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10/13/2014 1

OPSI Panel:LMP Pricing Improvements

Direct Energy, LLCScarp (David Scarpignato)

443-824-3114

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LMP vs. Uplift• Why? : Competition in the hope of:

– Market Efficiency– Transparency– Transfer generation risks to private investors rather than ratepayers

• Need for Competitive Retail Provider if Wholesale Deregulated– Compete for cheapest Supply rather than cronyism or self-dealing– Sophisticated risk hedging strategies to deal with volatility and cash flow

• Uplift Hinders Markets and Competition at Retail Level– Competitive retail providers depend on competitive wholesale markets – Competitive retail providers are harmed by out-of-market (Uplift)

• Uplift is unhedgeable and harms the competitive LSE business model• Severe out-of-market costs could eliminate retail competitors

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Out-of-Market/LMP Costs on Extreme Days• “Free Market” price formation (LMP) seems to fall apart

under "Extreme" days• Interchange Volatility

– Need to know what interchange will be to dispatch correctly• 8,000 MW unexpected interchange plummeted PJM prices (polar vortex)

and created uplift• Wrong internal commitments (DR and generation) if anticipate incorrect

interchange

– Need to encourage forward interchange scheduling on Extreme days• Limit real-time interchange transactions since internal commitment

decisions already made

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Generation Failures on Extreme Days• Creates need for excess commitments• Need to capture out-of market excess commitments– Price through carrying excess reserves– Reserves are joint-optimized with LMP

• Send market signal to those causing need for excess commitment (generators that fail to start)– About 32,000 MW of generators failed on January 7th

(22% of resources)– Charging load fails to signal generators to perform better

• Excess Reserves (Commitments) should be charged to deviations

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Solutions to Reactive Uplift• Units brought on for (voltage support) are paid

as uplift• Need to build transmission to fix chronic

operational issues regarding voltage.– A $50,000 capacitor bank makes more sense than

paying a generator $1,000,000 a in uplift– Single generator with market power to solve

reactive problem areas is poor construct

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MVA Rather Than MW Based LMP• Paying of units for constrained economic dispatch, REGARDLESS of

constraint belongs in LMP– LMP is supposed to be a “constrained economic dispatch” and not “THERMALLY

constrained economic dispatch”

• Need to include reactive (MVAR) in addition to real power (MW) as part of LMP– When unit brought on for reactive (voltage support) it is currently paid as uplift

• Do Constrained Economic Dispatch using MVA instead of MW.– Computing power is greater today– EMS systems are advanced and can even do optimized MVAR flow– Cost-capping for resource concentration associated with reactive issues - in

additions to today's based on thermal