Extended Locational Marginal Prices

Agenda
MOTIVATIONS FOR E-LMP

CONVEX HULL PRICING

COMPARISON : E-LMP vs LMP ANSWERING CRITIQUES

CONCLUSIONS

Non Convexities in the Market

What causes non-convexities? No-Load, Startup and Shutdown costs.
- Together with a non-zero Pmin

Minimum uptime and downtime constraints. Impacts LMP is not able to handle these efficiently.
- Optimization might not have a market clearing price a price to satisfy all the profit-making generators. - Leaves Uplifts as residue.

Are Uplifts bad?

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A Better Solution under Non-Convexities

Uplifts are required to compensate generators for following the social welfare optimizing schedule. Cannot be eliminated because there is no single MCP due to nonconvexities. However high uplifts distort price signals.
- Make some participants dissatisfied.

How do we make this situation better?

- Reduce Uplifts!!!

How?
- Convex Hull Pricing (CHP)

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Motivations for E-LMP

Convex Hull Pricing

COMPARISON : E-LMP vs LMP ANSWERING CRITIQUES

CONCLUSIONS

Convex Hull Pricing (CHP)

Mathematical technique used to determine LMPs that incorporate costs of commitment decisions [1]. Extends the LMP called ELMP. How are CHP and ELMP related?
- ELMP is obtained from the convex hull of the minimum total cost curve.

______________________________________________________________________________________________________________________________________

[1] Extended LMP (ELMP), Stakeholder Workshop, May 26, 2010.

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E-LMP What it is, What it is not.

Convex hull is the closest possible convex approximation of the minimum total cost curve. ELMP is calculated as the average change in price related to demand step large enough to eliminate the non convexities.
- E-LMP is the slope of the convex-hull.

E-LMP thus includes the cost of commitment decisions.

- since the minimum total cost curve takes this into account.
- Reduces uplifts.

E-LMPs are purely financial

- Only changes the price at the location compared to LMPs. - Do not change the commitment or dispatch levels.

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Motivations for E-LMP

Convex Hull Pricing

COMPARISON : E-LMP vs LMP ANSWERING CRITIQUES

CONCLUSIONS

Comparison of E-LMP and LMP

For this comparison, consider a simplified single bus system.
Gen G1 G2 G3 G4 G5 G6 Min Output (MW) 20 20 20 20 20 20 Max Output (MW) 100 100 20 20 20 20 Inc. Cost ($/MWh) 20 25 16 20 10 15 No Load Cost ($/hr) 100 100 300 300 600 600

Dispatch is as follows
Generator
G1 G2 G3 G4 G5 G6 Page 9

Dispatch
100 MW 90 MW 20 MW 20 MW 20 MW 0 MW

LMP
Uplifts $0 $ 100 $ 120 $ 200 $ 300 $0

ELMP
Uplifts $0 $ 150 $0 $0 $0 $0

At this load LMP = $25 / MWh. (Set by G2.) Total uplift under LMP = $720. ELMP = $40 / MWh Total uplift under ELMP = $150
*Refer Appendix A for calculations

Comparison of E-LMP and LMP

1) Incentives for Leaving the Market

Uplifts are the upper bound on the incentive for participants to form coalitions to trade outside the market. Actual MCP under LMP = 25 + 720/250 = $27.88 /MWh
- Profit made by Gen 2 = $0. (Gets paid $ 2600)
- Load 1 pays $ 2788.

If L1 and G2 leave the market to schedule among themselves;

- L1 needs to pay G2 $ 2600

- Net profit of the coalition = $188

L1 and G2 are better off. But market is worse off. Social welfare reduces. Under E-LMP, at the same load G2 has no incentive to leave the market. Social welfare maximizing solution retained. Due to high uplifts under LMP.
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Impacts of Uplifts
2) Dissatisfaction to participants

Higher the uplifts, more the difference between the prices seen and paid by the loads. i.e., higher price distortion
- Load sees a price of $ 25.
- Consumes accordingly. - Asked to pay $27.88. - Price sensitive loads with bids between $25 and $27.88 are dissatisfied.

Virtual bidders base their profit on the LMP differences.

If the difference is less than $2.88, they might lose money. In this case speculators are dissatisfied. This price difference is lower under E-LMP compared to LMP.
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Comparison of E-LMP and LMP

3) Does this condition seem similar to Pay-as-Bid?

