APPA's Competitive Market Plan - American Public Power Association

VII. Residual Short-Term and Imbalance Services:
The Optimization Market
B
ecause generator availability and customer demand cannot be
perfectly predicted, and electricity cannot (yet) be stored
economically in sufficiently large quantities, APPA’s proposal includes
an RTO-operated residual “optimization” market. This market would allow
for the co-optimization of offers by generators to sell excess energy and
ancillary services, and for LSEs to obtain economy energy and clear
imbalances. The optimization market also would provides an opportunity for
the sale of variable generation 75 not committed under bilateral agreements
and allows for the purchase of replacement power for variable generation not
available at a given time.
APPA believes it is not in the interest of either buyers or sellers to place set
limits on the percentage of load that can be met through the optimization
market. Such limits reduce needed flexibility for LSEs, including their ability
to purchase power from variable generation resources, and restrict the
flexibility of generators (especially variable generators) as well. APPA’s
proposed RTO-run optimization market is designed to minimize the size of
the spot market and encourage bilateral contracting for load not served by
owned resources to the maximum extent possible without unduly restricting
market participant options. Key design features of the optimization market
include:
1) Generator offers to sell into the optimization market would be
limited to no more than their short-run marginal costs (SRMC). The
SRMC includes only those costs that vary with the level of output, primarily
fuels and operations, maintenance and administrative costs that vary with
output. (For example, periodic inspection, replacement and repair of system
components would be included because such maintenance depends upon the
level of output. 76 ) Opportunity costs would not be included in the calculation
of the SRMC 77 , including for ancillary services, which will be co-optimized
with energy dispatch.
75
By “variable generation” APPA means resources that have little control over when they generate
due to their dependence on renewable “fuels,” e.g., wind and solar resources.
76
Serkan Bahceci, Julia Frayer, Amr Ibrahim, and Sanela Pecenkovic, A Comparative Analysis of
Actual Locational Marginal Prices in the PJM Market and Estimated Short-Run Marginal
Costs: 2003-2006, London Economics International, Section 5.2, February 2007,
http://www.publicpower.org/files/PDFs/LEIReport2012007.pdf
77
An example of the potential problems arising from the inclusion of opportunity costs can be
seen in PJM’s Regulation Market. Participants in this market must submit cost-based offers,
and if they fail the three pivotal supplier test, their offers are capped at the lower of the pricebased
or cost-based offer, plus a margin and opportunity costs. Changes to the margin and
the calculation of opportunity costs increased the cost of Regulation and led PJM’s Market
Monitor to conclude that the results of the Regulation Market were not competitive. 2010
State of the Market Report for PJM, Section 6, Monitoring Analytics, March 20, 2011, p. 448-9,
http://www.monitoringanalytics.com/reports/PJM_State_of_the_Market/2010/2010-sompjm-volume2-sec6.pdf
30 APPA’s Competitive Market Plan: 2011 Update www.PublicPower.org