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Rethinking Asset Values in a Competitive Environment

Fortnightly Magazine - February 1 2000

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BALANCING PROFIT POTENTIAL. The operator of this unit needs a bidding strategy that will result in a uniform expected level of profit, whichever market accepts him. The rationale behind this condition is the optimization of income, assuming indifference to the origin of profit. Given the expectations summarized in Figures 1 and 2, the operator develops bids that position the generator as a price-taker in the most profitable market during each hour. Clearly, the priority for an AGC-equipped generator would be to enter the energy market at peak hours, and to be scheduled for regulation availability during off-peak hours. A generator unable to serve regulation would need to consider the next most profitable market after regulation, spinning reserve, if the generator were capable.

In the off-peak hours, the bids into the regulation up market would be the expected energy price less its marginal cost (as regulation carries no marginal cost). His regulation bids are low enough to have a high likelihood of acceptance. Thus, he stands to make no less from regulation than the expected energy market profit.

As explained, the operator should bid to insure the same profit across markets, that is, whatever the most profitable market promises. The corresponding hourly bid into the PX for energy should be the marginal cost of delivery plus the expected regulation profit, which is regulation's expected price.

BIDS AND EARNINGS. Suppose the operator expects the clearing price for regulation availability will be $10.00 per megawatt-hour. The marginal cost of the CC in our example to supply energy is $15.07 per megawatt-hour, so to equalize his profit across markets, he bids $25.07 per megawatt-hour (= $15.07 + $10.00), into the PX. Thus, a minimum profit of $10.00 from energy would result from acceptance, commensurate with the profit expected through regulation.

During peak hours, when energy is expected to offer the highest profit, his bid into the forward energy market is the expected regulation price (also the expected regulation profit) plus the marginal cost of generation ($15.07). The rational bid for regulation is the profit expected from energy, or the anticipated energy price less the marginal cost (again, because regulation carries no marginal cost).

On the basis of its bidding strategy, the AGC-equipped CC in this example is scheduled for dispatch in the energy market for 11 consecutive hours, 9 through 19. For the other 13 hours of the day, it is scheduled for regulation up availability, and will be running at a minimum level, to be dispatched as needed by the ISO. The profit that the unit makes in each market is calculated below.

The resultant energy earnings are the summation of the difference between the market-clearing PX energy price and the marginal cost for the 11 hours just stated, times 400 megawatts (the unit's capacity). The earnings for regulation up availability are given by the summation of the market-clearing regulation up prices in hours 1 through 8, and 20 through 24, times 400 MW of capacity accepted. Dispatch by the ISO for regulation will supplement the income. For the revenue calculation in this example,