1. PowerGEM Power Grid Engineering & Markets 1 LMP’s and Congestion Relief Lens, Crystal Ball, or Alice’s Looking Glass ? January 30, 2003 Jim Mitsche jmitsche@power-gem.com www.power-gem.com

2. PowerGEM Power Grid Engineering & Markets 2 Opinions, Based on What ? Analysis of NY State Congestion Cost and Causes 2000 – 2002 –Report at http://www.nyiso.com/services/documents/groups/oc_tpas_subcomm/12_04_02/draft_final_ny_trans_grid_rev_112602.pdf Analysis of Delmarva Peninsula (PJM) Congestion Cost and Causes 2000 – 2002 –Report At http://www.pjm.com/transmission/trans_exp_plan/meeting/downloads/20021217_mitsche_cong.pdf http://www.pjm.com/transmission/trans_exp_plan/meeting/downloads/20021217_delmarva_congestion_study4.pdf 3 Years of Decision Support to Major TCC Owner in New York Thanks to my co-workers Boris Gisin and Manos Obessis, and to Scott Gass of PJM !

3. PowerGEM Power Grid Engineering & Markets 3 LMP’s Add to Price Volatility, What Do We Get for That ? In A Nutshell LMP’s point to congestion causes and impacting load/generation very well (with a little more data than usually available) LMP differences (congestion cost) patterns are often very mysterious and difficult to predict Financial products based on LMP differences are good for hedging, but not investment Some new approaches may reduce LMP price volatility and encourage LMP based transmission investment

4. PowerGEM Power Grid Engineering & Markets 4 LMP’s Point to Congestion Causes

5. PowerGEM Power Grid Engineering & Markets 5 LMP’s Point to Impacting Load/Generation

6. PowerGEM Power Grid Engineering & Markets 6 A Little More Data is Needed Shadow Prices Are More Useful than LMP’s for Cause Impact & Analysis –Shadow Prices (value of relieving a constraint) reflect Multiple Constraints –(1.9 per hour in PJM, 5+ is common) Outages –(4 per hour average in Delmarva alone, 10+ is common in ISO’s) Relief Cost & Effectiveness –PJM Shadow Prices vary $0 to $1269 Amount of Load Affected These Data + LMP’s Inform Markets

7. PowerGEM Power Grid Engineering & Markets 7 Why is Congestion Occurring at All Load Levels ? Why Doesn’t Congestion Cost Go Up with the Supply Curve ? Congestion Patterns are Often Mysterious

8. PowerGEM Power Grid Engineering & Markets 8 Does Congestion Increase with Increasing Load Level ? Generally No ! Somewhat more frequent congestion with no outages at higher loads

9. PowerGEM Power Grid Engineering & Markets 9 What Causes Congestion At Shoulder Load ? Transmission Outages Generation Outages Unit Commitment Decisions and Restrictions –Unit Minimums –Ramp Rates –Minimum Run Times Bidding Patterns & Generation Location

10. PowerGEM Power Grid Engineering & Markets 10 Delmarva Peninsula Summary of Congestion by Cause August 1999 - August 2002 Hours Cost No Outages Planned Maintenance Outages Forced Outages Construction Outages

11. PowerGEM Power Grid Engineering & Markets 11 CRR’s Make Good Hedges but Bad Investments

12. PowerGEM Power Grid Engineering & Markets 12 Why Spend $$ on New Transmission ? Reliability Needs Entry Fee –Safe Interconnection and Capacity Deliverability Costs Insurance Policy –LMP’s Provide Actuarial Data –CRR’s Define Hedges Investment –Volatile and Unpredictable –Where is the Pay-Back ?

13. PowerGEM Power Grid Engineering & Markets 13 Improving LMP Based Markets Is There a Way ? Embryonic Ideas –Reducing LMP Volatility Create a financial resource (bilateral transactions or bilateral secondary market ?) to use in commitment/dispatch to avoid going over the congestion “cliff”. Clear congestion with a longer term (one week?) to reduce the effect of outages and unit commitment. More volatile and transient (Day Ahead and real time?) congestion charged to load. –Transmission Investment Flowgate Set Asides –Identify Persistent but Somewhat Approximate Transmission Weaknesses –Identify or Offer Flowgate Increase Opportunities –Calculate & Use Flowgate Shadow Prices –Reserve and Pay-out a New Set Aside Like CBM