occasioned by, or in consequence of, any act of God (being an event or circumstance (i) due to natural causes, directly or indirectly and exclusively without human intervention, and (ii) which could not by any amount of ability have been foreseen or, if foreseen, could not by any amount of human care and skill have been resisted), strikes, lockouts, other industrial disturbances, acts of public enemy, wars, blockades, insurrections, riots, epidemics, aircraft, or civil disturbances; or the binding order of any Court, government or a local authority (except where the ancillary service agent seeks to invoke this paragraph and the local authority which made the binding order is the owner of, or is otherwise associated with or related to, the ancillary service agent); or any other event or circumstance beyond the control of the party invoking this paragraph and being such that, by the exercise of reasonable care acting in accordance with good industry practice, such party could not have prevented such failure. 62. Any force majeure provision will not apply to any liability of ancillary service agents which arises due to a breach of the Regulations or the rules whether or not such obligation arises in the provision of ancillary services. System Operator Draft Procurement Plan 1 June 04.doc Page 21 of 42

22 Arrangements for Unanticipated Procurement of Ancillary Services (4.2.7) 63. The System Operator will not depart from this Procurement Plan where to do so will result in the System Operator incurring additional costs that are not able to be recovered under rule 6.4 or of section III of Part C. 64. During a grid emergency, the System Operator will rely on ancillary service agents complying with their obligations set out in Part C, Schedule C3, Technical Code B of the rules. 65. Any departures from this Procurement Plan will be in accordance with rule 8, Section IV of Part C of the rules. 66. Where the System Operator identifies a need to change any aspect of this Procurement Plan, then a request for variation pursuant to rule 7.2 of section IV of Part C will be made to the Board. System Operator Draft Procurement Plan 1 June 04.doc Page 22 of 42

23 Comment on competitive cost pressures and degree of market innovation involved (4.2.8) 67. Rule of Section IV of Part C requires an inclusion in the ancillary service Procurement Plan of an assessment by the System Operator of competitive cost pressures and the degree of innovation it believes are involved in the procurement process it is proposing for that ancillary service. These are set out in the following table: Ancillary Service Frequency Regulating Reserve Instantaneous Reserves Over Frequency Reserve Voltage Support Reserves Black Services Start Competitive cost pressures Low FRR has to be supplied separately for each HVAC island, and there are few stations with the capability. Low to medium Medium for generation, which has to be supplied separately to each island. Low for Interruptible load (IL), where ownership issues limit competition in practice. Low Most South Island generation plant owned by one of two companies Low to Medium Small number of providers because voltage support requirements tend to be localised. Medium Not many generators have black start capability, but cost of new entry is relatively low. Degree of innovation involved in procurement process (possible future developments are covered in the next table) Medium Procurement using short-term clearing markets. Procurement process in line with international practice for the few markets that do not use AGC (automatic generation control). High Procurement using short-term clearing markets. New Zealand s co-optimisation of energy and reserves is leading edge in electricity markets internationally. High A novel solution to a New Zealand-specific problem allowing better management of overall reserve costs. Medium The combination of generator AOPOs and tendering for alternative solutions is in-line with world standards. Low But, simple procurement approach is appropriate given the relatively low cost of this service. 68. The degree of innovation in ancillary service procurement processes is reflected also in plans for further development of them. While this is the responsibility of the Electricity Commission, the System Operator will engage constructively with the Commission, its Advisory Groups and the industry to pursue cost-effective development of ancillary services methodologies. The System Operator s view on development initiatives relating to ancillary services, and their priority, reflects the work programme of the GSC as itemised in the following table: System Operator Draft Procurement Plan 1 June 04.doc Page 23 of 42

24 Item Development initiatives Scope or comment Priority 1 National instantaneous reserve and frequency regulating markets 2 Multiple frequency regulating with AGC (automatic generation control) 3 HVDC reserve sharing and frequency regulating 4 Multiple frequency regulating without AGC 5 Review SO policies on normal-frequency management Move to a national instantaneous reserve and frequency regulating markets to increase competition and efficiency. Introduce competition to the frequency regulation market by enabling multiple frequency regulating stations, which will also reduce the technical requirements to enter the market. Investigate the capabilities of the HVDC to provide energy reserve capability, thereby reducing reserve and hence energy costs. Introduce competition to the frequency regulating market through allowing multiple frequency regulating stations, albeit that without Automatic Generation Control (AGC) there will be practical limits to the number of participants (perhaps two per island). Review from operational experience whether the normal frequency band specified in the EGRs (49.8 to 50.2 Hz) is appropriate. High As a precursor to item 2. High High As a precursor to item 1. Medium Priority dependent on cost-benefit as an intermediate measure pending item 2. Medium 69. The System Operator Service Provider Agreement includes the specification of the scheduling, dispatch and pricing software (SPD) and the reserves management tool (RMT). Transpower owns and operates the software to meet these specifications and the EGRs. Transpower intends to modernise these market software systems, starting this year. 70. This presents an opportunity that the System Operator is keen to make available for the Commission to make improvements to the SPD and RMT software specifications at low incremental cost to the industry. Such improvements could include improved functionality and/or the acceleration of the ongoing industry development initiatives described above. 71. Automatic generation control (AGC) is established practice in most advanced overseas markets. Introducing AGC in New Zealand will improve system security in real-time, reduce the technical requirements for frequencyregulation, and introduce competition to the frequency regulating market. Updating the SPD and RMT software suite will enable AGC to be incorporated into a fully integrated system. System Operator Draft Procurement Plan 1 June 04.doc Page 24 of 42

