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The ISO graples with the politics of scarity.
Fortnightly Magazine - July 15 2003

him closely, he seems to be saying that it's more important for grid operators to maintain operating reserves than to deliver electricity to the customers themselves.

As Patton explains, reserve requirements are just that; they are requirements. As Patton sees it, "The SMD model and ISO operators must dispatch all available energy resources in order to maintain the required reserves." Thus, during shortage conditions, when the ISO can meet energy demand only by compromising the reserve requirement, the market is not really clearing. "Although energy demand is met," says Patton, "the operating reserve requirements are not satisfied."

Patton's answer during such periods is to boost the price to the top-all the way up to the safety net price cap of $1,000 per megawatt-hour-since the market needs more supply to clear. And the first and most important place to inject that supply is to bring the backup reserve up to speed.

"The relevant demand in this case," says Patton, "is the demand for operating reserves … the operating reserves have become the marginal source of supply."

You'd think that the utility's duty to serve has now become the ISO's duty to maintain reserves. As Patton puts it, "One must figure out what the market operator would have paid an incremental energy supplier to provide one megawatt of energy-allowing the operator to restore 1 MW of its operating reserves."

Of course, you don't have to be an expert to guess that this idea has won brickbats from the utilities that will be left paying for this peak-priced power.

In a protest filed by attorneys John Coyle of Duncan & Allen and Robert McDiarmid of Spiegel & McDiarmid, the coalition argues that scarcity pricing will not encourage gen plant construction.

Logic dictates, they say, that the opposite will occur: "Rewarding existing generators with higher prices when supplies are scarce will 'incent' generators to withhold supplies" and seek out expanded opportunities to reap monopoly rents.

MEANWHILE, SHORTCOMINGS WITH COMPUTER SOFTWARE STILL MAKE IT DIFFICULT FOR GRID OPERATORS TO PROTECT ALL THE HIGH-COST GAS TURBINES. This problem arises because certain operational limitations will sometimes force system operators to dispatch plants out of merit, when the bid would not have qualified on the margin. Thus, even when the system operators dispatch a high-cost gas turbine, they don't always add all the turbine bids into the pot to determine the locational marginal price (LMP). Listen to the New England ISO.

"In LMP markets," says the ISO, "the price is not set by simple stacking algorithm at each location.

"Some of the DCA peaking units [peakers that operate in designated congestion areas] are inflexible, with lengthy start-up, minimum-run, or minimum down-time characteristics."

As the ISO explains further, the inflexibility of some units is such that during extreme peak periods the units must run continuously for several days at a time so that they will be available during a few hours each day.

"Assume an inflexible unit with an offer price of $500/MWh operating at its low limit, but the nodal LMP is $100. … If the market rules were changed