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Convergence Bidding Overview
Margaret Miller
Manager, Market Design & Regulatory Policy
CPUC Convergence Bidding Workshop
August 26, 2010
Agenda
What are virtual bids?
Credit requirements
Position Limits
Settlements Implications
CRR Settlement Rule
Information release
Compliance
Slide 2
Convergence bidding provides important benefits.
Minimizes differences between day-ahead and real-time prices
Limits incentives to withhold supply or underchedule load Lower costs due to more efficient day-ahead commitment Increases certainty and grid reliability
Mitigates supplier market power
Ability to hedge generator offers and demand bids
Account for anticipated intermittent generation
Convergence bidding operates successfully in all the other US Independent System Operator nodal markets
Slide 4
Virtual Demand
Bid to buy at Day-Ahead price and sell at Real-Time price
Virtual Supply
Offer to sell at Day-Ahead price and buy at real-time price
Supported in Day-Ahead Market only
May be submitted at pricing nodes within CAISO system
Does not require any physical generation or load
Single day outcome – low risk
Convergence Bids also known as Virtual Bids are purely financial transactions
How do Convergence Bids Affect the Physical Market?
Virtual bids ARE used in the Integrated Forward Market process and can set the LMP
Virtual bids are NOT included in the Residual Unit Commitment process
Virtual bids will not be included in the LMPM process
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Slide 6
Why do market participants want to engage in virtual bidding?
Ability to arbitrage difference between Day-Ahead and Real-Time prices
Hedge generator outages and demand response
Optimize financial settlements between Day-Ahead and Real-Time market
Example 1 - Arbitrage difference in market prices at a location using virtual supply
Day-Ahead LMP = $20
Virtual supply bid clears for 100 MW at $20
Settles at 100 MW * $20 = $2,000
Real-Time LMP = $15
Virtual supply liquidated in opposite position at $15
Settles at 100 MW * $15 = $-(1500)
Slide 7
Net Position = $500 credit
Example 2 – Generator hedges against potential outage and high real-time prices
Day-Ahead Market LMP = $15
Schedule for 200 MW
Clears 100 MW Virtual Demand Bid at $15
Generator settles 200 MW * $15 = $ 3,000
Virtual demand settles 100 MW * $15 = $ -(1500)
Real-Time Market LMP = $ 20
Produces 100 MW
Virtual demand bid liquidated in opposite position at $20
Generator settles at 100 MW * $20 = - (2,000) RT imbalance
Virtual demand settles 100 MW * $20 = $2,000
Slide 8
Net Position = $1500 credit
Example 3 – Optimal Unit Settlement
Day-Ahead Market LMP = $15
100 MW Must Run/Must Offer Unit
100 MW Virtual Demand Bid clears at $15
Generator settles 100 MW * $15 = $ 1500
Virtual demand settles 100 MW * $15 = $ -(1500)
Real-Time Market LMP = $ 20
Virtual demand bid liquidated in opposite position at $20
Virtual demand settles 100 MW * $20 = $2,000
Generator although scheduled in Day-ahead receives RT price
Slide 9
Net Position Day-Ahead = $0 Net Position RT = $2000
Design includes sufficient safeguards to address concerns raised regarding nodal convergence bidding
Concerns Safeguards
Market manipulation•Position limits•CRR settlement rule•Ability to suspend bidding
Undermining established mitigation measures
•Position limits•Physical LMPM process
Payment default •Dynamic credit check
Slide 10
Obtains objective of mitigating concerns without compromising functionality
Convergence Bidding Overview
Participating in the Markets
Bidding Rules and Credit Policy Implications
Slide 12
Value of Virtual Bids is compared to Available Credit at the time of submitting bids.
Reference Price – 95th percentile value of historical price differentials for each season at each node
Absolute value of MW of all virtual bids are included except if both virtual demand and supply bids are submitted by the same the SC at the same location for the same hour. The greater MW value will be used then.
100% Available Credit can be used Available Credit is updated daily Rejecting Virtual Bids follows the rule of last in, first out
CreditAvailableVBMWabsPriceReference ii
))(*(
Adjustment of Estimated Aggregate Liability
After the Day-Ahead Market closes (but before the Real-Time Market closes) ISO will recalculate the Estimated Aggregate Liability based on absolute value of the cleared DA MW value * Virtual Bid Reference Price.
After the close of the Real-Time Market, ISO will recalculate the total liability and adjust the Estimated Aggregate Liability accordingly.
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Convergence Bidding Overview
Participating in the Market
Understanding Position Limits
Defining Position Limits
Position limits are limits on the MWh quantities of virtual demand and virtual supply bids that can be submitted by all the SCIDs that represent a given Convergence Bidding Entity at a single location
Limits each Convergence Bidding Entity to a percentage of a certain MW amount for a PNode or APNode.
Intended to mitigate the potential exercise of market power at a specific node in the absence of a liquid market
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Position Limits in the ISO Market
Position Limits will be imposed for:
Internal nodes at 10% Interties at 5% Trading Hubs and Default Load Aggregation Points – No limit
Schedule for increasing position limits for Internal Nodes:
Initial implementation through 8 months after implementation – 10% limit
Months 9 through 12 – 50% limit Position limits will no longer apply beginning on the first day of
the month as of the first anniversary of the implementation.
