LSSi contract Modifications

LSSi contract Modifications
On March 27, 2014, the AESO released its report “Assessment of Load Shed Service for Import (LSSi)
Product”. At the end of the report, the AESO invited comments on the suggested contract modifications
from stakeholders. ATCO Power appreciates this opportunity but would like to go a step further and
provide additional comments regarding aspects of the contract that the AESO intends to maintain but
which in ATCO Power’s view would benefit from modifications. ATCO Power has in the past presented
some of its own analysis on LSSi in AUC proceedings 1633 and 2718 and does not intend to repeat any of
these1 but instead will focus on potential contract modifications as requested.
I.
Decreased available volume of LSSi at higher price levels
The AESO identified that at higher price levels less LSSi is available but concludes that:
Given the availability and arming patterns observed to date as well as the contracting considerations
described above, the AESO does not recommend any changes in the requirements or the three-part
payment structure of LSSi to address the issue of price-responsive load curtailment.
ATCO Power disagrees with this conclusion and suggests two modifications which will be explained in
detail further below:
1. Change from a three-part payment structure to a two-part payment structure by eliminating the
$5/MW availability payment.
2. Increase the order of magnitude of the tripping payment to better reflect the estimated value of
lost load of price insensitive load customers.
1. Removal of the availability payment
LSSi is intended as a tool to increase import intertie capacity. As such it is created specifically to meet
the needs of a specific user group: Importers. The product should therefore be designed in a fashion
that incentivizes LSSi providers to make LSSi available when Importers desire additional import capacity.
Importers do not use the intertie on a random basis; they import power at times when the expected
pool price in Alberta exceeds their cost of procuring power and shipping it to Alberta. The fact that the
desire for LSSi is not random means that it can be reasonably forecasted. This has two significant
consequences:
a) The need for an availability payment is not there. Since a reasonable forecast of arming periods
is possible, the arming payment can be selected in a fashion that likely results in the desired
revenue. If arming periods were highly random, an availability payment would be useful to
ensure base revenue that can be forecasted. However for enabling something as predictable as
imports that is simply not necessary.
1
ATCO Power invites however any party that wishes to get an alternative view on the efficacy and efficiency of LSSi
to read those submissions.
b) The product can be gamed. The value of LSSi comes from being armed since it is only at those
times that additional imports are enabled. However, for normally price sensitive loads2 being
armed carries the risk of having to consume power at high prices. Since it can be reasonably
forecasted when LSSi would be armed, these loads could optimize their stated availability in a
fashion where they would be only available when it is highly unlikely that they would get armed
thereby mitigating their risk. In that case these loads would be able to collect almost risk free
money for providing no service (being “available” at times when there is no desire, does not
provide any benefits).
An example that highlights these concerns is presented in the Appendix. Given these two concerns ATCO
Power believes it would be prudent to eliminate the availability payment as part of future LSSi contracts.
2. Make tripping payment closer to Value of Lost Load (“VoLL”)
Potential LSSi providers fall into two general categories: price sensitive and price insensitive loads. Given
the purpose of LSSi, intuitively the desired providers are price insensitive loads. From observation it
seems though that so far the LSSi program has largely attracted price sensitive loads. That raises the
question whether this is (partially) an outcome of the product design.
ATCO Power’s understanding of the risk profile of the two provider categories is as follows:
(i) The major risk for price sensitive LSSi providers is to have to consume during high priced hours.
While an unexpected trip is certainly disruptive for operations, these participants are already set
up to curtail their demand on short notice. Further, since trips of a fully loaded intertie generally
result in high prices, they would be motivated to curtail based on price anyway; just not that
rapidly.
(ii) The major risk for price insensitive LSSi providers is being tripped; having to consume at prices
up to the price cap poses no risk to them. They value their consumption significantly higher than
the current price cap of $1,000/MWh. It is generally assumed that their break-even point would
be somewhere in the ten to twenty thousand dollar range.
In the current LSSi design, the tripping payment is set at $1,000/MW and providers compete through
their arming payment. With respect to its order of magnitude this tripping payment seems to be
adequate to compensate price sensitive providers for the inconvenience of a trip and they can match
their offer for the arming payment to their perceived risk of getting armed.
Price insensitive loads face however a quite different situation. The tripping payment is not even close
to compensating them for the value lost during a trip. So they have to price this shortfall into their
arming payment; a very complicated exercise. Since arming normally doesn’t pose a risk to them they
should normally be willing to offer to be armed more or less for free so more or less their entire offer
would consist of the transfer of the trip shortfall.
