Evolving Regulating Reserve Markets (Order 755)

Some recent changes have been made to the ancillary service markets to change the ways in which resources are incentivized. The most significant changes have been made to the regulating reserve markets. In late 2011, Order 755 was issued by FERC on Frequency Regulation

Compensation in the Organized Wholesale Power Markets (FERC 2011b). The order directed market operators that are part of the organized wholesale markets to include market-based payments for regulating reserve performance, lost opportunity costs for all regulating reserve capacity prices, and incentives and rules for accuracy. The order did not require any

standardization between markets and also made no changes to the net energy payments that came as a result of the energy from regulating. At present, all markets except ISO-NE have

implemented the changes for Order 755. In addition, ERCOT, though not FERC jurisdictional, has initiated a pilot program on fast regulation response service, which is in many ways

analogous to the implementations made to meet Order 755 in the other markets.

Although many markets already included lost opportunity costs in regulating reserve markets, the order enforced this. Historically, a few areas had paid only the lost opportunity cost to the suppliers that incurred these costs. With the order, it was decided that the lost opportunity cost is part of the marginal cost of providing regulating reserve capacity and should therefore be a part of the price paid to all regulating reserve suppliers. The order also stated that the market

operators are responsible for assigning the lost opportunity costs, but that intertemporal opportunity costs (i.e., by providing regulating reserve in the current hour, a supplier may lose out on energy profits in future hours) must be verifiable and can be included in a supplier’s regulating reserve offer.

Historically, ancillary service markets are paid only for the capacity that suppliers held to

provide the ancillary service and not the actual utilization of the capacity for the ancillary service (Rebours 2007). This order adjusts the payments for regulating reserve so that the resource is paid based on how much it was asked to control during each market interval as well as how accurate it followed its automatic generation control signal. The performance price must be market based rather than administratively set, and the performance is based on the absolute amount of movement that a supplier performs in a market interval. Suppliers that are asked to move up and down at a higher frequency would therefore be paid more for performance than those being asked to move more slowly. In addition, the closer in accuracy the supplier followed the automatic generation control signal, the more value it would receive as well. Exactly how the accuracy was measured would vary in each market, but the order required that the accuracy is based on how well a resource follows the control signal and not how well it follows area control

error, and that all resources’ accuracy is measured by the same means. This design would then incentivize resources that are more flexible and can provide regulating reserve faster and more accurate by providing greater payment than that made to slower and less accurate regulation resources.

Although the order had its objectives toward incentivizing suppliers that provided regulating reserve to be faster and more accurate, there was not a consensus on the benefits of the order. Many commenters on the order believed that the faster response would not have any significant reliability benefit and would only raise costs to consumers. Proponents of the order suggested that the introduction of performance payment would reduce the regulating reserve capacity prices. Other proponents also argued that the use of faster ramping resources would improve efficiency of meeting regulating reserve requirements and thereby reduce the capacity

requirement of regulating reserve. This was also shown in other studies that analyzed the impact of faster responding resources, such as Makarov et al. (2008). Table 4-9 shows ancillary service prices for a time period when Order 755 was implemented in NYISO (June 26, 2013) and then the prices for the same time period during the previous year without Order 755. Although there could be many other reasons this occurs rather than Order 755, prices for all ancillary services increased with the new design, not necessarily supporting the efficiency improvement. Although the argument of whether the implementation of Order 755 improves efficiency as well as the argument of how much it improves reliability should continue to be evaluated, it is clear that it does make the regulating reserve market better suited to incentivize response speed as well as response accuracy, giving a great push toward improved flexibility incentives.

Table 4-9. Ancillary Service Prices of the NYISO During a Period With and Without Regulation Performance Payment Before 755 (June 26– Oct. 22, 2012) Spin ($/MW-h) Nonspin ($/MW-h) 30-min. ($/MW-h) Regulation Capacity Regulation Mileage ($/MW)

Average price $4.00 $1.80 $0.08 $6.44 N/A

Average intervals at 0 price 84.5% 98.0% 99.9% 0.4% N/A After 755 (June 26–Oct. 22, 2013) Spin ($/MW-h) Nonspin ($/MW-h) 30-min. ($/MW-h) Regulation Capacity Regulation Mileage ($/MW) Average price $5.82 $3.26 $1.70 $10.59 $0.23 ($2.30)16 Average intervals at 0 price 86.4% 98.1% 99.4% 1.4% 10.2%

16 _{NYISO uses a multiplier of 10 for regulation mileage, in that a typical unit will perform mileage equal to 10 times} its capacity; therefore, multiplying the regulation mileage price by 10 can give a more relative comparison.