Market Design for

Ancillary Services

www.iexindia.com

Akhilesh Awasthy Director (Market Operation)

Overview

Need and conditions to create an Ancillary Market

Contract Specification for standard PX based contracts

Settlement principle

Delivery

Need and conditions to create an

Ancillary Market

Procurement Methods

Compulsory provision

Bilateral contracts

Tendering Spot market

• Generators connected to the system are obligated to commit a certain percentage of capacity •Pros:

− Fair as all are equally obligated − No complexity

•Cons: May be excess than what is needed Doesn’t minimize overall cost, as all are treated equal

• Procurement from generators based on negotiations on quantity, quality, price and delivery conditions •Pros:

− Only needed amount is procured − More personalised contracts

•Cons: Time consuming Lacks transparency Longer duration contracts are only possible

• Procurement from generators based on tenders for customized system requirement •Pros:

− transparency − Increased competition − Less standard contracts

•Cons: High data management cost Market manipulation frequent tendering not practicable

• Standardized contracts on Power Exchanges •Pros:

− Transparency − Very competitive

•Cons: Data management cost Only standardised contracts Need to mitigate risk of Market Power

“Preferred choice for procurement of Reserve and Load-following services in developed markets”

Issues in the present mechanism

• UI mechanism incentivises grid connected entities to operated within the pre-specified frequency range. It was largely looked at by regional entities as a trading mechanism of the last resort.

• With subsequent tightening of UI, limiting over drawal and under injection, and levy of Additional UI at various frequency steps (below 49.7/49.5/49.2 Hz), the mechanism is now being seen as a real time balancing and settlemn t tool.

• Peak UI rates are based on highest cost power scheduled in recent past however it does not encourage diesel/liquid fuel capacity available to participate in relieving stress from grid as it not sufficiently penalising.

• Regional entities with their near real-time forecast of demand, say 2 hours ahead, are left with no option to schedule but to over-draw under UI, sometimes posing serious & un-predicted challenges to grid-operators

• UI overstepping into the Reliability Margin is an added risk to grid security

• No tertiary control present in the system, for Grid Operator to bank on at times of need

UI Transition

Trading Settlement Mechanism

Penalising

Pre-requisite for implementing a market based ancillary market mechanism

• UI should be a heavily penalising mechanism for any deviations below a limited frequency limit. These rates should be significantly higher than variable cost of costliest generation, say Rs 30/- per unit • In general terms high UI will ensure following inequality:

Prices in FSAS < UI • But why we need inequality between FSAS and UI……….

Inequality with UI needed to establish FSAS:

• For a market to function there should be Buyers and Sellers who have similar expectations about Quantity and Price for A Commodity of particular Quality

• Therefore for a market based FSAS we need

– Sellers who see opportunity and

– Buyers who have need and are willing meet minimum expectations of sellers

• Sellers in FSAS could be those who could not get dispatched due to higher marginal cost

• During stressed grid situations (when FSAS is needed most) cheaper sellers, which can be scheduled and transmitted, would get dispatched and only costly sellers, say based on Liquid Fuel/ Diesel (say at marginal cost of 14-15 Rs/Unit) would be available for FSAS

• Regional grid operator would be calling in the quantum of support on behalf of all regional entities

• Any situation where UI rates turn out to be less than FSAS rates would be fiercely contested by these regional entities

• Therefore increase the UI rate further would allow costliest sellers to see opportunity and for grid operator (buyers) to have some head room for error in forecasting the requirement

Contract Specification for PX based FSAS

Contract Specification • Contract type: National/Regional/Bid area/State

• Auction Type: Pay as you bid, (why…..?)

• Delivery Point: Regional/State Periphery

• Lead Time for Commencing delivery: Min 15/30 mins (To Be Decided -TBD)

• Bidding Pattern: Capacity only/ Energy Only or a combination of both

• Compensation Mechanism: Energy only would be suitable only if there are frequent dispatch calls

• Minimum committed duration of dispatch call: say 12 time blocks

• Physical Settlement:

– Centralised by Exchange with scheduling by NLDC, RLDC & SLDCs

• Non delivery/part delivery penalties: Rate of next available resource plus some penalty and in case no such resource is available

• Scheduling Operating and transmission charges: need to exempt in line with UI

FSAS Options

• Procurement

•Market opens on Daily basis through Power Exchange after closure of DAM. •Willing participants are allowed to bid quoting their quantum & price. These staked bids, area wise, will be made available to NLDC/RLDC • Bidding based on response time/ generator type may be adopted • All the sellers are supposed to start injection within a pre-specified time as and when called for

Settlement

Settlement

How should generators be remunerated?

Capacity Capacity + Energy Energy

Pros: Rewards the most important and actual service Longer duration contracts can be procured

Cons: May not cover the complete cost Additional burden on users of grid/Operator

Pros: Completely remunerates the generators More willingness from gen. to participate in Ancillary Mkt.

Cons: Too costly for reliability Decision to call a generator becomes complex Need to track actual defaulters

Pros: Suitable for frequent calls Less cost to users of grid/Operator viable for shorter duration contracts

Cons: May not be viable for generators Lacks serious participation

Who should pay……

• Initially from the UI pool, so that transaction is settled in timely manner

• Ultimately, entity which has caused indiscipline should pay

• RLDC/NLDC to identify such entity

• They should be invoiced for the FSAS cost to the extent of their deviation from schedule by RPC on the basis of information provided by RLDC/NLDC, along with their normal UI invoice

• Socialising cost of FSAS would encourage indiscipline.

Delivery

Delivery

• Initiation : NLDC/RLDC by suo-moto action based on FORECAST,

few hours in advance. Quantity to be scheduled and location to be specified to PX by respective LDC.

• Scheduling: PXs to send scheduling request to respective LDC and

intimated to the generator as well. In line with DAM,

generation schedules will be issued by NLDC while buyer

is considered as a pool

• FORECAST: Critical to the market is to issue a call for scheduling

generators under FSAS based on forecast of a system contingency w.r.t frequency fall. Such forecast should be scientific employing available advanced tools.

• Multi Exchange Scenario: Protocol can be decided

Special Provisions Needed

• Deemed open access be granted to such generators

• Generators participating under FSAS need to be given special preference, as they are participating to support Grid – Standing Open Access clearance

– No charges for scheduling and Operation

– No State/Central Transmission charges

• Response time for generators need to be defined

Suggestions

• Demand-side response to be incorporated, although the same maybe operationalised in future

• Open Access procedures to be streamlined and bottlenecks removed. Open Access Registry could be implemented

• Pay-as bid mechanism to be adopted for bidding and settlement

• The mechanism should be a zero-sum-game. Recovery should be only from the overdrawing entities. However, default by them could be recovered from UI Pool temporarily to meet immediate payment obligations.

Thank You! www.iexindia.com

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