PJM’s Annual FTR Auction

1 Copyright 2003 PJM WWW.PJM.COM

PJM’s Annual FTR Auction


Introduction


FTR Market Enhancements

In order to create a more robust FTR Market,PJM is enhancing the FTR Market to include:

Annual FTR AuctionCurrent FTR allocation procedure will be converted into a long-term auction

New FTR ProductFTR Options are a financial instrument that provides a new hedging mechanism


Annual FTR Auction

Annual FTR Auction


FTRs are allocated to Firm Transmission Service Customers annually

Monthly FTR Auctions allocate residual FTR capability to highest bidder

TODAY

All FTR capability is auctioned off to the highest bidders

Auction revenues will be allocated to Firm Transmission Service Customers

FUTURE

Annual FTR Auction


BENEFITS

Annual FTR Auction

Provides more flexible transmission congestion hedging alternatives

Makes benefits of congestion hedges generally more available to customers who switch suppliers under Retail programs

Continues to allocate property rights to Firm Transmission

Customers through Auction Revenue Rights


What Are FTRs?Financial Transmission Rights are …

financial instruments awarded to bidders in the FTR Auctions that entitle the holder to a stream of revenues (or charges) based on the hourly Day Ahead energy price differences across the path


What are ARRs?

Auction Revenue Rights …are entitlements allocated annually to Firm Transmission Service Customers that entitle the holder to receive an allocation of the revenues from the Annual FTR Auction


Entire PJM System Capability

Auction RevenueRights

Auction Revenue

FTRs AwardedTo Bidders

(MWs & Price)

Annual FTR Auction

Annual ARR Allocation

ARRs Allocated

(MWs)

Auction RevenueRights

Holders


FTR Options

New FTR Product


New FTR Product

TODAY

FTR Obligations only

FTR Obligations can be a

benefit or a liability

FUTURE

FTR Obligations and FTR

Options

FTR Obligations can be a

benefit or a liability

FTR Options can be benefit, but never a liability


BENEFITS

New FTR Product

Provides additional Transmission congestion hedging

alternatives to PJM customers

Will make analysis of hedging alternatives less complex


FTR Market Timeline


Overview of Financial Transmission Rights

(FTRs)


What Are FTRs?Financial Transmission Rights are …

financial instruments awarded to bidders in the FTR Auctions that entitle the holder to a stream of revenues (or charges) based on the hourly Day Ahead energy price differences across the path


Why Do We Need FTRs?

• Challenge: – LMP exposes PJM Market Participants to price

uncertainty for congestion cost charges– During constrained conditions, PJM Market collects

more from loads than it pays generators

• Solution:– Provides ability to have price certainty– FTRs provide hedging mechanism that can be

traded separately from transmission service

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Characteristics of FTRs

Economic value based on Day Ahead LMPs Defined from source to sink can be in form of obligation or option

obligation can be benefit or liability option can be benefit but never liability

Financial entitlement, not physical right Independent of energy delivery Must be simultaneously feasible


Economic Value of FTR

• FTR Target Allocation is equal to the FTR MW amount times the price difference from the FTR sink point to the FTR source point

• LMPs based on the clearing prices from DayAhead Market • If LMP FTR Sink < LMP FTR Source ,

– the FTR is a liability if FTR defined as Obligation– the FTR has zero value if defined as Option

FTR Target Allocation

(FTR MW ) * (LMP FTR Sink - LMP FTR Source)=


How are FTRs Acquired?

1. Annual FTR Auction– multi - round – multi - period – multi - product – entire system capability

2. Monthly FTR Auction – single - round – purchase “left over” capability

3. FTR Secondary Market – bilateral trading

FTRs are acquired in three market mechanisms …


Types of FTR Products

FTRs can be acquired in two forms …

FTR Obligations

FTR Options


What are FTR Obligations Worth?

Benefit – the hourly economic value is positive – FTR same direction as congested

flow

Liability – the hourly economic value is

negative– FTR opposite direction as

congested flow


What are FTR Options Worth?

A Benefit– the hourly economic value is

positive – FTR same direction as the

congested flow.

Neither a Benefit or a Liability– the hourly economic value is

zero – FTR opposite direction to the

congested flow.

FTR Option cannot have negative value


FTR Consistent withCongested Flow

Thermal Limit

FTR Obligation = 100 MW

Congestion Charge = 100 MWh * ($30-$15) = $1500

FTR Obligation Credit = 100 MW * ($30-$15) = $1500

LMP = $30

LMP = $15

Source (Sending End)

Sink (Receiving End)

Bus B

Bus A

Energy Delivery = 100 MWh


Thermal Limit

FTR Obligation = 100 MW


FTR Obligation Credit = 100 MW * ($15-$30) = $-1500

LMP = $30

LMP = $15



Bus B

Bus A Energy Delivery = 100 MWh

FTR Obligation is a Liability


FTR Option is a BenefitThermal Limit

FTR Option= 100 MW


FTR Option Credit = 100 MW * ($30-$15) = $1500

LMP = $30

LMP = $15



Bus B

Bus A

Energy Delivery = 100 MWh


Thermal Limit

FTR Option= 100 MW


FTR Option Credit = 100 MW * ($15-$30) = $-1500 = $0

***When calculated, the FTR Option Credit is negative, therefore the economic value will equal zero.******

LMP = $30

LMP = $15



Bus B

Bus A Energy Delivery = 100 MWh

FTR Option is Neither a Benefit/Liability


Summary

• FTRs are financial instruments used to hedge congestion costs

• FTRs can be acquired in the Annual FTR Auction, Monthly FTR Auction or Secondary Market

• FTRs can be Obligations or Options obligation can be benefit or liability option can be benefit but never liability

• FTRs must be simultaneously feasible


Overview of Auction Revenue Rights

(ARRs)


What are ARRs?

Auction Revenue Rights …are entitlements allocated annually to Firm Transmission Service Customers that entitle the holder to receive an allocation of the revenues from the Annual FTR Auction


Characteristics of ARRs

Economic value based on LMPs from the Annual FTR Auction

Defined from source to sinkOnly available as an obligation

obligation can be benefit or liability Financial entitlement, not physical rightMust be simultaneously feasible


Economic Value of ARR

• ARR Target Allocation is equal to the ARR MW amount (divided by the number of rounds) times the price difference from the ARR sink point to the ARR source point

• LMPs based on the nodal clearing prices for each round of the Annual FTR Auction

• ARRs can be a benefit or a liability

ARR Target Allocation

(ARR MW ) * (LMP ARR Sink - LMP ARR Source)

(# of rounds)=


How are ARRs Acquired?

1. Annual ARR AllocationAuction Revenue Rights (ARRs) requested by Firm Transmission Customers are allocated on an annual basis

2. Daily ARR ReassignmentARRs allocated for the planning period will be reassigned on a proportional basis within a zone as load switches between LSEs within the planning period

ARRs are acquired in the following mechanisms …


What can the holder do with the ARR?

• Convert ARR into FTR by “self-scheduling” FTR into Annual Auction on exact same path as ARR

• Reconfigure ARR by bidding into Annual Auction to acquire FTR on alternative path or for alternative product

• May retain allocated ARR and receive associated allocation of revenues from the auction


Summary• ARRs entitle the holder to receive allocation of

Annual FTR Auction revenues • ARRs are allocated to firm Transmission Service

Customers• ARRs are reassigned on a proportional basis within

a zone as load switches between LSEs within the planning period

• ARRs are only available as an obligation – obligation can be benefit or liability

• ARRs must be simultaneously feasible

Documents

PJM’s Annual FTR Auction