Generators that accept uplifts essentially operate as pay-as-bid. More the generators that accept uplifts, closer the market is to a pay-as-bid. In the example, G2 through G6 are being paid just their bid.
- Generators could start overbidding to get more revenue. - Prices might turn volatile. - As the generators try to guess how the others might bid. 4) Hedging with FTRs

If uplifts are minimized, LSEs can use FTRs to hedge a greater proportion of the total cost of their load under E-LMP compared to LMP.
- Since FTRs are based on differences in locational prices.

- And uplifts are socialized.

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Comparison of LMP and E-LMP

5) Logical Price Signals

It is logical that prices increase as load increases.

- E-LMPs only increase with increase in demand.

Do LMPs do this? Not Always!

- May go down with increasing demand when optimal commitment changes in response to increasing demand. 6) Price spikes also reduce with E-LMP

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Comparison of LMP and E-LMP

7) E-LMPs Reflect Market Clearing Prices More Accurately

Consider a simplified single bus system.

Gen Min Output (MW) Max Output (MW)
100 100 100 20

Inc. Cost ($/MWh)

No Load Cost ($/hr)

500 500 500 40

G1 G2 G3 G4

20 20 20 5

50 52 55 65

At Load = 160 MW

Generator

Dispatch

At this load LMP = $52 / MWh. (Set by G2.) Total uplift under LMP = $800. ELMP = $57 / MWh

G1
G2 G3 G4

100 MW
60 MW 00 MW 00 MW

Total uplift under ELMP = $200

*Refer Appendix B for calculations

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E-LMPs Reflect Market Clearing Prices More Accurately

Under LMP
- Market Clearing Price = $52 + 800/160 = $57 / MWh - LMP was $52/MWh.

Under E-LMP
- Market Clearing Price = $57 + 200/160 = $58.25 / MWh - E-LMP was $57/MWh.

Inference:
- Price set by E-LMP is closer to the actual market clearing price. - Compared to LMPs.

Sends more accurate price signals compared to LMP.

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Motivations for E-LMP

Convex Hull Pricing

COMPARISON : E-LMP vs LMP ANSWERING CRITIQUES

CONCLUSIONS

Answering Critiques
Increasing the time-span for calculation of uplifts reduces uplifts. Why go for E-LMP?

Increasing the time-span might indeed reduce uplifts:

- Generator A makes a negative profit of $500 today. (Uplift payments : $500) - It makes a huge profit tomorrow.

- If the time period to calculate uplifts had been two days instead of one; no uplifts would have been needed for generator A.
- Result: UPLIFTS REDUCED!!!

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Why then go for E-LMP than doing this?

Lets say that the time period for calculating uplifts was two days.
- Generator A makes a profit of $500 today. - It predicts that it would make a negative profit of $500 tomorrow. - Net uplifts = $0. - Net Profit over two days= $0

Generator A bids strategically so that it does not get dispatched tomorrow.

- Makes a net profit of $500 (from today).

Gen A better off but social welfare not maximized.

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Total cost to consumers increases under E-LMP?

Not necessarily.

Even in the region where cost under E-LMP is higher, is it necessarily bad?
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Why go for E-LMP if it increases total cost to consumers?

ISO is non-discriminatory.
- A dollar in producers pocket = A dollar in consumers pocket.

Ought to consider only social welfare.

- Does lower load payment mean a better social welfare?

Does social welfare change under LMP and E-LMP?

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Why go for E-LMP if it increases total cost to consumers?

ISO is non-discriminatory.
- A dollar in producers pocket = A dollar in consumers pocket.

Ought to consider only social welfare.

- Does lower load payment mean a better social welfare?

Does social welfare change under LMP and E-LMP?

- No !!!

Why then change the market structure to go for E-LMP?

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Why go for E-LMP if it increases total cost to consumers?

ISO is non-discriminatory.
- A dollar in producers pocket = A dollar in consumers pocket.

Ought to consider only social welfare.

- Does lower load payment mean a better social welfare?

Does social welfare change under LMP and E-LMP?

- No !!!

Why then change the market structure to go for E-LMP?

Price Signals!!!
Does E-LMP send better price signals than LMP?

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Does E-LMP send better price signals than LMP?

Generator
Ga Gb Gc

Pmin
0 0 50

Pmax
50 60 50

Cost
25 50 70

No-Load cost
200 200 350

Ga

Gb

Load = 150 MW LMP at node = 50; E-LMP at node = 55

Details
Profit of Ga Uplifts for Gb Uplifts for Gc Total Cost Gc

LMP
$ 1050 $ 200 $ 1350 $ 9050

E-LMP
$1300 $ 50 $ 1100 $ 9400

What is the price signal sent ???

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What is the Price Signal sent?

Incentivizes cheaper generation - better than LMP.

