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Enron Mail |
Rick,
Some comments from Nick are attached below. Nick's first comment reflects a general concern I had about the paper which was it's treatment of imbalance settlement. I would see this as one of the essential elements of market design. I've always felt that the physical/financial distinction was slightly artificial because even with "physical" contracts, power systems must have a means for cash settlement of imbalances (in the absence of universal controls which limit actual takes to contract volumes). However, the paper does not really pick this up and in section 3.1 implies that cash settlement might only be "feasible" in some market structures. I would have added imbalance settlement to section 2.1 which describes the fundamentals required for any market. It would also help to draw a brighter distinction between spot markets and imbalance settlement. At the same time I would have dropped the mention of "binding market rules" from 2.1. I'd see this as a subset of the need for an ISO to take over the operation of the system in real time rather than as a separate fundamental principle. It's also not made clear in what sense these commitments are binding. Are they binding in a financial sense (in which case they are covered by imbalance settlement) or somehow physically (either this is unfeasible since units trip etc or it requires some form of balancing penalty which is ruled out later in the paper). I felt that the paper also compounded issues such as LMP's/transmission rights with other non-locational elements of market design, this makes it difficult to follow in places. It would be clearer to have the locational elements addressed separately as an adjunct to the basic principles. Centralised unit commitment is put up as an element of the model proposed. As Nick hints at below, we wouldn't see this as an essential element of market design. Under NETA, individual participants commit their own units with the SO only taking over full control at 3.5 hours out. Even with centralised commitment, I'm not convinced that simple bidding would be superior to multi-part bids. Much here depends on timescales, eg, a day-ahead market with simple bids is more exposed to allocative inefficienc than a continuous hourly market with simple bids. Simple bidding was often proposed for the Pool, but I think a single daily big would have increased prices if two-shifting generators had not been able to reflect their start-up and no-load costs separately. (These elements were also gamed, although this game eroded as competition increased.) Specific UK sensitivities which you may want to finesse in the paper: ? we've consistently opposed locational pricing because of our Teesside positions. Publicly we've argued that the proposals do not provide good economic signals over sufficiently long time-periods to enhance allocative efficiency and that the transactions costs outweigh any possible efficiency gains (constraints only cost about o20m pa here). Despite arguing our commercial position, I'm quite happy with this approach and am genuinely sceptical about the benefits of locational pricing in the UK. This position would of course change in much larger, sparse and less-interconnected networks such as exist in parts of the US. ? Our fall back position is that any locational pricing scheme in the UK must preserve pre-existing implied rights for generators, ie, grandfathering. I recognise that this can be a barrier to competition in some networks with imcumbent market power, but I don't think that this is as big an issue in the UK (where competition already exists) as it is on the Contintent and in the US. Hope these help, let me know if you want to discuss further. Paul -----Original Message----- From: Elms, Nick Sent: 22 May 2001 14:29 To: Dawson, Paul Subject: Frontier Economics' Whitepaper Paul, Here's some comments on Frontier's whitepaper. Do you want to discuss them? Section 3.1 The distinction between cash and physical settlement of forward contracts is blurred. Under NETA contract settlement is achieved by contract notification to Elexon. Even then a party doesn't need to deliver on the contract - it could cash out at the imbalance price. However, in practice NETA is more similar to physical settlement since imbalance price volatility means Parties try to avoid imbalances. Section 4.1.1 Decentralised commitment doesn't require parties to trade physical transmission contracts. LMPs would also allow decentralised commitment. It is difficult to imagine an efficient dispatch resulting from flowgate trading unless there are few transmission constraints and hence few flowgates. Simplified flowgates is the same as zonal LMPs. Interim model (section 5) 1) It will be difficult to impose a single RTO design on the multitude of jurisdictions in the US - because of the private stakes in the industry. 2) The proposed day-ahead market need not be run by the ISO. It's not a unit commitment since it may not result in a feasible unit commitment, and even if it did Parties may deviate through imbalance trading. Rather, day-ahead trading could be left to the market to develop. Generators would self commit based on their own forecasts of spot prices for the following day and parties could hedge their positions through day ahead contracts trading. These day-ahead energy contract markets would be based at hubs - leaving parties with basis risk between the hub and their location. Parties require some means of heging the basis risk - financial transmission rights is a possibility. Competitive framework (section 6) 1) Demand side response reduces generators' market power. Forward contracting mitigates the effect of market power on both generators and consumers, particularly the impact of short term market power. This may be an argument for using HHIs to measure market power. 2) A move towards regulatory intervention every time the supply/demand imbalance became tight would add to regulatory risk. And it may deter new entrants if such intervention prevents prices from rising. 3) With full retail competition there is no need to regulate suppliers' forward contracting since suppliers can only pass on their competitive costs to customers. Non-eligible customers create a problem. What price should these customers pay? It is difficult to regulate a supplier's contracts and to somehow split its contract costs between eligible and non-eligible customers. This is why a spot price pass-through is suggested. Financial institutions would be free to provide hedging contracts to consumers. Those institutions would in turn have financial contracts with generators. An alternative is incentive regulation of suppliers of non-eligible customers. To avoid the california problem the regulator would need to limit the supplier's downside and upside risk. Nick
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