25 System Operator reporting to the Board (4.2.9) REPORTING INFORMATION 72. The System Operator will in its System Operator monthly report provided in accordance with Regulation 45 report to the Board in relation to the procurement of ancillary services as follows: settlement volumes, prices, costs, and administrative costs where appropriate any issues arising with respect to cost allocation, liability and disputes other general procurement issues to be contained within the System Operator monthly report provided in accordance with Regulation 45. System Operator Draft Procurement Plan 1 June 04.doc Page 25 of 42

26 Appendix A QUANTITIES, PRICING & TENDER ARRANGEMENTS FOR EACH INDIVIDUAL ANCILLARY SERVICES 73. This appendix of the Procurement Plan sets out: the processes that the System Operator will follow for contracting and purchasing each category of ancillary service; the key technical requirements for each ancillary service; the performance capability required for each ancillary service; an indication of the likely quantities of ancillary services that will be needed. 74. The forecast expenditure figures contained in Appendix A are estimates only and are subject to ancillary service agent offer prices, asset owner compliance, ancillary service agent performance, and the actual dispatch of the power system. System Operator Draft Procurement Plan 1 June 04.doc Page 26 of 42

27 A1 FREQUENCY REGULATING RESERVE Objective of Frequency Regulating Reserve 75. The System Operator will procure frequency regulating reserve from ancillary service agents that can meet the System Operator s requirements set out in this Procurement Plan. Performance Requirements and Technical Specification of Frequency Regulating Service 76. In order to be able to provide the frequency regulating reserve service the ancillary services agent will provide: one or more generating units at a FRR site that each have a response rate of greater than 10 MW per minute; control equipment to enable the ancillary service agent to provide the Frequency Regulating Reserve service; and recording equipment to measure and record output or demand at a FRR Site, frequency of the Grid in Hertz, and Frequency Time Error. 77. Subject to paragraph 80, when dispatched to provide the frequency regulating reserve service (in accordance with rule of section III of Part G), the ancillary services agent will, within [3 minutes] of the dispatch instruction being received, use all reasonable endeavours to: commence to respond to the instruction in accordance with rule 4.11 of section III of Part G; continuously maintain the frequency of the grid as close as possible to 50 Hz, but at all times to within the normal frequency range; control the synchronous time error to the limits specified in rule of section II of Part C; and return frequency time error to zero at least once every day. 78. The ancillary service agent must ensure that sufficient generating sets are available to provide the frequency regulating reserve service to the performance standards when an FRR Site is dispatched. 79. The ancillary service agent must ensure that each generating unit is maintained in accordance with good industry practice. 80. The ancillary service agent must ensure that each item of control equipment: is available when the relevant frequency regulating reserve is dispatched; will increase or decrease generation to maintain frequency at 50 Hz when the relevant FRR Site is dispatched; and is maintained in accordance with good industry practice. System Operator Draft Procurement Plan 1 June 04.doc Page 27 of 42

28 81. In using all reasonable endeavours to meet the requirements described in paragraph 77, the ancillary service agent is not required to: generate outside the limits of the MW band contained in the dispatch instruction issued in accordance with Part G of the rules or above the relevant Control Max or below the relevant Control Min; or provide a response rate greater than that specified in the ancillary service procurement contract for the relevant frequency regulating reserve site. Monitoring requirements for Frequency Regulating Reserves 82. The ancillary service agent must provide recording equipment to measure and record the following: output at a frequency regulating reserve site; frequency of the grid system in Hz; and frequency time error; 83. When dispatched to provide the frequency regulating reserve service the recording equipment must: measure and record output at an agreed location in the grid system at least once every 10 seconds, each measurement accurate to within plus or minus 5%; measure and record frequency at least once every 2 seconds, each measurement accurate to within 0.01 Hz; measure and record frequency time error; and be maintained in accordance with good industry practice. 84. The ancillary service agent must ensure that the data recorded by the recording equipment is held by the ancillary service agent for at least 14 business days and is provided to the System Operator within 5 business days of a written request from the System Operator. 85. In the event that the frequency deviates outside of the limits of 49.8Hz and 50.2Hz or the time error exceeds 5 seconds, the System Operator reserves the right to: request the recorder output (provided for above) to be provided upon written (including facsimile transmission) request where reasonably available within 24 hours, but no later than 5 business days of the request where there is reasonable grounds to believe that the frequency regulating reserve station facilities were not performing in accordance with the technical requirements, require that tests be carried out at the ancillary service agent's expense, to verify the capability; and System Operator Draft Procurement Plan 1 June 04.doc Page 28 of 42

