Dispatch Down Service Analysis of reference price “stickiness” and

Dispatch Down
Service
Analysis of reference price “stickiness” and
market participant behaviour in the DDS Market
September 17, 2010
Table of Contents
1.0
Executive Summary ........................................................................................... 1
2.0
Purpose ............................................................................................................... 1
3.0
Introduction......................................................................................................... 2
4.0
Reference Price Shelf (price “stickiness”) ....................................................... 2
4.1
4.2
5.0
5.1
5.2
Analysis of price “stickiness” ............................................................................. 2
Symmetry around the reference price and heat rate levels............................... 5
Market Participant Behaviour ............................................................................ 6
Historical Analysis............................................................................................. 6
Spark Spread Analysis...................................................................................... 9
6.0
Summary ........................................................................................................... 12
7.0
Conclusions / Next Steps ................................................................................ 13
1.0
Executive Summary
In December 2007 the AESO implemented improvements to the energy market based
on the Department of Energy’s Alberta’s Electricity Policy Framework of June 2005.
The changes, sometimes referred to as quick hits, included a price adjustment
mechanism that negates the downward effect that dispatching Transmission Must Run
(TMR) units have on the pool price. The mechanism is known as the Dispatch Down
Service Market (DDS).
In July 2009 the AESO published a review of the performance of the Quick Hit changes
that included a review of the DDS market and its effectiveness. Since that time,
stakeholders have raised various issues regarding the functioning of the DDS market
and in particular the offer behaviour of market participants.
A 2008 MSA review of DDS highlighted a number of these issues, and coined the term
Price “stickiness” at the reference price to describe instances where the pool price is set
very close to the reference price for a considerable period of time.1
In 2010 the AESO agreed to do further analysis which was presented to the Market
Advisory Committee (MAC) and the MSA. The analysis indicated:
•
•
Price “stickiness” exists; 80% of the price “stickiness” is due to the DDS volume
associated with the size of the Transmission Must Run (TMR) dispatch (DDS
volume) while 20% is due to offer bunching just below the 12.5 reference price
heat rate level.
The shelf appears to have created asymmetry around the reference price level
indicating that the reference price heat rate does not always result in a reference
price that is above the typical historical operation of the market as intended.
The AESO undertook further analysis to determine if there have been any observable
changes in market participant behaviour with the introduction of the DDS market. Spark
spread analysis was also conducted and is viewed to be inconclusive in determining if
market participants have altered their offer behaviour in any meaningful or specific way
as there does not appear to be any relationship between participation in the DDS
market and the spark spread.
2.0
Purpose
The AESO monitors the market on an ongoing basis and has prepared this report in
response to various stakeholder concerns regarding the functioning of the DDS market.
The report contains analysis of reference price “stickiness” and market participant
behaviour in the DDS market, the two main issues raised by stakeholders.
1
“Quick Hits Review: Dispatch Down Service”, July 10, 2008:
http://www.albertamsa.ca/files/DDS_Report_071008(2).pdf
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3.0
Introduction
During and after the AESO Quick Hits Six Month Review2 report several market
participants raised issues regarding the effectiveness of DDS as it is currently used to
correct the effect of TMR in the energy market. There are two main issues:
1. The reference price has created a price shelf in the merit order.
2. Due to market participant behaviour DDS does not fully reconstitute the price,
i.e., the market participant behaviour in question is characterized by market
participants offering lower than what they might have absent DDS
At the request of the MAC the AESO undertook analysis to explore these issues. This
paper provides the results of that analysis and the AESO’s conclusions.
4.0
Reference Price Shelf (price “stickiness”)
4.1
Analysis of price “stickiness”
The analysis previously presented to the MAC indicated that there has been some
evidence that price has been stuck around the reference price. The analysis indicated
that reference price “stickiness” can be characterized by the amount of time prices are
just below the reference price. There are two issues that contribute to the “stickiness”:
1. The DDS volume and the shelf that it creates in the merit order.
2. The fact that there is a known shelf in the merit order, results in the probability of
being dispatched just below a 12.5 heat rate is significantly higher than just
above a 12.5 heat rate. Due to this, market participants are incented to offer just
below the 12.5 heat rate, resulting in offers “bunching up”, further contributing to
the shelf just below the reference price.
Figure 1 shows duration curves of annual heat rates pre and post quick hits. It is noted
that in both 2008 and 2009 there has been a significant amount of time where the SMP
has been set near a 12.5 heat rate.
2
“Quick Hits, A Six Month Review”, July 3, 2009.
