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Convergence Bidding Overview Margaret Miller Manager, Market Design & Regulatory Policy CPUC Convergence Bidding Workshop August 26, 2010.

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Presentation on theme: "Convergence Bidding Overview Margaret Miller Manager, Market Design & Regulatory Policy CPUC Convergence Bidding Workshop August 26, 2010."— Presentation transcript:

1 Convergence Bidding Overview Margaret Miller Manager, Market Design & Regulatory Policy CPUC Convergence Bidding Workshop August 26, 2010

2 Agenda  What are virtual bids?  Credit requirements  Position Limits  Settlements Implications  CRR Settlement Rule  Information release  Compliance Slide 2

3 Convergence bidding provides important benefits.  Minimizes differences between day-ahead and real-time prices  Limits incentives to withhold supply or underchedule load  Lower costs due to more efficient day-ahead commitment  Increases certainty and grid reliability  Mitigates supplier market power  Ability to hedge generator offers and demand bids  Account for anticipated intermittent generation Convergence bidding operates successfully in all the other US Independent System Operator nodal markets

4 Slide 4  Virtual Demand  Bid to buy at Day-Ahead price and sell at Real-Time price  Virtual Supply  Offer to sell at Day-Ahead price and buy at real-time price  Supported in Day-Ahead Market only  May be submitted at pricing nodes within CAISO system  Does not require any physical generation or load  Single day outcome – low risk Convergence Bids also known as Virtual Bids are purely financial transactions

5 How do Convergence Bids Affect the Physical Market?  Virtual bids ARE used in the Integrated Forward Market process and can set the LMP  Virtual bids are NOT included in the Residual Unit Commitment process  Virtual bids will not be included in the LMPM process 5

6 Slide 6 Why do market participants want to engage in virtual bidding?  Ability to arbitrage difference between Day-Ahead and Real-Time prices  Hedge generator outages and demand response  Optimize financial settlements between Day-Ahead and Real-Time market

7 Example 1 - Arbitrage difference in market prices at a location using virtual supply Day-Ahead  LMP = $20  Virtual supply bid clears for 100 MW at $20  Settles at 100 MW * $20 = $2,000 Real-Time  LMP = $15  Virtual supply liquidated in opposite position at $15  Settles at 100 MW * $15 = $-(1500) Slide 7 Net Position = $500 credit

8 Example 2 – Generator hedges against potential outage and high real-time prices Day-Ahead Market  LMP = $15  Schedule for 200 MW  Clears 100 MW Virtual Demand Bid at $15  Generator settles 200 MW * $15 = $ 3,000  Virtual demand settles 100 MW * $15 = $ -(1500) Real-Time Market  LMP = $ 20  Produces 100 MW  Virtual demand bid liquidated in opposite position at $20  Generator settles at 100 MW * $20 = - (2,000) RT imbalance  Virtual demand settles 100 MW * $20 = $2,000 Slide 8 Net Position = $1500 credit

9 Example 3 – Optimal Unit Settlement Day-Ahead Market  LMP = $15  100 MW Must Run/Must Offer Unit  100 MW Virtual Demand Bid clears at $15  Generator settles 100 MW * $15 = $ 1500  Virtual demand settles 100 MW * $15 = $ -(1500) Real-Time Market  LMP = $ 20  Virtual demand bid liquidated in opposite position at $20  Virtual demand settles 100 MW * $20 = $2,000  Generator although scheduled in Day-ahead receives RT price Slide 9 Net Position Day-Ahead = $0Net Position RT = $2000

10 Design includes sufficient safeguards to address concerns raised regarding nodal convergence bidding Concerns Safeguards Market manipulation Position limits CRR settlement rule Ability to suspend bidding Undermining established mitigation measures Position limits Physical LMPM process Payment defaultDynamic credit check Slide 10 Obtains objective of mitigating concerns without compromising functionality

11 Convergence Bidding Overview Participating in the Markets Bidding Rules and Credit Policy Implications

12 Slide 12 Value of Virtual Bids is compared to Available Credit at the time of submitting bids.  Reference Price – 95 th percentile value of historical price differentials for each season at each node  Absolute value of MW of all virtual bids are included except if both virtual demand and supply bids are submitted by the same the SC at the same location for the same hour. The greater MW value will be used then.  100% Available Credit can be used  Available Credit is updated daily  Rejecting Virtual Bids follows the rule of last in, first out

13 Adjustment of Estimated Aggregate Liability  After the Day-Ahead Market closes (but before the Real- Time Market closes) ISO will recalculate the Estimated Aggregate Liability based on absolute value of the cleared DA MW value * Virtual Bid Reference Price.  After the close of the Real-Time Market, ISO will recalculate the total liability and adjust the Estimated Aggregate Liability accordingly. 13

14 Convergence Bidding Overview Participating in the Market Understanding Position Limits

15 Defining Position Limits  Position limits are limits on the MWh quantities of virtual demand and virtual supply bids that can be submitted by all the SCIDs that represent a given Convergence Bidding Entity at a single location  Limits each Convergence Bidding Entity to a percentage of a certain MW amount for a PNode or APNode.  Intended to mitigate the potential exercise of market power at a specific node in the absence of a liquid market 15

