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Pricing the Grid: Comparing Transmission Rates of the U.S. ISOs

Fortnightly Magazine - February 15 2000

the 700-MW flow before redispatch minus the 600-MW flow limit. The ISO picks the bids that are cheapest in terms of their effective cost per megawatt-hour of line flow relief. In this example, the ISO fully relieves congestion by accepting part of merchant B's cheapest bid. That bid, which is the marginal source of congestion relief, sets the congestion price of $36 per megawatt-hour of flow over the constrained line 1-3.

Figure 5 shows the resulting dispatch by the ISO. This dispatch respects the 600-MW line flow constraint and allows each merchant to maintain a balanced schedule. This dispatch costs $1,200 more than the efficient dispatch found by the Northeastern ISOs. Power traders can easily correct part of this inefficiency. Without affecting total quantities of power produced at each bus, merchants B and C can shift 150 MW of output from generator C1 to generator B1, thus reducing costs and increasing their profits by $450 (150 MW times the $3 difference in generator incremental costs).

The merchants will have a difficult time finding the remaining $750 of cost reductions, however. Part of the reason is that the needed redispatch involves plants at multiple busses and with multiple owners; the additional cost savings require that generator A2 increase output by 300 MW while generators B1, B3 and C1 decrease output by 100 MW, 150 MW and 50 MW, respectively. But the merchants sometimes will not want to undertake such trades because of the incentives created by the pricing of the transmission constraint between busses 1 and 3. For example, while Table 4 indicates that the California price for this constraint is $36 per megawatt-hour, the efficient price is only $30.[Fn.5]

In all fairness, California's main transmission constraint ("Path 15") does not have the sort of loop flow problem that appears in the example of figures 3 through 5. In California, therefore, dispatch generally will be almost as efficient, and sometimes equally efficient, as dispatch of transmission in the New York and PJM markets.

Regional power systems that are considering imitating the California approach to transmission pricing should be aware, however, that loop flows can compromise the efficiency of this pricing approach. There nonetheless is a simple remedy for the inefficiencies of the California approach, a remedy that would improve market efficiency with or without loop flows. This remedy is to allow the ISO to accept unbalanced bids for congestion redispatch, so that the ISO, for example, can reduce the generation of one merchant firm while increasing the generation of another merchant firm. This remedy has been explicitly rejected in California because of a belief that such voluntary bids from voluntary bidders would allow the ISO to "force" trades among market participants.

Non-Price Methods. ERCOT, MISO and New England primarily rely upon two non-price methods to assure that transmission limits are respected. The first method has the ISO (or some other party) pay generators or loads for redispatch; the costs of this redispatch are then recovered from designated customer groups. The second method has the ISO curtail use of transmission facilities according to the