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The LMP Model: Bottlenecking Merchant Transmission

Locational marginal pricing has not been adequate in providing transmission expansion incentives. Others are needed.
Fortnightly Magazine - April 15 2003

situations where transmission expansion improves the deliverability of capacity and increases the reliability of the system.

In a recent order signaling FERC's willingness to support the development of market mechanisms providing incentives for new merchant transmission, the commission approved the New York ISO's (NYISO's) proposal for the creation of UDRs for transmission expansion. UDRs are property rights that can be awarded to transmission expansion and upgrades for the increased capacity benefit of an upgrade into a constrained area. These rights are analogous to the award of congestion revenue rights (CRRs) for hedging energy congestion.

Like CRRs, UDRs are not a physical right of delivery, but rather a financial right to count the generation capacity located in one area toward the capacity requirement of another area. UDRs, once implemented, will be able to be sold bilaterally to loads or generators, or when combined with qualified capacity, to be sold in the NYISO-administered capacity auctions. Future enhancements to the NYISO auctions may allow UDRs to be combined with the capacity within the auction.

The Cross Sound Cable: A Case Study

The Cross Sound Cable (CSC), which interconnects in New Haven, Conn. (ISO-NE), and Long Island, N.Y. (NYISO), is likely to be the first beneficiary of FERC's UDR treatment. Cross Sound was the example used in the development of the market rules and procedures in the NYISO.

Developed by TransEnergie US as a merchant transmission facility and contracted on a long-term basis to the Long Island Power Authority (LIPA), the CSC is a 330-megawatt (MW) high-voltage direct current (HVDC) underwater cable. LIPA, its consultants, and TransEnergie, in conjunction with FERC, have worked together to lead the effort in developing the market rules and procedures that will integrate this fully controllable merchant HVDC cable into the northeast energy, ancillary services, and capacity markets.

Moreover, the NYISO, and its predecessor the New York Power Pool, have used a statewide installed capacity requirement (ICAP) to serve the state's resource adequacy needs, assuring that sufficient capacity exists to meet the utilities' peak load plus an installed reserve margin. As retail competition evolved and as NYISO was formed to manage the transmission grid, utilities and other energy service companies serving customers were assigned a share of the statewide ICAP requirement. In addition to the statewide requirement, New York City and Long Island, due to transmission constraints, were defined as separate localities, with additional local ICAP requirements.

There is not enough transmission capability between these two areas and the rest of New York state to serve the peak load of these constrained regions without the support of generation located within the area. Therefore, the locational ICAP requirements were established to ensure that sufficient generation capacity was built to assure maintenance of reliability standards. 2 Utilities and energy service companies meet their local needs with local resources and procured ICAP in excess of their local requirement from the rest of New York State or with an acquired import right from a neighboring control area such as ISO-NE, PJM, or Hydro Quebec.

The development of the Cross Sound Cable increased reliability in New