Organized by Independent Power Producers Association of India

New Delhi April 11, 2013

The Need for Regulatory & Policy Framework for

Ancillary Services & Alternative Energy Options

In the Indian Power Scenario

Creation & Implementation of a Market Design

for Ancillary Services

Knowledge Partner ICRA Management Consulting Services limited

Conference on

Presentation structure

• Expected Ancillary Services (AS) Mechanism in India

• Key aspects of Ancillary Services Market Design

• Mode of Procurement

• Price discovery

• Tariff structure

• Duration of contracts

• Effective monitoring

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• Phase I (As proposed by NLDC) – Under phase – I only one service under Frequency Support Ancillary Service

(FSAS) is expected to be launched , limited to generation side services.

• Phase II (Expected) – Frequency Control Ancillary Services

• Primary (Local automatic control: generators and loads) • Secondary (Central automatic control: generators) • Tertiary (Manual control: generators and loads)

– Network Control Ancillary Services (NCAS) • Voltage Control Ancillary Services (NCAS) • Power Flow Control Ancillary Services (NCAS)

– System Restart Ancillary Service (SRAS)

Expected Ancillary Services (AS) Market Structure in India

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• SLDCs are apex bodies responsible for optimum scheduling and despatch of electricity at a state level

• SLDCs/Utilities would have a window of time to balance load and generation before FSAS kicks in at a specified frequency (say, 49.65 Hz) if they do not intend to procure energy from the AS market

• For example, an over drawl / loss of generation of about 700 MW would result in drop from 50 Hz to 49.65 Hz in the NEW-NE grid

• FSAS process would be initiated by NLDC at the specified frequency

Expected AS Market Structure in India: Triggering of FSAS

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• Power Number is the sustained change in MW of

load-generation balance that result s in a change in

frequency of 1 Hz.

• Power Number for the NEW-NE grid is about 2000

MW per Hz.

50.10

50.00

49.90

49.80

49.70

49.65

49.60

Target Grid

Frequency

This range provides

flexibility to utilities

to take corrective

actions to balance

load and generation

Trigger point for

Ancillary Services

Expected AS Market Structure in India : Day Ahead Bid process and dispatch

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NLDC Power

Exchanges Accredited Generators

Forecast the Required Quantity (MW) - Tentative

Conducts Day Ahead Bidding

Bid for providing Ancillary Services

Dispatch notification of selected bids 6 time

blocks prior to dispatch

Notifies anonymous area-wise bids to NLDC

Notifies bidders immediately about the bids

Provides complete details of the bidders

Notify withdrawal (if any) at least 3 hours before

dispatch

Supply Power

1 2

8

7

5 6

9

4

3

Expected AS Market Structure in India : Payment Mechanism

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RLDC RPC Utilities/Ent

ities

Obtains data Computation

of UI and ancillary payment

Notifies payment

information

Energy Accounting

(MU) based on scheduled &

actual dispatch

Payment from UI Pool Account

Make payment for drawls under UI & AS to UI

Account

Power Exchanges

AS Power Generators

AS Charges / Penalties

AS Charges / Penalties

1

2

3

4

5

6

7

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Key aspects of Ancillary Services Market Design

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Mode of Procurement Mandatory, Bilateral, Competitive Bids, Spot Market

Price discovery Pay as bid, Uniform pricing, Normative tariff

Tariff structure Fixed, Capacity, Utilization, Utilization Frequency, Opportunity Cost

Duration of contracts Short term, Long term

Effective monitoring To ensure fair competition, Price cap

• Countries follow different approaches in procuring Ancillary Services

• Ancillary Service requirement is typically estimated by ISO

• Ancillary Services such as Primary Frequency Control (through speed governors) and Basic Voltage Control are mandated by the regulators in some countries /markets

• Secondary and Tertiary Frequency controls are procured through tendering process or through spot market by the ISO or through bilateral contracts by utilities.

• Black Start or System Restart services are procured through competitive bidding where it is not mandatory.

