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3Rs for Power And Demand

Dynamic monitoring and decision systems maximize energy resources.

Fortnightly Magazine - December 2009

when both power producers and responsive demand provide binding self-commitments. In particular, without utilities and aggregators providing information about longer-term demand characteristics, much would be built in an open-loop manner resulting in gross under-utilization. Instead, fairly straightforward 3Rs for mid-and long-term forward markets should be designed to present symmetric risks to all parties. This probably is the only sustainable way toward efficient utilization and investments in future energy systems.

To make the point clear about the relevance of mid-and long-term forward electricity markets with transparent and binding 3Rs, it’s helpful to look into the major discrepancy between the expected price based on historic spot prices and the actual forward prices in NordPool where such prices are publicly posted (see Reference 9 and Figures 2 and 3).

The further into the future one goes, the higher are the deviations from the expected mean and the higher the variance ( see Figure 6 ). Both the deviations from the expected mean and the variance are very significant and have a major impact on the prices of electricity and signals for right investments. Without the right mid- and long-term 3Rs, these risks are very asymmetric and create tremendous volatilities in spot markets, and longer term imbalances between the supply and demand ( see Reference 10 ). To align risks in electricity markets with risks in fuel markets and cap and trade markets, it’s essential and long overdue to have 3Rs for mid- and long-term electricity forward markets (see References 10 and 11) .

Last but not least, T&D investments, although fully regulated, could become more used and useful if the longer-term forward signals about likely demand and supply are made more transparent. The predictions must be binding; otherwise they remain useless. The presence of binding mid- and long-term self-commitments would help tremendously in allocating mid- and long-term financial transmission rights (FTRs) which reflect the inter-dependence of physical and financial risks.

And of course, load can’t be kept perfectly at what is committed, and neither can wind be predicted perfectly. But what can be done by each self-committing participant is to provide statistical bounds within which deviations can occur away from the predictable self-committed specifications. These simply can’t be determined by system operators, but it’s information perfectly within the abilities of market participants who know their own equipment over almost any time horizon.

It will become necessary to create some other derivatives, once the basic 3Rs are in place, to manage hard-to-predict uncertainties. It is critical to note that these uncertainties are an order of magnitude smaller with binding self-commitments than without (see Reference 8 and Figure 4).

Aligning Incentives

Streamlining effective wind integration will require taking a serious look at today’s operating and planning practices by regulated utilities, as well as at the 3Rs for the electricity markets. Given the high variability of wind and demand willing to participate, the related regulatory, physical, financial risks and information rents must be supported by the right 3Rs. Otherwise, the incentives remain misaligned with the potential values brought about by new technologies.

A well-defined self-commitment by future resources