29 85.3. in the event that the ancillary service agent cannot maintain the frequency or time error within the required targets, despite its equipment performing in accordance with the technical requirements, the ancillary service agent must advise the System Operator as soon as is practicable. Offer period for Frequency Regulating Reserve 86. The System Operator will procure frequency-regulating reserves on a short term Clearing Market procurement basis. Offers will be sought for each halfhour using the processes set out in Schedule C4 of the rules. Ancillary service agents can submit an offer for each half-hour at least two hours prior to the trading period that is the subject of the offer. 87. The Service Provider may, no later than 2 hours prior to a trading period, submit an offer to provide the Frequency Regulating Reserve Service for that trading period. Each offer submitted is valid until revised or cancelled in accordance with paragraph 89 or Each frequency regulating reserve offer must be transmitted to the System Operator via the electronic facility contained in the information system. 89. The ancillary service agent may revise an offer to provide frequency regulating reserve offer by submitting a revised offer up to two hours prior to the beginning of the Trading Period in respect of which the offer is made. The ancillary service agent may cancel an offer to provide frequency regulating reserve up to two hours prior to the beginning of the Trading Period in respect of which the offer is made. 90. When submitting an offer to provide frequency regulating reserve, the ancillary services agent must ensure the Control Min is greater than or equal to zero and the Control Max is at least twice the range of the MW Band. 91. The ancillary services agent may cancel or submit a revised offer to provide the Frequency Regulating Reserve Service later than two hours prior to the beginning of the Trading Period (but otherwise in accordance with paragraph 89 only in circumstances where a bona fide physical reason necessitates the cancellation or revision but not otherwise. Quantity requirements for Frequency Regulating Service 92. The System Operator will dispatch the quantity of frequency regulating reserves for each trading period required to maintain the frequency standards set out in rule 2.3 and 3 of section II of Part C of the rules. Procurement proposal 93. The System Operator will seek tenders to secure at least one provider of frequency regulating reserve in each island 94. The System Operator will enter into contracts with other providers at any time throughout the period of this Procurement Plan. System Operator Draft Procurement Plan 1 June 04.doc Page 29 of 42

30 Frequency Regulating Procurement Costs 95. The actual procurement costs for frequency regulating reserves for the procurement period 1 November 2002 to 31 October 2003 were $34 million. 96. The costs for the procurement of frequency regulating reserves during the period of this Procurement Plan will be dependent on the following: the offer prices and quantities received for frequency regulating reserves; the number of available providers of frequency regulating reserves; and the energy offer prices and quantities provided by participants. 97. The System Operator will provide an update on the current level of procurement costs for frequency regulating reserves to the Board in its monthly report provided under paragraph 72. System Operator Draft Procurement Plan 1 June 04.doc Page 30 of 42

31 A2 INSTANTANEOUS RESERVES Objectives of Instantaneous Reserve 98. The System Operator will procure instantaneous reserves from ancillary service agents that can meet the System Operator s requirements set out in this Procurement Plan. The System Operator will procure instantaneous reserves as: Fast Instantaneous Reserve (FIR); and Sustained Instantaneous Reserve (SIR) 99. The policies and processes used to schedule and dispatch instantaneous reserves are those set out in Schedule C4 of the rules. Performance Requirements and Technical Specification for Instantaneous Reserves 100. The definitions of FIR and SIR are set out in Part A of the rules. Only ancillary service agents that can meet the technical requirements of these definitions can provide instantaneous reserves An ancillary service agent must ensure that at all times the equipment that is the subject of the reserve offer: is maintained in accordance with good industry practice so that the equipment is able to provide instantaneous reserves that meet the standards set out in this Procurement Plan; is able to respond, when dispatched, within the timeframe applicable to either FIR or SIR, as the case may be; meets, where relevant, the requirements for frequency response and control set out in rule 5.1 of Technical Code A of the rules and has been approved by the System Operator; is available and has the capacity to provide the quantity of instantaneous reserve specified in the reserve offer; is available and has the capacity to provide the dispatched quantity of reserve; and An ancillary service agent dispatched in accordance with Part G of the rules must provide either: additional generation automatically following an under frequency event which is consistent with the dispatched quantity of reserve; or a reduced demand or load disconnection consistent with the dispatched quantity of instantaneous reserve whenever the frequency of the grid system falls to or below the trip frequency specified in the ancillary service procurement contract. System Operator Draft Procurement Plan 1 June 04.doc Page 31 of 42