16 Position Limits in the ISO Market  Position Limits will be imposed for:  Internal nodes at 10%  Interties at 5%  Trading Hubs and Default Load Aggregation Points – No limit  Schedule for increasing position limits for Internal Nodes:  Initial implementation through 8 months after implementation – 10% limit  Months 9 through 12 – 50% limit  Position limits will no longer apply beginning on the first day of the month as of the first anniversary of the implementation. 16

17 Position Limits in the ISO Market  Schedule for increasing position limits for Interties:  Initial implementation through 8 months after implementation – 5% limit  Months 9 through 12 – 25% limit  Months 13 through 16 – 50% limits  Position limits will no longer apply beginning on the first day of the seventeenth month from the implementation 17

18 Determining Position Limits at Nodes and Inter-ties Position limits are based on:  For Generator Nodes – Pmax of the generator resource  For Demand Nodes – forecast of the maximum MW consumption of the physical demand resources.  For nodes associated with both supply and demand – based on the larger of the maximum demand and the maximum capacity MW value (Pmax)  For Inter-ties – based on the Operating Transfer Capability of the intertie.  ISO will publish the locational limits for the eligible Pnodes and APNodes 18

19 Convergence Bidding Overview Settlement Implications

20 Convergence Bidding GMC  A bid submission fee of $0.005 per virtual bid segment will be charged to convergence bids  Revenues from this fee will be used to offset fees imposed for cleared convergence bids (gross MWh), in 2011  GMC for cleared convergence bids proposed at $0.078 per cleared gross MWh 20

21 Obligation for Virtual Demand to pay IFM Tier 1 Uplift  Allocate IFM Tier 1 Uplift to virtual demand when system wide virtual demand is positive.  Obligation for virtual demand based on how much additional unit commitment was driven by net virtual demand that resulted in IFM clearing above what was needed to satisfy measured demand  Allocated to SCs with a positive net virtual demand position

22 Obligation for Virtual Supply to pay RUC Tier 1 Uplift  Extent CAISO forecast ≤ actual load RUC Tier 1 Uplift paid by net virtual supply and underscheduled load  Extent CAISO forecast > actual load RUC Tier 1 paid by measured demand by ratio share  Allocate RUC Tier 1 Uplift to virtual supply when system wide net virtual supply is positive  Virtual Supply obligation to pay RUC Tier 1 Uplift would be based on pro-rata share of the total obligation as determined by their total (net) virtual supply bids

23 Real-Time Bid Cost Recovery  Costs related to bid cost recovery for short-start units started in Real-Time as a result of a RUC schedule will be allocated to net virtual supply and underscheduled load  These costs will now be allocated through RUC Tier 1 Uplift rather than through Real-Time BCR Uplift  Costs attributed to other factors that result in Real-Time uplift will continue to be allocated to Measured Demand until a two-tier charge is developed

24 Convergence Bidding Overview Congestion Revenue Rights Settlement Rule

25 Defining Congestion Revenue Rights (CRRs)  CRRs are financial instruments that give the Holder the right to receive or the obligation to pay a share of the total congestion revenue associated with a given Trading Hour of the Day-Ahead Market.  CRR Settlement Rule applies only to CRR holders that participate in Convergence Bidding. 25

26 Defining the CRR Settlement Rule  CRR settlement rule is put in place to recapture - where warranted – the increase in CRR revenues to CRR Holders that are attributable to that Company’s Convergence Bidding. 26

27 Convergence Bidding Overview Compliance

28  Department of Market Monitoring will be monitoring the Convergence Bids and CRR Settlement Rule charges  CRR Settlement Rule is not applied at the affiliate level, but will be monitored by DMM.  Monitoring virtual bidding activity for anomalous market behavior, gaming, or the exercise of market power.  ISO has the authority to suspend or to limit the ability to bid at a single Eligible PNode or at ALL Eligible PNodes 28

29 Compliance  Ability to suspend or limit virtual bidding pursuant to Tariff Section if virtual bidding:  Detrimentally affects System Reliability or grid operations  Causes or contributes to unwarranted divergence in prices between the Day-Ahead Market and the HASP or Real-Time Market  Causes or contributes to unwarranted divergence in Shadow Prices between the Day-Ahead Market and the HASP or Real- Time Market that contributes to a significant divergence in LMPs at any Eligible PNode and/or Eligible APNode 29

30 Non-Compliance May Result In…  Suspension from or limitation in participating in the Market.  Once participant is suspended, suspension could remain in place for up to 90 days unless FERC directs otherwise or ISO determines it is no longer needed.  Financial Impact – potential revenues lost for not participating in the market 30

31 Convergence Bidding Overview Information Release

32 The ISO will release the following information on convergence bids:  Bid data released on 90 day lag  Same as physical resource bid data  Hourly net cleared virtual quantities at each node  Helps identify nodes with high virtual activity  Day-Ahead Market Summary Report  Includes MWh and dollars for submitted as well as cleared physical and virtual bids system wide Slide 32

33 Convergence Bidding Overview References

34  Draft Final Proposal of the Design for Convergence Bidding – September 14, 2009  Addendum to Draft Final Proposal of the Design for Convergence Bidding – October 2, 2009  Convergence Bidding Draft Tariff Modifications, CAISO Fourth Replacement Tariff – April 23, 2010 and May 13, 2010  Convergence Bidding Design Policy to FERC  Implementation Plan v. 2.1 – June 3, 2010  Business Requirements Specifications v.1.2 – April 20,

35 Convergence Bidding Overview Thank you for attending. For questions, please contact:


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