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Water Heaters to teh Rescue: Demand Bidding in Electric Reserve Markets

With just a few changes in reliability rules, regulators could call on consumer loads to boost power reserves for outages and contingencies.
Fortnightly Magazine - September 1 2003

the design of the ISO's day-ahead unit-commitment and its five-minute security-constrained dispatch prevented it from notifying beforehand the winning bidders in its ancillary-services markets. As a consequence, generators did not know whether they were "selected" to provide operating reserves until after the fact. In addition, the ISO might, during a major outage, call upon units that were not selected to provide reserves, and therefore they did not get paid for providing the service. In August 1999, ISO New England filed emergency market revisions with FERC. In response to the ISO's request, FERC permitted the ISO to cap the prices of operating reserves at the current hour's energy price. 6

The prices paid by ISO New England for reserves may have little meaning because of flaws in the ISO's reserve markets. During the three-year period from January 2000 through December 2002, the price of spinning reserve averaged $1.15, the price of supplemental reserve averaged $2.08, and the price of replacement reserve averaged $0.81/MWh. (During 2002, the prices averaged $1.68, $1.67, and $1.10/MWh, respectively).

New England implemented a new, improved market design in March 2003, based on the PJM design. This new market system, however, does not include PJM's two-part market for spinning reserve. ISO New England has not yet decided on the structure of its markets for contingency reserves and, therefore, may have no operating markets for any of the contingency reserves until late 2003.

New York. The New York ISO operates an integrated set of markets for energy, real-power ancillary services, and congestion management. 7 Because of the severity of transmission constraints in New York, especially in New York City and Long Island, New York's reserve markets have three zones.

Prices in the New York ISO ancillary-service markets, which do not contain the flaws that the New England markets have, might be a more reasonable indicator of what prices should be in a well-functioning market. New York, like New England, acquires roughly 600 MW of each of the three reserve services each hour. For the two-year period from January 2001 through December 2002, the prices of spinning, supplemental, and replacement reserve in New York averaged $2.74, $1.69, and $1.16/MWh, respectively. This ordering of prices is consistent with the value of each service, with spinning reserve the most valuable and replacement reserve the least valuable. (The New England prices, on average, did not follow this order.)

Mid-Atlantic. Until December 2002, PJM had no markets for contingency reserves. Any generator committed for service by PJM is guaranteed recovery of the costs associated with unit startup and no-load costs. To the extent these costs are not recovered from energy markets each day, PJM pays these units the difference between their operating costs and revenues for the day. These uplift costs were collected from PJM customers through an operating-reserve payment, although the nexus between these costs and reserves is ambiguous.

Beginning Dec. 1, 2002, PJM began operating a two-tier market for spinning reserve. 8 (PJM does not yet operate markets for the other contingency reserves.) Tier 1 consists of units online, following economic dispatch, and able