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Fortnightly Magazine - October 1 1996

for energy supplied to the ISO. Moreover, the ISO should rely as much as possible on price signals to achieve load balancing. The ISO can rely on price to balance load by setting the hourly balancing charge equal to the marginal cost paid to the generators that provide the balancing energy. Therefore, the ISO's prices for energy supplied (e.g., for negative imbalances) should not be set by regulation, but by whatever price generators are asking for additional supply (or whatever prices customers are bidding in for load reductions). This model makes the ISO's rate for balancing energy a true real-time pricing (RTP) rate.1 In short, the ISO can keep load and supply in balance through an hourly energy cost set by the market. Administrative decisions or "penalty" pricing become unnecessary.

There is no reason to exclude any customer or generator that wishes to participate in the ISO spot market. Quite the opposite; the more players who participate, the more efficient is the ISO, which gains flexibility in balancing supply and demand with an increase in the number of generators and customers who offer supply and price-responsive load.2 Similarly, as more supply becomes available, the cost may fall for energy used for balancing. Finally, the larger the spot market, the more price-responsive load.

Financial Settlements

The ISO actually performs two functions, one physical (or operational) and one financial. First, the ISO physically balances kilowatt-hour supply and load every instant for the overall system.3 Second, at the end of the day (or week or month), the ISO balances the dollars. These two tasks represent separate functions and, in fact, can prove quite different. For physical balancing, the ISO need know nothing about contracts (em that is, which generator serves which customer.4 Generator G1 may be serving Customer Cg and Generator G5 serving Customer Cb. As far as the ISO and its operations are concerned, the contractual pairing could be G1:Cb and G5:Cg. It simply doesn't matter. For financial balancing, on the other hand, the ISO must know the kilowatt-hour obligation and entitlement amounts of every "direct pay" contract,5 in order to track the generation/usage balance between each generator (or aggregator) and its customers.

To illustrate the difference, imagine that in a given hour all contracts between generators and

customers are perfectly in balance, except for two. In one of those contracts, the generator produces 10 kilowatt-hours (Kwh) more than the customer takes; in the other, the generator produces 10 Kwh less than the customer takes. From a physical perspective, the system is in balance, so the ISO has no balancing to do. However, several hours (or days) later, after all the meters are read, the ISO discovers that one contract (or generator) had a positive imbalance and the other contract (or generator) had a negative imbalance. The ISO accounting office must then charge the generator who had the negative imbalance, and pay the generator who had the positive imbalance. Thus, the ISO did not have to do any physical balancing for that hour, only financial balancing. In fact, even if every contract were out