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Figure 1
Annual Heat Rate Duration Curves
20
15
18
14
13.5
13
16
Heat Rate (SMP/Bid-Week Gas Price, GJ/MWh)
Heat Rate (SMP/Bid-Week Gas Price, GJ/MWh)
14.5
14
12
10
8
6
4
2
12.5
0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of Time
2006
12
2007
2008
2009 YTD
11.5
11
10.5
10
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
% of Time
2006
2007
2008
2009
The DDS volume impact can be measured in part by the amount of time the SMP has
been set immediately below the reference price (i.e. within 1¢). This is illustrated in
figure 2. The amount of time the SMP has been within $1 and $5 is also included, as the
amount of time within $1 is indicative of the impact of offers bunching up just below the
reference price. Table 1 provides annual percentages for the amount of time the SMP
has been set close to the reference price. It is noted that both 2008 and 2009 have seen
increases in the amount of time the SMP has been set within $1 and 1¢ of the reference
price.
As seen in Figure 2, in 2006 and 2007 there appears to have been symmetry around
the derived reference price. Post quick hits the shelf appears to have created
asymmetry around the reference price level, suggesting that the reference price heat
rate may not be set above the normal operation of the market as intended in the initial
design. An analysis of historical symmetry at differing heat rates can be seen in section
4.
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Table 1
Percent of Time the SMP is Set Relative to the Reference Price
2006
2007
2008
2009 (To Q3)
1.825%
2.881%
4.092%
7.616%
-$5 ≤ SMP < -$1
0.290%
0.941%
4.951%
5.595%
-$1 ≤ SMP < -$0.01
0.010%
0.022%
1.349%
4.626%
-$0.01 ≤ SMP ≤ Ref. Price
0.001%
0.018%
0.232%
0.003%
$Ref. Price < SMP ≤ $0.01
0.395%
0.691%
1.628%
0.258%
$0.01 < SMP ≤ $1
1.783%
2.450%
0.574%
1.222%
$1 < SMP ≤ $5
95.696% 92.996% 87.174%
80.680%
Other Price
Figure 2
Stickiness of the SMP to the Reference Price
30%
25%
% of Time
20%
15%
10%
5%
0%
2006
2007
2008
2009
Year
Five Dollars Less
One Dollar Less
One Cent Less
One Cent More
One Dollar More
Five Dollars More
Other Price
The tendency for offers to bunch just below the reference price is illustrated by
comparing the merit order curves pre and post quick hits implementation. Figure 3
shows aggregated merit order curves by the heat rate of the offers. Heat rates are
calculated based on the bid-week gas price as it is consistent across the month. The
figure illustrates that a shelf has developed at the 12.5 heat rate level. More information
regarding the 12.5 heat rate shelf is provided in Table 2 which presents the percentage
of overall offers in between a 12 heat rate and a 13 heat rate. Even after accounting for
the DDS volume there is evidence that there is some amount of bunching below the
12.5 heat rate and this result has been found to be statistically significant, as
represented in Table 2 below. The degree of bunching is illustrated in Figure 3 which
visually displays the 12.5 heat rate shelf in relation to the rest of the time period. Figure
3 also shows that 1% of the time the price is at the 12.5 heat rate when the DDS
volume is excluded compared to 5% with the DDS volume present. Thus 20% of the
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shelf is due to market participant behaviour and 80% of the shelf is due to the DDS
volume.
Table 2
Heat Rate
12 - 12.5
12.5 - 13
Pre Quick
Hits
0.16%
0.17%
Post Quick
Hits
1.58%
0.12%
Post Quick Hits with DDS
Volume Removed
0.45%
0.12%
Figure 3
Percent of Non-Zero Offers vs. Offered Heat Rate
Pre Quick Hits: June 2006 - May 2007
Post Quick Hits: Jun 2008 - May 2009
25
15
20
14
Heat Rate (GJ/MWh)
Offered Heat Rate (Offer Price/Bid Week Gas Price,
GJ/MWh)
16
15
13
12
11
10
9
10
8
60%
61%
62%
63%
64%
65%
66%
67%
68%
69%
70%
% of Non-Zero Offers
5
0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
% of Non-Zero Offers
Pre Quick Hits Offers
Post Quick Hits Offers
Post Quick Hits Offers with DDS Volume Removed
In summary, the analysis of the reference price shelf showed that there is indeed a shelf
at or near the reference price. The TMR heat rate is at or near the reference price 8%
to 9% of the time creating quite a pronounced shelf. Approximately 80% of this shelf is
due to the DDS volume itself and the other 20% is due to market participant offers.
