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Copyright 2003 PJM WWW.PJM.COM 1 PJM’s Annual FTR Auction.

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Presentation on theme: "Copyright 2003 PJM WWW.PJM.COM 1 PJM’s Annual FTR Auction."— Presentation transcript:

1 Copyright 2003 PJM 1 PJM’s Annual FTR Auction

2 Copyright 2003 PJM 2 Introduction

3 Copyright 2003 PJM 3 FTR Market Enhancements In order to create a more robust FTR Market, PJM is enhancing the FTR Market to include: Annual FTR Auction Current FTR allocation procedure will be converted into a long-term auction New FTR Product FTR Options are a financial instrument that provides a new hedging mechanism

4 Copyright 2003 PJM 4 Annual FTR Auction

5 Copyright 2003 PJM 5 FTRs are allocated to Firm Transmission Service Customers annually Monthly FTR Auctions allocate residual FTR capability to highest bidder TODAY All FTR capability is auctioned off to the highest bidders Auction revenues will be allocated to Firm Transmission Service Customers FUTURE Annual FTR Auction

6 Copyright 2003 PJM 6 BENEFITS Annual FTR Auction Provides more flexible transmission congestion hedging alternatives Makes benefits of congestion hedges generally more available to customers who switch suppliers under Retail programs Continues to allocate property rights to Firm Transmission Customers through Auction Revenue Rights

7 Copyright 2003 PJM 7 What Are 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 energy price differences across the path

8 Copyright 2003 PJM 8 What are ARRs? Auction Revenue Rights … are entitlements allocated annually to Firm Transmission Service Customers that entitle the holder to receive an allocation of the revenues from the Annual FTR Auction

9 Copyright 2003 PJM 9 Entire PJM System Capability Auction Revenue Rights Auction Revenue FTRs Awarded To Bidders (MWs & Price) Annual FTR Auction Annual ARR Allocation ARRs Allocated (MWs) Auction Revenue Rights Holders

10 Copyright 2003 PJM 10 FTR Options New FTR Product

11 Copyright 2003 PJM 11 New FTR Product TODAY FTR Obligations only FTR Obligations can be a benefit or a liability FUTURE FTR Obligations and FTR Options FTR Obligations can be a benefit or a liability FTR Options can be benefit, but never a liability

12 Copyright 2003 PJM 12 BENEFITS New FTR Product Provides additional Transmission congestion hedging alternatives to PJM customers Will make analysis of hedging alternatives less complex

13 Copyright 2003 PJM 13 FTR Market Timeline

14 Copyright 2003 PJM 14 Overview of Financial Transmission Rights (FTRs)

15 Copyright 2003 PJM 15 What Are 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 energy price differences across the path

16 Copyright 2003 PJM 16 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 ? ? ?

17 Copyright 2003 PJM 17 Characteristics of FTRs Economic value based on Day Ahead LMPs Defined from source to sink can be in form of obligation or option obligation can be benefit or liability option can be benefit but never liability Financial entitlement, not physical right Independent of energy delivery Must be simultaneously feasible

18 Copyright 2003 PJM 18 Economic Value of FTR FTR Target Allocation is equal to the FTR MW amount times the price difference from the FTR sink point to the FTR source point LMPs based on the clearing prices from DayAhead Market If LMP FTR Sink < LMP FTR Source, –the FTR is a liability if FTR defined as Obligation –the FTR has zero value if defined as Option FTR Target Allocation (FTR MW ) * (LMP FTR Sink - LMP FTR Source )=

19 Copyright 2003 PJM 19 How are FTRs Acquired? 1.Annual FTR Auction –multi - round –multi - period –multi - product –entire system capability 2.Monthly FTR Auction –single - round –purchase “left over” capability 3.FTR Secondary Market –bilateral trading FTRs are acquired in three market mechanisms …

20 Copyright 2003 PJM 20 Types of FTR Products FTRs can be acquired in two forms … FTR Obligations FTR Options

21 Copyright 2003 PJM 21 What are FTR Obligations Worth? Benefit –the hourly economic value is positive –FTR same direction as congested flow Liability –the hourly economic value is negative –FTR opposite direction as congested flow

22 Copyright 2003 PJM 22 What are FTR Options Worth? A Benefit –the hourly economic value is positive –FTR same direction as the congested flow. Neither a Benefit or a Liability –the hourly economic value is zero –FTR opposite direction to the congested flow. FTR Option cannot have negative value

23 Copyright 2003 PJM 23 FTR Consistent withCongested Flow Thermal Limit FTR Obligation = 100 MW Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Obligation Credit = 100 MW * ($30-$15) = $1500 LMP = $30 LMP = $15 Source (Sending End) Sink (Receiving End) Bus B Bus A Energy Delivery = 100 MWh

24 Copyright 2003 PJM 24 Thermal Limit FTR Obligation = 100 MW Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Obligation Credit = 100 MW * ($15-$30) = $-1500 LMP = $30 LMP = $15 Source (Sending End) Sink (Receiving End) Bus B Bus A Energy Delivery = 100 MWh FTR Obligation is a Liability

25 Copyright 2003 PJM 25 FTR Option is a Benefit Thermal Limit FTR Option= 100 MW Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Option Credit = 100 MW * ($30-$15) = $1500 LMP = $30 LMP = $15 Source (Sending End) Sink (Receiving End) Bus B Bus A Energy Delivery = 100 MWh

26 Copyright 2003 PJM 26 Thermal Limit FTR Option= 100 MW 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.****** LMP = $30 LMP = $15 Source (Sending End) Sink (Receiving End) Bus B Bus A Energy Delivery = 100 MWh FTR Option is Neither a Benefit/Liability

27 Copyright 2003 PJM 27 Summary FTRs are financial instruments used to hedge congestion costs FTRs can be acquired in the Annual 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

28 Copyright 2003 PJM 28 Overview of Auction Revenue Rights (ARRs)

29 Copyright 2003 PJM 29 What are ARRs? Auction Revenue Rights … are entitlements allocated annually to Firm Transmission Service Customers that entitle the holder to receive an allocation of the revenues from the Annual FTR Auction

30 Copyright 2003 PJM 30 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 physical right Must be simultaneously feasible

31 Copyright 2003 PJM 31 Economic Value of ARR ARR Target Allocation is equal to the ARR MW amount (divided by the number of rounds) times the price difference from the ARR sink point to the ARR source point LMPs based on the nodal clearing prices for each round of the Annual FTR Auction ARRs can be a benefit or a liability ARR Target Allocation (ARR MW ) * (LMP ARR Sink - LMP ARR Source ) (# of rounds) =

32 Copyright 2003 PJM 32 How are ARRs Acquired? 1.Annual ARR Allocation Auction Revenue Rights (ARRs) requested by Firm Transmission Customers are allocated on an annual basis 2.Daily ARR Reassignment ARRs allocated for the planning period will be reassigned on a proportional basis within a zone as load switches between LSEs within the planning period ARRs are acquired in the following mechanisms …

33 Copyright 2003 PJM 33 What can the holder do with the ARR? Convert ARR into FTR by “self-scheduling” FTR into Annual Auction on exact same path as ARR Reconfigure ARR by bidding into Annual Auction to acquire FTR on alternative path or for alternative product May retain allocated ARR and receive associated allocation of revenues from the auction

34 Copyright 2003 PJM 34 Summary ARRs entitle the holder to receive allocation of Annual FTR Auction revenues ARRs are allocated to firm Transmission Service Customers 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 benefit or liability ARRs must be simultaneously feasible


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