CHAPTER 1
INTRODUCTION

"Design to the mission, design as a system, keep it simple."

[109, p. 20]

CENTRALLY MANAGED WHOLESALE power markets operating over high-voltage transmission grids support the steady flow of electric power from bulk power sellers to bulk power buyers, for ultimate resale and distribution to retail customers. This mission has been complicated in recent years by a dramatic surge in the availability and use of variable energy resources (VERs).

A VER is a power source whose power injections into a transmission grid cannot be fully dispatched in a controlled manner to balance changes in power withdrawals or to meet other system requirements. Examples include solar panels and wind turbines that are not fully firmed by storage. The increased participation of VERs in wholesale power markets, together with the increased encouragement of active demand-side participation, increases the uncertainty and volatility of grid net load, i.e. power withdrawal net of non-dispatched power injection.

In consequence, as discussed more fully in Chapters 2-3, US RTO/ISO-managed wholesale power markets1 are finding it harder to secure dependable reserve with sufficient flexibility to permit the continual balancing of net load, a basic requirement for power system reliability. Trade and settlement arrangements in these markets are still largely based on rigid reserve definitions, eligibility requirements, and settlement processes that make it difficult to ensure adequate provision and appropriate compensation of needed reserve from multiple types of resources. Emphasis is placed on the designation and compensation of artificially separated product concepts such as energy, ramping, and capacity, whereas value in power markets in fact principally arises from the dispatchable availability and delivery of power-paths, i.e. flows of power into and out of a grid at specific grid locations during designated operating periods.

This study reconsiders the design of US RTO/ISO-managed wholesale power markets in light of these concerns. Four market design principles are stressed:

1. [MD1:] All wholesale power markets must necessarily be forward markets2 due to the speed of real-time operations.
2. [MD2:] Only one type of product can effectively be offered in a wholesale power market: namely, reserve, an insurance product offering availability of net load balancing services for future real-time operations.
3. [MD3:] Net load balancing services offered into wholesale power markets generally take the form of power-paths that can be dispatched at specific grid locations over time.3
4. [MD4:] All dispatchable resources should be permitted to compete for the provision of power-paths in wholesale power markets without regard for irrelevant underlying technological differences.

A swing-contract market design is proposed that is in accordance with principles MD1-MD4. This design envisions an ISO-managed wholesale power market M(T) organized as a reserve market for some designated future operating period T. Reserve consists of dispatchable power-paths for period T. As illustrated in Figure 1.1, a power-path for period T refers to a sequence of power injections and/or withdrawals at a single designated grid location during period T.4 Dispatchable resources offer reserve (dispatchable power-paths) into M(T) by means of "swing contracts."

Figure 1.1 One of many possible power-paths that a dispatchable resource with swing (flexibility) in down/up ramping and power amplitude could be signaled to deliver at its grid location during operating period T = .

More precisely, as carefully explained in Chapter 4, a swing contract issued by a dispatchable resource is a reserve contract that can offer into a swing-contract market M(T) in either firm or option form.5 consists of four components, each specified by : (i) an offer price ; (ii) an exercise set ; (iii) a physically characterized set of power paths for period T, each of which could feasibly deliver at a designated grid location during T in response to dispatch signals; and (iv) a performance payment method .

If is cleared, the offer price (if positive) is paid to either directly or in amortized payment-schedule form. The offer price thus permits to cover ex ante any cost that would have to incur to ensure the availability of the power-paths in . This availability cost could include capital investment cost, start-up cost, no-load cost, and opportunity cost. The exercise set consists of designated times between the close of M(T) and the start of T at which the ISO can exercise , assuming has been cleared. The form of this exercise set determines whether is a firm contract or a type of option contract.6

The dispatchable power-paths in are characterized in terms of attributes such as delivery location, start-time, minimum down/up time, active and reactive power limits, ramp-rate limits, duration limits, and energy capacity. The precise specification of these attributes determines the degree of swing (flexibility) in 's offered reserve. Finally, the performance payment method permits resource to recover ex post any cost that incurs for verified period-T service performance, i.e. for the verified period-T delivery of a power-path in in response to dispatch signals. This performance cost could include fuel cost, labor cost, transmission service charges, and machinery wear and tear caused by fast ramping.

Reserve offers submitted into M(T) take the form of portfolios of swing contracts offered by dispatchable resources for operating period T. These dispatchable resources can include generators, distributed-resource aggregators, and storage facilities. Reserve offers in firm form effectively constitute regulation reserve, whereas reserve offers in option form effectively constitute contingency or planning reserve.

As demonstrated in Chapter 5, these reserve offers can take the standard supply-offer forms required by current US RTO/ISO-managed wholesale power markets. Examples include: must-run energy blocks; hourly step-function power supply schedules with a separate price designated for each power-step; and power self-scheduled by power traders to secure needed transmission support for the power outcomes of privately negotiated physically covered bilateral contracts.

However, as is also demonstrated in Chapter 5, the general formulation of a swing contract can accommodate reserve offers with a much broader range of offered attributes than envisioned in these standard supply offer forms. Moreover, the issuer of a swing contract can use the performance payment method included in to specify m's required compensation ex post for dynamic aspects of a delivered power-path, such as ramping, duration, and reactive power support, as well as static aspects such as total delivered energy.

Reserve bids submitted into a swing-contract market M(T) take the form of price-sensitive and/or fixed demands for power-path delivery during operating period T. Reserve bids can be submitted by load-serving entities to service the forecasted loads of their customers during T, and by power traders who need to self-schedule the power outcomes of privately negotiated physically covered bilateral contracts in order to secure needed transmission support.

As detailed in Chapters 6-9, an ISO managing a swing-contract market M(T) solves a contract-clearing optimization problem to determine which reserve offers and price-sensitive reserve bids to clear for operating period T. The objective of the ISO is to maximize the expected total net benefit of the market participants, conditional on initial state conditions and subject to system constraints.

Total net benefit consists of total benefit net of total avoidable cost. The system constraints include power balance, transmission line, and reserve constraints. These constraints incorporate, as exogenous inputs: (i) all fixed demands; (ii) all forecasts for non-dispatched power injection; (iii) all of the power-path attributes included by dispatchable resources in their reserve offers; and (iv) system-wide and zonal reserve requirements set by the ISO to ensure coverage of net load uncertainty sets as a robust means of protection against net load forecast errors.

The ISO functions as a clearing house for M(T), collecting payments and overseeing payouts to market participants. However, the ISO does not have any financial stake in market operations. To maintain this independent status, all net reserve cost7 and transmission service cost incurred through market operations are passed through to market participants. Net reserve cost is allocated across market participants based on the relative volatility and size of their net must-service load.8 Transmission service cost is allocated across market participants based on the power imbalance9 at their grid locations.

More generally, Chapter 10 proposes a linked collection of swing-contract markets whose...