4.2
Symmetry around the reference price and heat rate levels
The AESO analyzed the symmetry of offers around the reference price both pre and
post quick hits implementation in order to determine if there had been a change in offer
behaviour caused by the placement of the reference price. The reference price heat rate
was intended to provide a reference price that was above the normal operation of the
market. Figures 4 shows the % of time SMP is set below the reference price at varying
heat rates for 2005, 2006 & 2007.
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Figure 4
% of Time System Marginal Price (SMP) is less than the Transmission Must Run
(TMR) Reference Price at Varying Heat Rates
2005 - 2007
100%
98%
96%
94%
% of Time
92%
90%
88%
86%
84%
82%
80%
78%
12
12.5
13
13.5
14
14.5
15
15.5
16
16.5
17
17.5
18
18.5
Heat rate Level
2005
2006
2007
As seen above, in all 3 years there is some market activity occurring both above and
below the heat rate. It appears that most market activity occurs below a 15 heat rate as
illustrated by a flattening of the curves, thus setting the heat rate at this level may
reduce offer bunching and therefore price “stickiness”.
5.0
Market Participant Behaviour
Several market participants have raised issues regarding the effectiveness of DDS as it
is currently used to reconstitute price in the energy market. Stakeholders felt that due to
changes in market participant behaviour since implementation DDS does not fully
reconstitute the price. Further analysis was conducted and is shown below.
5.1
Historical Analysis
Average zero dollar offers pre and post quick hits implementation were compared to
determine if there has been any change in the amount of energy offered at $0/MWh. An
increase in $0 offers might suggest that market participants are offering at a lower price
than before the quick hits implementation to be eligible to provide DDS. As seen in
figure 5, there does not appear to be any significant change in the amount of energy
offered at $0/MWh.
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Figure 5
Average Zero Dollar Offers Pre and Post Quick Hits
2007 - 2009
6,000
Average Offers (MW)
5,000
4,000
3,000
Data invalid due to Quick
Hits Implementation in
December
2,000
1,000
Dec-09
Oct-09
Nov-09
Sep-09
Jul-09
Aug-09
Jun-09
Apr-09
May-09
Mar-09
Jan-09
Feb-09
Dec-08
Oct-08
Nov-08
Sep-08
Jul-08
Aug-08
Jun-08
Apr-08
May-08
Mar-08
Jan-08
Feb-08
Dec-07
Oct-07
Nov-07
Sep-07
Jul-07
Aug-07
Jun-07
Apr-07
May-07
Mar-07
Jan-07
Feb-07
-
Month
In figure 6, an increase in average hourly generation can be observed from 2007 to
2009. Generation including DDS has also appeared to increase over 2007, indicating
that there may have been a change in behaviour. However it is unclear if this change is
due to the DDS market. Figure 6 also exhibits net revenue, total DDS payments and
metered volumes of the selected gas generators. Net revenue represents the difference
between total revenue and the cost of fuel derived from the unit heat rate and gas price.
The decrease observed in revenues from 2008 to 2009 can be partly explained by the
lower gas prices observed in 2009, as well as lower pool prices. Some change in
market participant behaviour is to be expected with the introduction of a new market.
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Figure 6
Yearly Net Revenue, DDS Payments and Average
Hourly Metered Volumes for Select Gas Units
Average Hourly Gas Generation
$250
500
400
450
$200
Net Revenue and Total DDS Payments ($ millions)
400
350
100
50
-
2007
Average Gas Generation
150
Average Gas Generation
Average Gas Generation
200
Average Gas Generation incl DDS
250
Average Gas Generation incl DDS
MWh
300
2008
380
370
$150
360
$100
350
340
$50
Average Hourly Generation of Select Gas Units (MWh)
390
330
$-
320
2009
2007
Year
Net Revenue
2008
2009
Total DDS Payments
Average Metered Volumes
DDS dispatch share by fuel type has generally displayed a high concentration of gas
units due to the fact the gas units generally offer deeper discounts in the DDS market.
Figure 7 displays DDS dispatch share by fuel type and by market participant.
Figure 7
DDS Dispatch Share by Fuel Type
DDS Dispatch Share by Participant
100%
100%
90%
80%
80%
60%
60%
% of DDS Disipatched
% of DDS Dispatched
70%
50%
40%
40%
30%
20%
20%
10%
Gas
Nov-09
Dec-09
Oct-09
Sep-09
Jul-09
Aug-09
Jun-09
May-09
Apr-09
Mar-09
Jan-09
Feb-09
0%
Dec-08
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
Apr-09
Coal
May-09
Mar-09
Feb-09
Jan-09
Dec-08
0%
Hydro
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5.2
Spark Spread Analysis
The previous analysis undertaken by the AESO looked at DDS provider offer behaviour
before and after quick hits was implemented. The analysis suggested that offer
behaviour may have changed but it was not clear that DDS contributed to that change in
behaviour or was the only contributor. Other possible contributing factors include the
must offer must comply rules and gas price.