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Position Limits in the ISO Market
Schedule for increasing position limits for Interties:
Initial implementation through 8 months after implementation – 5% limit
Months 9 through 12 – 25% limit Months 13 through 16 – 50% limits Position limits will no longer apply beginning on the first day of
the seventeenth month from the implementation
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Determining Position Limits at Nodes and Inter-ties
Position limits are based on:
For Generator Nodes – Pmax of the generator resource
For Demand Nodes – forecast of the maximum MW consumption of the physical demand resources.
For nodes associated with both supply and demand – based on the larger of the maximum demand and the maximum capacity MW value (Pmax)
For Inter-ties – based on the Operating Transfer Capability of the intertie.
ISO will publish the locational limits for the eligible Pnodes and APNodes
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Convergence Bidding Overview
Settlement Implications
Convergence Bidding GMC
A bid submission fee of $0.005 per virtual bid segment will be charged to convergence bids
Revenues from this fee will be used to offset fees imposed for cleared convergence bids (gross MWh), in 2011
GMC for cleared convergence bids proposed at $0.078 per cleared gross MWh
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Obligation for Virtual Demand to pay IFM Tier 1 Uplift
Allocate IFM Tier 1 Uplift to virtual demand when system wide virtual demand is positive.
Obligation for virtual demand based on how much additional unit commitment was driven by net virtual demand that resulted in IFM clearing above what was needed to satisfy measured demand
Allocated to SCs with a positive net virtual demand position
Obligation for Virtual Supply to pay RUC Tier 1 Uplift
Extent CAISO forecast ≤ actual load RUC Tier 1 Uplift paid by net virtual supply and underscheduled load
Extent CAISO forecast > actual load RUC Tier 1 paid by measured demand by ratio share
Allocate RUC Tier 1 Uplift to virtual supply when system wide net virtual supply is positive
Virtual Supply obligation to pay RUC Tier 1 Uplift would be based on pro-rata share of the total obligation as determined by their total (net) virtual supply bids
Real-Time Bid Cost Recovery
Costs related to bid cost recovery for short-start units started in Real-Time as a result of a RUC schedule will be allocated to net virtual supply and underscheduled load
These costs will now be allocated through RUC Tier 1 Uplift rather than through Real-Time BCR Uplift
Costs attributed to other factors that result in Real-Time uplift will continue to be allocated to Measured Demand until a two-tier charge is developed
Convergence Bidding Overview
Congestion Revenue Rights
Settlement Rule
Defining Congestion Revenue Rights (CRRs)
CRRs are financial instruments that give the Holder the right to receive or the obligation to pay a share of the total congestion revenue associated with a given Trading Hour of the Day-Ahead Market.
CRR Settlement Rule applies only to CRR holders that participate in Convergence Bidding.
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Defining the CRR Settlement Rule
CRR settlement rule is put in place to recapture - where warranted – the increase in CRR revenues to CRR Holders that are attributable to that Company’s Convergence Bidding.
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Convergence Bidding Overview
Compliance
Compliance
Department of Market Monitoring will be monitoring the Convergence Bids and CRR Settlement Rule charges
CRR Settlement Rule is not applied at the affiliate level, but will be monitored by DMM.
Monitoring virtual bidding activity for anomalous market behavior, gaming, or the exercise of market power.
ISO has the authority to suspend or to limit the ability to bid at a single Eligible PNode or at ALL Eligible PNodes
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Compliance
Ability to suspend or limit virtual bidding pursuant to Tariff Section 39.11.2.2 if virtual bidding:
Detrimentally affects System Reliability or grid operations
Causes or contributes to unwarranted divergence in prices between the Day-Ahead Market and the HASP or Real-Time Market
Causes or contributes to unwarranted divergence in Shadow Prices between the Day-Ahead Market and the HASP or Real-Time Market that contributes to a significant divergence in LMPs at any Eligible PNode and/or Eligible APNode
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Non-Compliance May Result In…
Suspension from or limitation in participating in the Market.
Once participant is suspended, suspension could remain in place for up to 90 days unless FERC directs otherwise or ISO determines it is no longer needed.
Financial Impact – potential revenues lost for not participating in the market
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Convergence Bidding Overview
Information Release
The ISO will release the following information on convergence bids:
Bid data released on 90 day lag
Same as physical resource bid data
Hourly net cleared virtual quantities at each node
Helps identify nodes with high virtual activity
Day-Ahead Market Summary Report
Includes MWh and dollars for submitted as well as cleared physical and virtual bids system wide
Slide 32
Convergence Bidding Overview
References
References
Draft Final Proposal of the Design for Convergence Bidding – September 14, 2009
Addendum to Draft Final Proposal of the Design for Convergence Bidding – October 2, 2009
Convergence Bidding Draft Tariff Modifications, CAISO Fourth Replacement Tariff – April 23, 2010 and May 13, 2010
Convergence Bidding Design Policy to FERC
Implementation Plan v. 2.1 – June 3, 2010
Business Requirements Specifications v.1.2 – April 20, 2010
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Convergence Bidding Overview
Thank you for attending.
For questions, please contact:
