Dear Colleague:

The Edison Electric Institute just published a report I wrote on Real-Time 
Balancing Operations and Markets: Key to Competitive Wholesale Electricity 
Markets. The report is available from the Publications page of my website, 
www.EHirst.com. Here is a summary of the report:

Electricity production and consumption must occur at essentially the same 
time. Therefore, real-time (minute-to-minute) operations and the associated 
markets and prices are essential ingredients of a competitive wholesale 
electricity industry. In addition, these intrahour markets are the foundation 
of all forward markets and contracts, including hour- and day-ahead markets, 
monthly futures, and bilateral contracts. Finally, these intrahour operations 
maintain system reliability by ensuring that enough and the right kinds of 
supply and demand resources are available when needed. 

Because of various load, generation, and transmission factors, balancing 
generation to load on a minute-to-minute basis is complicated. Loads are 
volatile, both from hour to hour and from minute to minute during the morning 
rampup and evening dropoff. Generators differ substantially in their costs of 
electricity production. In addition, generators have various idiosyncratic 
characteristics, such as maximum and minimum output levels and maximum 
ramprates, that limit their ability to respond rapidly to changes in system 
load or generation. Finally, transmission characteristics affect the 
real-time balancing function because of congestion and sudden transmission 
outages. These factors can lead to dramatic and rapid changes in electricity 
prices, including occasional negative prices when generators pay someone to 
take their output.

The early years of operations by independent system operators (ISOs), based 
on the experiences in New England, New York, and California, show how 
difficult it is to translate the theory and initial design of competitive 
markets into ones that work efficiently. These ISOs have been plagued with 
various startup problems that artificially raise electricity costs to 
consumers, implicitly encourage strategic bidding by some generators, do not 
sufficiently discipline generator market power, sometimes yield insufficient 
resources, and impair reliability. Fortunately, the ISOs have been quick to 
identify and remedy flaws in their initial market designs. On the other hand, 
the ISOs have done a poor job of documenting these problems and their 
resolutions.

This report is primarily a primer on how such intrahour operations and 
markets should work. It demonstrates these principles through several 
examples. These examples deal with generator ramprate limits, low-operating 
limits, startup costs, and other generator characteristics. Other examples 
show how energy-limited (e.g., hydro) units differ in their bidding and 
operations from capacity-constrained (e.g., thermal) units, how the 
consideration of multiple time intervals affects operations and pricing, how 
generators located outside the control area are treated differently from 
those within the control-area boundary, how interval pricing combined with 
hourly settlements can encourage generators to ignore dispatch signals, and 
how intermittent resources (such as wind) affect control-area operations. 

Although U.S. wholesale competitive markets today suffer from a variety of 
problems, there is reason to be optimistic. Ultimately, the ISOs (and, later 
on, RTOs) will identify and fix the problems within their market structures, 
and they will adequately document their problems and the associated 
resolutions so that their market participants and the designers of other 
systems can learn from past mistakes. Ultimately, efficient real-time markets 
should allow reliability councils and system operators to largely replace 
command-and-control rules with market signals (i.e., prices that vary rapidly 
in response to changes in system security). These changes should lower the 
costs of maintaining reliability; deploy supply and demand resources more 
efficiently; and guide investments in new generation, transmission, and 
demand-side resources.

Eric  
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Eric Hirst 
Consulting in Electric-Industry Restructuring
106 Capital Circle
Oak Ridge, TN 37830
865-482-5470 (phone & fax)??? Eric@EHirst.com
http://www.EHirst.com