The AESO agreed to further examine gas unit participation in the DDS market by
performing a spark spread analysis for the period 2007 to 2009. The spark spread
analysis would indicate whether or not it was profitable for various gas-fired units to run.
The spark spread was calculated as follows:
Spark Spread = Price of Electricity ($/MWh) – [Cost of Gas ($/GJ) * Unit Heat Rate (GJ/MWh)]
For the analysis, the NGX AB-NIT Same Day Index was used to represent the cost of
natural gas. As seen in figure 7 below, the cumulative spark spread in 2008 displayed
an increase over 2007. 2009 cumulative spread has declined over 2008 & 2007 due to
lower pool prices. Large increases in spark spread generally occur in response to higher
pool price or lower gas price.
Figure 8
Cumulative Spark Spread Margin for Select Gas Units
2007 - 2009
$2,500,000
Cumulative Margin ($)
$2,000,000
$1,500,000
$1,000,000
$500,000
2007
2008
31-Dec
17-Dec
3-Dec
19-Nov
5-Nov
22-Oct
8-Oct
24-Sep
10-Sep
27-Aug
13-Aug
30-Jul
2-Jul
16-Jul
18-Jun
4-Jun
21-May
7-May
23-Apr
9-Apr
26-Mar
12-Mar
26-Feb
29-Jan
12-Feb
15-Jan
1-Jan
$-
2009
Weekly hours of positive spark spread was plotted against DDS dispatched to
determine if the two variables are correlated. The results are provided in Figures 9 & 10
below.
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Figure 9
Weekly Total Spark Spread vs. DDS Dispatched for Select Gas Units
2008
$160,000
Spark Spread
Correlation: -0.33306
25,000
DDS Dispatched
$140,000
20,000
$100,000
15,000
$80,000
10,000
$60,000
DDS Dispatched (MWh)
Spark Spread ($)
$120,000
$40,000
5,000
$20,000
$-
1
3
5
7
9
11
13
15
17
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
2008 weekly average pool price
$300
$/MWh
19
$200
$100
$1
3
5
7
9
11
13
15
17
19
21
23
25 27
Week
29
31
33
35
37
39
41
43
45
47
49
51
Figure 10
Weekly Total Spark Spread vs. DDS Dispatched for Select Gas Units
2009
$80,000
weekly total spark spread
Spark Spread for week
4: ~$150,000
DDS dispatched
25,000
Correlation: -0.23746
20,000
15,000
$40,000
10,000
DDS Dispatched (MWh)
Spark Spread ($)
$60,000
$20,000
5,000
$-
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
33
35
37
33
35
37
39
41
43
45
47
49
51
2009 weekly average pool price
$300
$200
$100
$1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
39
41
43
45
47
49
51
The analysis indicated that there does not appear to be any relationship between DDS
dispatched and the quantity of positive spark spread. The correlation coefficient is
slightly negative for both years therefore indicating a slight negative relationship. Thus
there is some indication that when spark spread is low participation in the DDS market
increases. However, the monthly data also indicates that this relationship is inconsistent
over time.
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Figure 11
# of Generating Unit Hours where a DDS Dispatch Occurred During Negative &
Positive Spark Spread Hours for Select Gas Units
12
1,600
1,400
10
8
# of hours
1,000
6
800
600
4
Average Gas Price (GJ/MWh)
1,200
400
2
200
Dispatch hours where spark spread is negative
Dispatch hours where spark spread is positive
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
0
Jan-08
-
NGX AB-NIT same day index
The AESO also examined the relationship between the hours in which DDS was
dispatched and the spark spread in those hours. As seen in figure 11, a DDS dispatch
can occur in both positive and negative spark spread hours.3
Based on the analysis in figure 11 it is difficult to determine if market participants are
participating in the DDS market when it is less profitable for them to participate in the
energy market.
Figure 12 provides the percent of dispatch type during negative spark spread hours.
This analysis was completed to determine if there has been more participation in the
DDS market when it is less profitable in the energy market. The analysis was done a
year prior to the implementation of quick hits to provide a comparison of market
participant behaviour pre and post the inclusion of the DDS market.
3
Please note that in figure 11 generating unit hours where a DDS dispatch occurred were summed by
month, thus the number of unit hours will not equal the number of hours in a month.
