Should the power industry adapt its approach to capital markets in this environment? The answer, of course, is yes. Multiple frameworks are necessary to establish a power company’s or project’s...
Solving The Crisis In Unscheduled Power
preventing frequency error from being even larger; so, it is helping frequency.
The NERC control performance standard CPS1 measures individual BA performance (called ACE, for "Area Control Error") relative to the entire interconnected system's performance (measured by frequency error) by multiplying the two together and placing a limit on that product. CPS1 makes maximum efficient use of the benefit of interconnected operations [6-9]. ACE consists of the BA's inadvertent interchange (actually instantaneous "tie-line error" which is supposed to sum over an hour to inadvertent interchange) minus a "bias" obligation shared among all the BAs. 9 The red line in Figure 3 graphically depicts the limit set by CPS1 on the relationship between inadvertent interchange and frequency error.
Price Driven by NERC Compliance
Provided NERC has legislative power to levy a huge fine for non-compliance with CPS1, the price of FCC would be set by the procurement of good FCC to get compliant with CPS1. FCC exists either in the form of an ancillary services purchase on ancillary services markets, or as a component of the CPS1 equation. 10
As an alternative to a huge NERC penalty at month's end, the trading of FCC to get compliant with CPS1 would drive a price for FCCs, just as the market for emission rights emerged as intended to avoid the huge Environmental Protection Agency (EPA) penalty for pollution that the EPA never actually collects. This makes a market for FCCs as much a NERC compliance mechanism as the SO 2 emission rights market is an EPA compliance mechanism. Controlled frequency, like clean air, is a public good needing a central authority to drive the market for error-rights.
To be consistent with CPS1, the price of FCC would vary as the square of frequency error. Equivalently, a frequency-contribution adder to the unit energy price of inadvertent interchange would vary as a fixed cash multiple of frequency error. This relationship, called "the Blohm formula"11 in the NERC JIITF report (, pp. 8, 18), is required so that the FCC that is traded to be compliant with CPS1 can be considered "marginal" FCC. The relationship between FCC and CPS1, and the trading of FCC to get compliant with CPS1, are depicted graphically in Figure 4 for an interconnected system of 3 BAs identical to one another. The final equation in footnote 11 is also the monthly average of the hourly frequency-contribution value of inadvertent interchange and can be conveniently re-arranged12 to get the hourly frequency-contribution unit price of inadvertent interchange: pIt = -kDFt, where pIt is the "frequency contribution price" per megawatt-hour of a BA's inadvertent interchange It at hour t , k is a monetary unit or alternatively some constant/fixed unit price per megawatt-hour-Hertz, and DFt is the frequency deviation at hour t. This price is an "adder" to the hourly energy unit price of inadvertent interchange. No separate calculation or pricing of FCC is needed.
Before NERC gets legislative empowerment and a market emerges for trading FCC or inadvertent interchange, the NERC JIITF white paper recommends setting the FCC price by administratively applying the Blohm formula.