Dual Pricing Constraint

Dual Pricing Constraint

Dual Pricing Constraint Physical + Virtual Net CAISO intertie awards <= CAISO intertie ATC Consistent with role of convergence bidding in LMP markets Physical Only Net Day Ahead E-tagged intertie awards <= CAISO intertie ATC Untagged awards (virtual or physical) cannot create counter-flow Consistent with NERC, WECC reliability requirements

Physical Only Constraint - Today Intertie limit: 2000MW import ATC; 2500MW physical imports; 500MW physical exports 2500MW physical import awards Real physical supply procured under the WSPP Schedule C agreement WSPP Schedule C requires a Day-ahead e-tag 500MW physical export SC intends to sell the energy in RT, no e-tag CAISO fails the Day-ahead check-out process with neighboring transmission providers CAISO must curtail 500MW of physical import e-tags, Day Ahead, at 3pm This causes significant costs to suppliers who actually e-tag Day Ahead (Liquidated Damages under WSPP Schedule C, Charges under CAISO tariff) CAISO deals with Physical Only Constraint After IFM Optimization Process Today!

Physical Only Constraint With ICB CAISO cannot solve Dual Pricing Constraint without Day Ahead e-tag requirement If no Day Ahead e-tag requirement, CAISO Dual Pricing Constraint will lead to substantial: False Negatives (CAISO doesn t bind physical only constraint, yet fails Day Ahead checkout) False Positives (CAISO binds physical only constraint, but didn t need to) Day Ahead e-tag requirement is essential to managing dual pricing constraint: There will be increased occurrences of concurrent IFM physical imports and exports: Different intertie products have different economics Bundled renewable imports, low carbon imports, unspecified exports, etc. Day Ahead e-tag requirement does not reduce liquidity with ICB: Real-time supply can compete in IFM and receive IFM price with: Intertie virtual supply award + HASP self schedule Appropriately exposed to RUC costs

Physical Only Constraint: Should it be solved in IFM optimization? Is it appropriate to treat physical and virtual bids differently in the IFM optimization process? 1. LMP market design with convergence bidding requires that physical and virtual bids be treated as fully fungible in any LMP optimization process 2. Other physical only constraints dealt with outside of LMP optimization process Consider Day Ahead physical-only unit commitment requirement Separate RUC process after IFM optimization run What would happen if a unit commitment constraint was instead added to the CAISO IFM optimization process? Separate physical and virtual prices! Physical Only Constraints should appropriately be dealt with outside of the CAISO s LMP Optimization Processes!

Dual Pricing Constraint - Option A Applies physical only constraint to IFM LMP optimization process Fails the fully fungible criteria for physical and virtual bids in an LMP optimization process Creates different prices for virtual awards versus physical awards at the same node when both constraints bind Virtual bids can only increase physical congestion, not decrease it Undermines ability to rely on virtual bids as a hedge vehicle for physical transactions Will drive average price divergence between physical IFM and HASP prices!

Dual Pricing Constraint - Option A Example; Intertie is physically fully congested every hour in the import direction for a given month Half the hours, IFM LMP > HASP LMP due to congestion only Half the hours, IFM LMP < HASP LMP due to congestion only Assume some participants have perfect foresight into which hours IFM LMP > HASP LMP Assume average prices converge across all hours over the month Rational market response with ICB under Option A: In hours with IFM > HASP, participants submit virtual supply bids Equilibrium at IFM (Virtual) = IFM (Physical) = HASP (Physical) In hours with IFM < HASP, participants submit virtual Demand bids Equilibrium at IFM (Physical) < IFM (Virtual) = HASP (Physical) The new average price equilibrium across all hours IFM (Physical) < IFM (Virtual) = HASP (Physical) Without perfect information, participants, acting rationally, will drive Virtual IFM Prices to converge with HASP prices on average, which will be higher than average IFM prices!

Modified 2-Pass Approach Pass 1: LMP Optimization Process IFM LMP Optimization treats physical and virtual bids as fully fungible Physical only constraint ignored Results in economically correct LMP price and quantities Same outcome as CAISO internal nodes Physical prices and virtual prices always the same Virtual bids can symmetrically increase or decrease physical congestion Pass 2: Physical Feasibility Run For each intertie, least economic physical awards reduced to meet physical only constraint Counter-flow virtual awards reduced to rebalance system due to physical only reductions First reduce counter-flow virtual awards of SCs with physical only reductions Next reduce counter-flow virtual awards in least economic order

Modified 2-Pass Approach Benefits: Treats virtual and physical bids as fully fungible in IFM Optimization process, Results in the same price for physical and virtual awards in all circumstances Results in the same price as what would occur at CAISO internal nodes Virtual bidding can symmetrically increase and decrease congestion Virtual bidding can drive congestion convergence each hour, and on average Virtual bidding can be effectively used as a hedge for physical activity Gaming opportunity identified by DMM in original two-pass is eliminated Balanced outcome eliminates unbalanced uplift potential from original two-pass Eliminates regrettable outcomes (award inconsistent with bid price) Drawbacks: Continues to have lost opportunity outcomes (no award when bid in merit)

2-Pass Example Example Data Current Method Option A Option B Modified 2- Pass Solution (pass 1 - pricing) Res Bid Q (MW) Bid P ($) Award (MW) LMP ($) Award (MW) LMP ($) Award (MW) LMP ($) Award (MW) LMP ($) Modified 2- Pass Solution (pass 2 - quantity) Award (MW) PI 200 50 150 60 150 50 150 50 200 59 145 59 PE 50 59 50 60 50 50 50 50 45 59 45 59 VI 150 60 55 60 55 60 0 50 0 59 0 59 VE 55 100 55 60 55 60 55 50 55 59 0 59 PG 1500 80 900 80 900 80 945 80 900 80 900 80 PL 1000 500 1000 80 1000 80 1000 80 1000 80 1000 80 LMP ($)

Comparison of Approaches Current Method Regrettable outcomes, and lost opportunity outcomes Small Q of virtuals can relieve large Q physical congestion Option A Eliminates both regrettable outcomes and lost opportunity outcomes Inappropriately applies physical only constraint to LMP optimization process Two different prices for same node in same market, reducing hedge quality Asymmetrical increases IFM physical congestion; cannot reduce it Drives average price divergence, exacerbated under imperfect information conditions Modified Two-Pass Approach Economically correct, treats physical and virtual as fully fungible Same pricing solution as internal virtual nodes Drives hourly and average price convergence Eliminates uplift potential and gaming opportunity identified with original 2-pass approach

Dual Pricing Constraint - Summary 1. Phys & Virt: Net CAISO intertie awards <= CAISO intertie ATC 2. Phys Only : Net Day Ahead E-tagged intertie awards <= CAISO intertie ATC Day Ahead e-tag requirement necessary to manage physical only constraint Day Ahead e-tag requirement does not reduce physical liquidity with ICB Inappropriate to include physical only constraint in IFM Optimization process Option A will result in average price divergence, asymmetrically increasing IFM congestion Two Pass Solution is necessary Powerex proposes a modified Two Pass Solution for further review and evaluation