Standard Market Design (SMD)in New England

Federal Energy Regulation CommissionConference on Standard Market Design

January 22, 2002

David LaPlante

Vice President, Markets Development

ISO New England Inc.

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Presentation Topics

• ISO-NE selection of Standard Market Design• SMD description

– Initial implementation– Planned enhancements

• SMD and smaller market participants

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What is SMD?

• PJM’s current market design (Locational Marginal

Pricing, Multi-Settlement) with the following

enhancements:– Spinning reserve market– Electronic Dispatch signals sent directly

to all generators every five minutes– Marginal losses included in prices– Automated market mitigation procedures– Dispatch of Hydro-electric units with offers and self-schedules– Detailed business processes for SMD operation– Auction all financial transmission rights

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Why SMD in New England?

• Decision made in early 2001 based upon:– Schedule for New England custom CMS/MSS

design showed:• CMS Q1 2003• CMS/MSS Q1 2004 at Best

– New, unproven/untested market design– Final budget of $100 - $120 Million– Expiration of retail standard offers at year-end

2003

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Why ISO-NE Switched to SMD

• Full implementation of locational marginal pricing and multi-

settlement one year earlier and at lower cost• Reduced risk of market problems upon implementation

– Proven market design

• Reduced risk of implementation problems– Use of existing software for day-ahead market, real-time

market and external transactions

• Step toward convergence of northeast markets• Provides long-term benefits in market design and software

development

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Standard Market Design Features

• Market participation voluntary• Provides ability for participants with physical

supply to self-supply their requirements and self-

schedule resources opt out of the market• Anticipate 75-80% reliance on bilateral

marketplace for energy needs to continue

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SMD Enhancements

• Spinning reserve market– Needed in New England because of need to back down

thermal units to provide reserves

• Electronic dispatch signals sent every 5-minutes– ISO-NE dispatches all generation directly

• Marginal losses included in prices– Dispatch in NE includes penalty factors, for losses must

be included in prices

• Automated market mitigation procedures– Extend current ISO-NE mitigation into SMD

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SMD Enhancements: Hydro Generation Options in the Day

Ahead Market

A. Self-schedule generation and offer

prices for any additional water

B. Submit all available water and

associated prices for dispatch by ISO

C. Combination of A and B.

• These produce financially binding hourly schedules

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Hydro Options - A Picture

1 3 5 7 9 11 13 15 17 19 21 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69

Day-ahead Schedule

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

Prices for incrementa

l output

Available capacity

Output MW

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A. Fixed day-ahead schedule coupled with owner

option to increase/decrease output via self-schedule

- Allows owner to respond to market conditions

B. Fixed day-ahead schedule with economic dispatch

priced below it

- Allows owner to respond to market conditions

stay below maximum dispatch

C. Full economic dispatch based upon offer prices

SMD Enhancements: Hydro Generation Options in the Real-Time Market

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SMD Enhancements - Business Processes

• Market rules define market for market

participants• ISO-NE has developed detailed set of internal

business processes on how to run market

internally• These are being validated with PJM• Once complete, we will make them available to all

for SMD implementation at no cost

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SMD Enhancements - Financial Transmission Rights Auctions

• All financial transmission rights will be auctioned

off• Revenue from those auctions allocated to load• Assures those who value them most highly will

get load• Semi-annual/annual auctions

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SMD and Smaller Market Participants

• New England has many small (10 MW to ~ 100

MW) public power utilities• Two “joint action agencies” have been formed to

support their participants in the wholesale markets• These agencies provide the technical and

managerial support for the municipals• The allocation of financial transmission rights to

those utilities is an outstanding issue

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Future Enhancements to SMD(V2.0)

• New York ISO and ISO-NE have agreed to

enhancements to SMD based on review of “best

practices”– Hourly bidding– Co-optimizing energy with regulation and spinning

reserves– Off-line reserve markets

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Reasons for Enhancements

• Hourly bidding– Improves ability of generators to schedule limited energy

resources; both hydro and interruptible gas

• Co-optimization of energy and reserves in real-time– Improves efficiency of real-time dispatch and may allow

more complete utilization of transmission system

• Off-line reserve market options under review– Longer-term option-like market– Day-ahead with associated real-time Market

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Developing a “Standard” Market Design

• The bulk of the standard has to be absolute• However, some portion should be open to

innovation and evolution– Allows vendors to distinguish products and compete

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Applying this Theory to a Standard for Electricity Markets

• Candidate features for standardization:– Locational Pricing– Day-Ahead Market– Real-Time Market– Financial Transmission Rights– External Transaction Scheduling Rules

• Candidate Features for Innovation:– Ancillary service market design, including co-

optimization– ICAP product and market for it