The increased cost to the consumer is used to send a long-term signal towards incentivizing cheaper units.
- Benefits consumers in the long run.

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Motivations for E-LMP

Convex Hull Pricing

COMPARISON : E-LMP vs LMP ANSWERING CRITIQUES

CONCLUSIONS

Conclusions

Reduces Uplifts Reduces spikes

Logical Price Signals

Reflects MCP more accurately
Advantages
Disadvantages

E-LMP also suffers from some of the problems faced by LMPs.

A step forward in determining the correct price signals for the market. Better than LMPs.
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References
1. Basic Principles of Convex Hull Pricing, Webinar#1, October 30, 2009 2. Convex Hull Pricing Extended LMP (ELMP)Stakeholder Workshop, May 3, 2010 3. Extended LMP (ELMP), Stakeholder Workshop, May 26, 2010 4. Market-Clearing Electricity Prices and Energy Uplift, Paul R. Gribik, William W. Hogan, and Susan L. Pope, December 31, 2007 5. On minimum-uplift pricing for electricity markets, William W. Hogan and Brendan J. Ring, March 19, 2003 6. Extended LMP, MISO, https://www.midwestiso.org/WhatWeDo/StrategicInitiatives/Pages/ELM P.aspx

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Questions?

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Appendix A
Consider a case of six generators and a load connected to single node
G1 G2 G3 G4

G5

G6

Gen

Min Output (MW) 20 20 20

Max Output (MW) 100 100 20

Inc. Cost ($/MWh) 20 25 16

No Load Cost ($/hr) 100 100 300 Load (250MW)

G1 G2 G3

G4
G5 G6

20
20 20

20
20 20

20
10 15

300
600 600

Variation of LMP with Load

At the load of 250 MW we have an LMP value of $25/MWh Generator dispatch values: G1 = 100, G2=90, G3=20, G4=20, G5=20, G6=0.

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CALCULATION OF UPLIFTS FOR AN EXAMPLE

For Generators

G1: 25*100 20*100 100 = +400 (Profit)

G2: 25*90 25*90 100 = -100 (Loss : Uplift Reqd.) G3: 25*20 16*20 300 = -120 (Loss: Uplift Reqd.) G4: 25*20 20*20 300 = -200 (Loss: Uplift Reqd.) G5: 25*20 10*20 600 = -300 (Loss: Uplift Reqd.) G6: Not committed (Neither Profit nor Loss) Total Uplift : $720

IMPACTS DUE TO THE UPLIFTS

The additional price that need to be contributed to the generators for them to commit and follow the optimal schedule. Uplift equally distributed to the consumers = 720 / 250 = $2.88 / MWh Therefore, Market clearing Price (Actual) = $27.88/ MWh Speculators and Price Sensitive loads are at the risk of $2.88 offset. This offset is high enough to turn them into loss making entities.

Appendix B
Example 2: Consider a case of four generators and a load connected to single node
G1 G2 G3 G4

Gen

Min Output (MW) 20 20 20 5

Max Inc. No Load Output Cost Cost (MW) ($/MWh) ($/hr) 100 100 100 20 50 52 55 65 500 500 500 40

Load

G1 G2 G3 G4

LMP AND E-LMP REFLECTING PRICE VOLATILITIES

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COMPARISON OF TOTAL COST TO CONSUMERS

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ADDITIONAL SUPPORTING POINTS FOR E-LMP

E-LMP takes into account the price spikes that are attributed to the forecasting errors. Since the E-LMP takes into account the costs attributed to the uncommitted generators (future commitment) therefore, spikes are not there.

Unlike the LMP where the price may decrease with the increase in price the ELMP signifies the price increase with the increase in load.
It can be seen that the LMP causes price volatilities but the ELMP offers fairly stable price.

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E-LMP AND LMP AS COMPARED TO THE MARKET CLEARING PRICE

For a load of 160 MW (G1 = 100MW, G2=60MW , G3 = 0MW, G4 = 0MW) in example 2

LMP= 52 $/MWh , Uplift = $800

E-LMP = 57 $/MWh, Uplift = $200 Market Clearing Price 1 = $52 + 800/160 = $57 / MWh (for LMP) Market Clearing Price 2 = $57 + 200/160 = $58.25 / MWh (for E-LMP) Therefore, the price set by E-LMP is near to the market clearing price. Hence act as a better price signals.

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Why go for a new market structure?

Uplifts
- Use the existing market model. - Charge prices to beneficiaries.

Better price signals

- Reduce time period for calculation of uplifts. - Counteracted by increased uplifts.

Might be complicated.

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