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Rethinking Asset Values in a Competitive Environment

Fortnightly Magazine - February 1 2000

40 MW is needed during all 13 hours of regulation, and the real-time energy price is paid per megawatt-hour. Thus, the revenue from real-time dispatch for regulation can be calculated as the summation of differences between the real-time energy prices and marginal cost for the 13 stated hours of dispatch, times 40 MW.

The income the unit has achieved after bidding into the PX and ancillary services markets is $310 per megawatt-day. These results are summarized in Table 3. The daily and annual earnings and the NPV over the lifetime of the unit are given in Table 4.

In the case of the combustion turbine, the bid for energy is marginal cost plus the clearing price of non-spinning reserve prices. From Table 3, one can see that the unit participates for 10 hours in the energy market and for 14 hours in the non-spinning reserve market. The daily and annual net incomes are illustrated in Table 4. The net present value represents the summation of these values over the lifetime of the asset. Note that the unit earns $246 per kilowatt, rather than the $177 per kilowatt shown in the case of conventional analyses.

A comparison of the two units' valuations, the first based on energy alone and the other on multiple product bidding (shown in Table 4), suggests the sort of error that one invites with historical projections based on energy. These examples show that with a rational, profit-optimizing approach such as that outlined, a generator can gain access to greater overall revenues. The simplistic assumption that, over its lifetime, a unit will participate in the energy market and may even receive some capacity charges may underestimate its potential income. In California, New England, New York, PJM and Ontario, there is a definite advantage to participating in ancillary service and spot markets, where active ancillary services and real-time imbalance bidding is in place.

Regional Markets: All Equally Friendly?

The task of asset valuation requires attention to the type and structure of ancillary service markets in the relevant region. For instance, ECAR does not have a bidding system for distinct ancillary service products, but is divided between energy and capacity payments. Even in California, the operation of ancillary services markets thus far has seen fewer bids than are necessary to meet ISO requirements for ancillary services, and has removed some supply-side incentive to broader participation through the imposition of price caps. Despite the progress that lies ahead in the emergence of liquid ancillary services markets, generators' operational characteristics and their competitive positioning in providing various products require attention, as the price of energy is insufficient to provide an estimate of a generator's worth. If it alone is used in revenue forecasts, such forecasts are likely to make generators with different technologies appear more similarly profitable than they actually may prove to be. As operators gain insight concerning the prices prevalent in a particular market, their minimum requirements for return from other markets inevitably will cause dynamic price changes. For different generator technologies, the various price fluctuations will affect the temporal bidding profile