2
It is worth mentioning that the AESO has identified in its 2007 paper that LSSi intuitively should be provided by
firm, price insensitive loads, as any others would naturally already have shed load under the conditions when it is
needed.
It is apparent that there is a trade-off between the arming payment and the tripping payment. The
higher the tripping payment, the lower the arming payment needs to be to provide the same financial
return and vice versa. It is in ATCO Power’s view further obvious that to rank competitive bids,
differences between bids need to be limited to one variable. This can be either done by either fixing the
arming payment or the tripping payment (the latter is currently the case in the current structure) or to
connect the arming and the tripping payment through a formula. ATCO Power does not see a reasonable
way to create such a formula so would not recommend it. This leaves two main design options for LSSi
contracts:
a) fix the tripping payment and allow for competition on the arming payment; or
b) fix the arming payment and allow for competition on the tripping payment.
Option a) matches the risk profile of price sensitive loads identified in (i) above while option b) matches
the risk profile of price insensitive loads identified in (ii). In either case, the level of the fixed component
needs to be determined. Since a payment structure that mirrors one’s risk profile makes participation
easier, ATCO Power considers it only appropriate and in the spirit of fair and open competition if the
fixed component is then selected in a fashion that makes participation easier for the other group.
ATCO Power suggest therefore that the AESO changes the tripping payment in a fashion that brings it
closer to the value of lost load for normally price insensitive customers (around $15,000/MW). By
maintaining the competition on the arming payment both groups of potential providers should have a
reasonable opportunity to compete. Alternatively, the arming payment could be fixed at a level
appropriate for price sensitive customers and competition could occur on the tripping payment.
However, this would constitute a significant change from the current design, and while VoLL estimates
exist, it would potentially be more difficult to judge an appropriate level for the fixed arming payment.
II.
Stability of available LSSi volumes between T-85 and T-20
ATCO Power is concerned with the current practice where LSSi providers have no lockdown period for
their offers. LSSi is intended to increase the import capacity. Importers need to make their commitment
to the pool by T-2. Starting from this point in time, they start to incur costs when preparing to import
into Alberta. Since the only acceptable operational reason for not delivering energy into Alberta are
transmission considerations, the source energy needs to be either procured by that time or the importer
is faced with either potential higher procurement costs or compliance concerns. If the import can then
not be scheduled due to import capacity being limited due to LSSi unexpectedly not being available the
importer faces bookout fees. The situation gets worse if LSSi becomes unavailable closer to realtime
since the importer by that time may have incurred transmission costs that may become stranded.
All these issues are completely outside of the control of importers. The LSSi providers however, chose to
provide a service at a price they selected. They therefore have the means to price the risks of earlier
commitment. ATCO Power submits that it is inappropriate to saddle importers with the risk of LSSi
becoming unavailable and that it is more appropriate to have LSSi providers carry the risk of earlier
commitment. In ATCO Power’s view LSSi availability should be locked in at least at T-2, ideally even
earlier so that importers can consider the availability of LSSi before they have to make their
commitment to the AESO.
Separate from this consideration ATCO Power is interested in understanding how the AESO currently
determines which volume is available for availability payments given the provider’s ability to constantly
restate their availability as long as they are not armed.
III.
Manual Tripping of LSSi load through System Controller’s directive
ATCO Power is opposed to the AESO being able to manually trip for intertie contingencies. Normal
contingencies are handled through the use of contingency reserves. The AESO must meet certain WECC
requirements with regard to contingency reserves. LSSi was intended as a completely different product.
It is intended to prevent frequency excursions after an intertie trip that cannot be manually controlled
through system controller action. LSSi should not be used as a replacement for contingency reserves.
ATCO Power recognizes that through the hourly use of LSSi it is difficult to judge based on the normal
day-ahead schedule to determine how much reserves are needed for a given hour. However, the AESO
carries standby reserves that can be activated whenever the intertie becomes a larger contingency than
anticipated.