Procurement methods used in AS markets

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Procurement of Ancillary Services in Select Markets1

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SN Ancillary Service Compulsory provision Bilateral contracts

Tendering process

Spot market

1 Primary frequency control

Spain, PJM Australia, France, New

Zealand

Germany, Great Britain, New

Zealand, Sewden

Australia, New Zealand

2 Secondary frequency control

- France Germany, New Zealand

Australia, Spain, PJM

3 Basic voltage control Australia, Spain, Germany, France, Great Britain, New

Zealand, PJM, Sewden

France, New Zealand

Great Britain -

4 Enhanced voltage control

- France, Germany

Australia, Spain, Great Britain

-

1. Based on Paper by Rebours, Kirschen, Trotignon and Rossignol –

A Survey of Frequency and Voltage Control Ancillary Services - Part II: Economic Features

• Regulators have different approaches for pricing Ancillary Services such as mandating ancillary services with no explicit cost, a regulated (normative) price , uniform pricing and pay as bid price

• In Uniform pricing method, all successful bidders are paid the price of highest bid accepted

• In Pay as bid pricing bidders are paid at the price they have bid

• Most of the US markets use uniform pricing for frequency control ancillary services

• Countries such as Great Britain , France and Germany have adopted pay as bid pricing

• CERC’s consultation paper (2010) has suggested uniform pricing for Ancillary Services in India

Pricing Ancillary Services

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Pricing method used in various countries1

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S. No.

Ancillary Service None Regulated Price

Pay as bid price Common Clearing Price

1 Primary frequency control

Spain, PJM New Zealand

Australia, France, Germany, Great Britain, New Zealand,

Sewden

Australia

2 Secondary frequency control

- - Australia, Spain, PJM, France, Germany, New Zealand, Great Britain, Sewden

Australia, Spain, PJM

3 Basic voltage control Australia, Spain, Germany, Sewden

PJM, Great Britain

France, Great Britain, New Zealand

-

4 Enhanced voltage control

- Spain Australia, France, Germany, Great Britain

-

1. Based on Paper by Rebours, Kirschen, Trotignon and Rossignol –

A Survey of Frequency and Voltage Control Ancillary Services - Part II: Economic Features

• Proponents for uniform pricing argue that under competitive conditions, market prices are unlikely to be different between uniform price and pay-as-bid price; as utilities may bid higher than their marginal cost in pay-as-bid price1

• Theoretically, Pay-as-bid price is effective incase utilities bid based on their marginal cost

Uniform Pricing Versus Pay-as-Bid Pricing

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0

1

2

3

4

5

6

7

A B C D E F

$/M

Wh

MW

Uniform Price Auction1

0

1

2

3

4

5

6

7

B D C E F A

$/M

Wh

MW

Pay as Bid Auction1 Marginal Cost of A Total Consumer Demand

Uniform Market Clearing Price Average Price

1. Source - Uniform-Pricing versus Pay-as-Bid in wholesale Electricity Markets : NYISO

• Multiple products under FCAS (from Regulation to Replacement) can be procured either sequentially or simultaneously. (Relevant for Phase-2 in India)

• Under Uniform Pricing model, sequential bidding may result in adverse selection where a better quality resource (e.g. Regulation reserve) is priced lower than a poor quality resource (e.g. Replacement reserve). Such a situation is called “Price Reversal”.

• To address “Price Reversal”, California market has implemented simultaneous bidding with rational buyer approach. Rational buyer approach minimizes the overall procurement cost while considering technical constraints.

• Incase of Pay as bid approach, both sequential and simultaneous bidding did not show any such adverse impacts.

Issues in Uniform Pricing model for multi product FCAS

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• Multi Part: Typically - Capacity charges + Usage charges

• Multi Part system is more common across the world

• Bids for Ancillary Services are selected based on their capacity charges and dispatched based on their “usage charges” in real-time

• Multi Part structure is likely to make Ancillary Services more bankable as it would mitigate the risk of non- off take of power

• Single Part tariff may get easier agreement from the discoms who would ultimately pay for the Ancillary Services

Tariff Structure for Phase-1: Multi Part Vs Single Part

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Indicative tenures for Phase-2

• Day ahead & Intra-day markets – FCAS: Regulation services

– FCAS: Spinning reserve

• Monthly contracts – FCAS: Backup reserves

• Long term contracts – SRAS: System Restart

– VCAS: Voltage Control Services

Tenures of Ancillary Services

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Indicative tenures for Phase-1

• Day ahead markets

– FSAS

There is a need for effective monitoring by regulators

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• Risk of cartel formation: It is known that markets for Voltage Control suffer from high market concentrations because of location specific requirement.

• During 2010, Italian Competition Authority has fined three generating plants providing VCAS in the Central – South Zone who were found to be acting in cartel.

• Price caps: In specific cases, regulators may impose price caps

• Price reversals: It is required to identify price reversals and correct design flaws. In a price reversal situation an inferior quality service (e.g. Secondary Reserve) may receive a higher price than a higher quality service (e.g. Regulation)

• Such reversal was witnessed in California, New England and New York markets.

Thank You

Prepared for IPPAI by ICRA Management Consulting Services Limited For further details, please contact R. Raghuttama Rao MD, IMaCS raghuttama.rao@imacs.in

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