Convergence Bidding Issues

Eric Hildebrandt, Ph.D. CAISO Department of Market Monitoring

CPUC Convergence Bidding WorkshopJuly 26, 2010

Average hourly LMPs: PG&E LAP, Q3 2010

Slide 2

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IFM

RTD

IFM RTD DifferencePeak $39.02 $39.36 -1%

Off-peak $25.32 $21.10 17%Total $34.46 $33.27 3%

Virtual demand profitable

Virtual supply profitable

Virtual supply

profitable

Potential benefits of LSE participation in convergence bidding.

Virtual demand Can commit generation unit in DA needed to meet real-time demand

e.g. extra generation during specific peak hours.

Virtual supply Can displace physical supply if market participant believes that less

physical supply will be needed in real time e.g. due to extra generation from unscheduled generation in off-peak

Can also prevent virtual demand by generators from undermining local market power mitigation procedures.

In these cases, convergence bidding can reduce the total cost of meeting overall demand and should be profitable (on average).

Slide 3

Safeguards against potential detrimental use of virtual bidding

Position limits

CRR “clawback” rule

Ability to temporarily suspend virtual bidding

Referral to FERC for market manipulation

Deep and liquid market for virtual bidding, including participation by LSE’s.

Slide 4

Illustrative Examples: Base Case (with no virtual bids)

Potential impact of virtual demand bids.

Potential impact with addition of relatively high priced virtual supply bids (e.g. traders).

Potential impact with addition of competitively priced virtual supply bids (e.g. LSEs).

Based on examples originally presented at August 10, 2007 MSC/Stakeholder meeting. Whitepaper available at: http://www.caiso.com/1c8f/1c8ff4236e8e0.pdf

Virtual Bidding and Local Market Power Mitigation

Base Case Example: Generation within non-competitive load pocket)

$160 Day Ahead

$150 Unit 6 Unit 7 Market Bid (Physical)

$140

$130

$120

$110

$100

$90

$80 Unit 5 Unit 7 DEB (Physical)

$70 Unit 4 Unit 6

$60 Unit 3 Unit 5

$50 Unit 2 Unit 4

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500 1,700

Unit MW DEB Bid1 200 $15 $352 200 $25 $453 200 $35 $554 200 $45 $655 200 $55 $756 200 $65 $1457 200 $75 $145

Competitive Constraints run of pre-IFM local market power mitigation procedures

$160 Day Ahead

$150 Unit 7 Market Bid (Physical)

$140

$130

$120

$110

$100

$90

$80 Unit 5 Unit 7 DEBs

$70

$60 Unit 3 Unit 5

$50 Unit 2

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500 1,700

Competitive Constraints (CC)

Dispatch Unit 6

Unit 6Unit 4

Unit 4

Generation clearing in load pocket with competitive constraints enforced

(under CAISO demand forecast)

All Constraints run of pre-IFM local market power mitigation procedures

$160 Day Ahead

$150 Unit 7 Market Bid (Physical)

$140

$130

$120

$110

$100

$90

$80 Unit 5 Unit 7 DEBs

$70

$60 Unit 3 Unit 5

$50 Unit 2

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500 1,700

Competitive Constraints (CC)

Dispatch

Unit 6

Unit 6Unit 4

Unit 4

All Constraints (AC) Dispatch

Generation clearing in load pocket with all constraints enforced

Mitigation of bids based on pre-IFM local market power mitigation procedures.

$160

$150 Unit 7

$140

$130 Final Day Ahead

$120 Market Bids

$110 (After Mitigation)

$100

$90

$80 Unit 5 Unit 7 DEB s

$70

$60 Unit 3 Unit 5

$50 Unit 2

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500 1,700

Competitive Constraints

(CC) Dispatch

Unit 6

Unit 6Unit 4

Unit 4

All Constraints (AC) Dispatch

Base Case (no virtual demand or supply): Final IFM market results

Day Ahead Demand Curve (physical)

$160 Final Day Ahead

$150 Unit 7 Market Bids

$140 (After Mitigation)

$130

$120

$110

$100

$90

$80 Unit 5 Unit 7 DEB (Physical)

$70 MCP = $65

$60 Unit 3 Unit 5

$50 Unit 2

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500

MCQ = 1,100 MW

Unit 6

Unit 4

Unit 4

Unit 6

Potential Impact of Virtual Demand Bids by Generators

Generator’s can be expected to submit virtual demand bids to “hedge” risk of outages in real time.

Local market power mitigation procedures may be undermined if virtual demand not offset by competitively priced virtual supply.

Although generator may loose on virtual demand bid, this may be profitable due to increase in revenues from DA sales from generation portfolio

This problem may be mitigated by competitively priced virtual supply bids from LSEs.

Example of potential impact of virtual demand on day-ahead market (without virtual supply)

Day Ahead Demand Bids (with virtual demand)

$160

$150 MCP = $145

$140

$130 Final Day Ahead

$120 Market Bids

$110 (After Mitigation)

$100

$90 DEBs

$80

$70

$60 Unit 3 Unit 5

$50 Unit 2

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500

Unit 4

Unit 4

Unit 6

Virtual Demand Bid

Unit 7

Unit 7Unit 5

Example of potential impact with relatively high priced virtual supply bids (e.g. by traders).

Day Ahead Demand Bids (with Virtual Demand)

$160

$150

$140

$130 Final Day Ahead

$120 Market Bids

$110 (After Mitigation)

$100

$90 DEBs

$80

$70

$60 Unit 3 Unit 5

$50 Unit 2

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500

Unit 4

Unit 4

Unit 6

Unit 7

Unit 7Unit 5

Virtual Supply Bid

Virtual Demand Bid

Example of potential impact with competitively priced virtual supply bids (e.g. LSE).

Day Ahead Demand Bids (with Virtual Demand)

$160

$150

$140

$130 Final Day Ahead

$120 Market Bids

$110 (After Mitigation)

$100

$90

$80

$70

$60 Unit 3 Unit 5

$50 Unit 2 DEBs

$40 Unit 1 Unit 3

$30 Unit 2

$20 Unit 1

$10

100 300 500 700 900 1,100 1,300 1,500

Unit 4

Unit 4

Unit 6

Unit 7

Unit 7Unit 5

Virtual Supply Bids

Virtual Demand Bid

Other issues

CPUC reporting and review Virtual bidding can provide “external” benefits by mitigating

supplier market power (which can lower overall costs and risks). Direct profits/losses from virtual bidding can be tracked/reported

on frequent basis (even daily). Portfolio level limits and/or review triggers could be established

to control/review losses.

Unregulated affiliate issues DMM will monitor for indications of any potential use of virtual

bidding by regulated entities to increase CRR revenues by unregulated affiliates.

CRR activity by regulated entities cannot be used to increase profitability of virtual bidding by unregulated affiliates.

Slide 15