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Figure 12
DDS & Energy Dispatched Compared to Negative Spark Spread Hours
2007 - 2009
100%
Post Quick Hits
80%
% of hours
60%
40%
20%
DDS ONLY
ENERGY ONLY
Dec-09
Oct-09
Nov-09
Sep-09
Jul-09
Aug-09
Jun-09
Apr-09
May-09
Mar-09
Jan-09
Feb-09
Dec-08
Oct-08
Nov-08
Sep-08
Jul-08
Aug-08
Jun-08
Apr-08
BOTH ENERGY & DDS
May-08
Mar-08
Jan-08
Feb-08
Dec-07
Oct-07
Nov-07
Sep-07
Jul-07
Aug-07
Jun-07
Apr-07
May-07
Mar-07
Jan-07
Feb-07
0%
NO DISPATCH
As seen above, energy dispatches have occurred fairly consistently during negative
spark spread hours both pre and post quick hits. DDS is rarely dispatched without an
accompanying energy dispatch that is greater than zero MW during a negative spark
spread hour. This indicates that for the assets considered, there appears to be no
attempt to participate in the DDS market and not in the energy market.
There does not appear to be any relationship between participation in the DDS market
and spark spread. Offer behaviour during negative spark spread hours since the quick
hits implementation appears to be consistent with the behaviour before quick hits.
It should also be noted that there are other market dynamics and technology limitations
which can make it difficult for gas generators to accurately predict prices and
consistently be in a position to capture positive spark spreads which may explain why
generators are participating in the markets during negative spark spread hours.
6.0
Summary
The AESO has undertaken further analysis of DDS offer behaviour and the reference
price shelf. AESO analyses revealed no conclusive evidence of inappropriate offer
behaviour and while a shelf has been created in the merit order around the reference
price it is largely due to the DDS volume itself and not offer behaviour. Further
explanation is provided below.
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Reference Price “Stickiness”
The emergence of a price shelf at the reference price was anticipated but the impact
was expected to be mitigated by setting the reference price outside the typical, historical
operation of the market. The AESO analysis indicates that:
•
There is evidence of a price shelf near a 12.5 heat rate. This price “stickiness” is
mainly due to the DDS volume associated with the size of the TMR dispatch
(DDS volume) and offer bunching just below the 12.5 heat rate. 80% of the price
“stickiness” is due to the DDS volume, and 20% is due to offer bunching.
•
The imposed shelf appears to have created asymmetry around the reference
price level suggesting that the 12.5 heat rate used to determine the reference
price is not always above the typical historical operation of the market.
While recognizing the impact that the reference price level may have had on the market,
the AESO notes that the reference price is currently above the typical operation of the
market and there are issues with any price reconstitution mechanism. In that context,
the AESO is not convinced that major changes are required or would be efficient and
effective in resolving the issue.
Market Participant Behaviour
Various analyses were carried out to examine market participant behaviour with the
introduction of the DDS market. These include analysis of historical merit order
distribution, DDS dispatch share by market participant, gas generation versus total net
revenue for select gas units, and spark spread. These analyses have been inconclusive
in determining if market participants have altered their behaviour in any meaningful or
specific way. In particular, there does not appear to be any relationship between
participation in the DDS market and the spark spread. Specifically, the AESO notes that
DDS is rarely dispatched without an accompanying energy dispatch. This implies that
market participants do not appear to be positioning their assets to inappropriately
participate in the DDS market and not the energy market which would negate the price
reconstitution intent of the DDS rules.
The AESO analysis has not found evidence of a significant or inappropriate change in
market participant behaviour related to the DDS rules. The AESO has also provided the
results of its analysis to the MSA for their consideration and notes that the MSA also
independently actively monitors the market for signs of inappropriate behaviour. Again
the analysis has not convinced the AESO that major changes are required to the DDS
market.
7.0
Conclusions / Next Steps
The quick hits rules implemented some important and significant changes to Alberta’s
electricity market design and the AESO agreed to report on the market after six months
of operating under the quick hits rules. Subsequent to that six month review the AESO
has undertaken further analysis specifically with respect to the DDS market rules which
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13
incorporate a full 18 month analysis and address specific DDS market issues raised by
various stakeholders.
The AESO maintains its view that the DDS rules and the DDS market appears to be
operating as designed. While there is evidence that some of the anticipated design
issues occasionally arise, the DDS rules are technically sound and the DDS market is
operating in a FEOC manner and in the public interest. The AESO does not believe that
further work on rule changes are necessary or appropriate at this time.
The AESO regularly reviews market metrics internally as part of its normal market
monitoring function and has a regulatory duty to ensure that all ISO rules continue to
promote the fair, efficient and openly competitive operation of the electricity market. The
AESO will monitor the DDS market to ensure market conditions do not change in a
manner that inappropriately impacts the DDS market operation.
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