By implementing manual tripping and thereby allowing the use of LSSi as contingency reserve, the AESO
increases the tripping risk for LSSi providers and presumably the cost of LSSi. On the other side, the
AESO is then using less contingency reserves, presumably lowering the AESO’s cost for contingency
reserves. ATCO Power believes that this trade-off in costs is inappropriate and inefficient and the AESO
has not provided any evidence to the contrary. The market for contingency reserves is well established
and presumably more competitive than the current market for LSSi3. Further, manual tripping clearly
falls into the realm of contingencies that are supposed to be dealt with through contingency reserves,
i.e. the product matches the requirements.
Further, ATCO Power is concerned about the general concept of tripping loads at a time where system
reliability is already maintained (the under-frequency event was avoided) just to meet a reserves
standard requirement despite alternative means of meeting the obligations being available.
ATCO Power therefore submits that future LSSi contracts should have no manual tripping provisions.
IV.
Payments for LSSi availability when AB–B.C. intertie is on outage or LSSi cannot increase
import capability
The core issue pointed out by the AESO is whether it is appropriate to make availability payments to LSSi
providers when it is certain that LSSi cannot increase import capability. The AESO suggests that it might
not be appropriate to make payments under these circumstances. This would require some kind of
3
It is ATCO Power’s impression that the interest in providing LSSi is barely enough to actually undertake
competitive procurement.
special communication between LSSi providers and the AESO since these technical circumstances are
not directly visible or obvious to LSSi providers.
However, in ATCO Power’s view, this is just a special case of the more generic issue whether availability
payments should be made when there is no need or desire for the product. ATCO Power believes they
should not as discussed in I.1. In ATCO Power’s view, the right solution is therefore to eliminate the
availability payment in its entirety which in addition to the benefits described in I.1 has the benefit of
eliminating the need for special communications during times of physical limitations on LSSi use.
Appendix – January 24 – 27, 2014 Analysis
Figure 1 below plots the value of 3 data series available from the AESO:
1. Hourly pool price ($/MWh)
2. Hourly LSSi offered (MW)
3. Average hourly AC intertie flow (MW)4
Series 1 is plotted on the right hand y-axis while series 2 & 3 are plotted on the left hand axis. Since the
analysis focusses on imports, exports above a certain level have been cropped. To ATCO Powers
knowledge the period in question did not include any relevant intertie related events. While LSSi is
normally needed to increase imports higher than about 550 MW, ATCO Power used the minimum cutoff of 350 MW identified in ID #2011-001R for the analysis.
750 MW
650 MW
550 MW
$150
LSSi Offered
Tie
Price
$130
$110
450 MW
$90
350 MW
$70
250 MW
$50
150 MW
$30
50 MW
$10
-50 MW
-150 MW
-250 MW
Figure 1: January 24-27, 2014
ATCO Power provides the following observations:
(i) Intertie flows are not random. Exports usually occur in the lowest priced hours, generally in the
off-peak. With increased prices, imports increase as well. Since importers have to schedule two
hours in advance, it is the potential or expected price that matters. This can best be seen in the
data for January 27th. During the entire on-peak the potential for higher prices remained which
is reflected in the consistent levels of imports over the period. Actual prices however
experienced swings with most of the hours being below $50 and only a few significantly higher
priced hours.
4
This data series aggregates the BC and MT intertie flows into one series. For a better graphical representation the
sign was reversed so that imports are represented by positive number while exports are represented by negative
numbers.
(ii) Offered LSSi volumes are not random. In contrast to imports, LSSi availability is highest in lowpriced off-peak hours. The data shows that when prices increase or the risk of high prices
increases, the availability of LSSi drops. The data shows not only this behaviour but also the
sophistication of LSSi providers in utilizing the incremental flexibility they currently enjoy over
importers. As mentioned in (i) above, importers’ volumes could be considered sub-optimal in
many hours on the 27th which is due to their T-2 lockdown. As discussed in the paper, LSSi
providers currently enjoy the ability to freely restate their availability up to T-20 minutes. That
LSSi providers utilize this flexibility can be seen from the fact that they were able to match their
availability significantly better to the price profile on that day (and the day before).
(iii) Import level did not even come close to requiring LSSi for all but 18 hours5 of the period. Paying
LSSi providers to be available during these periods served therefore no purpose. This is
especially the case since clearly LSSi providers optimize their availability profile directly contrary
to the potential need profile. Over the 4 day period the AESO paid LSSi providers over $100,000
in availability payments most of which reflects pure windfall profits for LSSi providers who seem
to deliberately avoid being armed (and actually providing any service).
5
In 18 out of the 96 hours in the period, imports where higher than the conservative cut-off level of 350 MW.