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Rethinking Asset Values in a Competitive Environment

Fortnightly Magazine - February 1 2000


The daily income changes with forward prices. In our case, the total income over the initial and subsequent years adds up to $78,277 per megawatt-year. The NPV of the income generated over the unit's lifetime is $638 per kilowatt. The corresponding numbers for the CT are $94 per megawatt-day, $29,333 per megawatt-year and $177 per kilowatt, respectively. These earnings are based on the expected annual earnings for the unit, taking into consideration the impact of outages, seasonal price volatility and operational costs.

Now what about a strategy that involves multiple bids on multiple products?

ANCILLARY SERVICES. A CC plant, when equipped with automatic generation control, or AGC, can participate in the market for "regulation," one of the various ancillary services. If selected for regulation, a unit is paid one price to maintain available capacity; the ISO then dispatches the unit as needed and pays a second price for the hours that the unit actually supplies regulation service. In California's current market, the payments for availability are not withdrawn when a unit is paid a second price for dispatch. Rather, the two payments overlap.

To develop simultaneous bids for these multiple products, the unit operator needs a set of expectations regarding the prices from the energy and ancillary services markets like those in Figure 1. A bidding strategy takes into account the maximum possible profit based on expected prices in various markets within each hour, as given in Figure 2.

Glancing from the profit trend in Figure 2 to Figure 1, one will see that the generator's highest expected profits during the early and late hours of the day lie in the regulation up market. During peak hours, the higher PX energy prices promise the most profit.

In addition to the income from energy and regulation up availability, Figure 2 displays a potential revenue trend called "supplemental real-time income." That term indicates the net income that would result whenever a generator was required to supply energy by the ISO. The hourly income is given by the hourly real-time energy price, which is what the generator receives, less marginal cost. The dispatch revenue is called "supplemental" in this discussion because the ancillary service reserves the unit, but cannot guarantee energy production in terms of capacity or duration of operation. It therefore carries some uncertainty.

If the CC unit in the example were dispatched for real-time energy during the hours when it is supposed to provide ancillary service, a net loss could be incurred during the early hours, while positive net revenue would be earned in the latter part of the day. Since the proportion of the generator's capacity that can be dispatched for ancillary service purposes is a part of (never more than) the total capacity secured through availability payments, the availability payments will have greater magnitude than dispatch income in the overall profit calculation. The percentage of capacity that actually will be dispatched will vary according to the type of service and fluctuation in the need for it.

How should a bidding strategy balance the various simultaneous profit opportunities in multiple product