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NYISO Files Demand Curve Revisions to Improve Shortage Pricing

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December 27, 2010

The New York ISO has filed with FERC proposed tariff revisions to improve shortage pricing for its Regulation Service and Operating Reserves products by modifying the existing demand curves applicable to those products to better reflect the value of energy during shortage conditions and to improve the consistency between tariff provisions and operational practices.

The NYISO expects that the proposals, "will provide a greater energy market price incentive for generator performance, generator location, demand response, and transmission expansion."

Specifically, NYISO proposes to modify the pricing points for its Regulation Service Demand Curve and for two of the Operating Reserve Demand Curves: the Total 10- Minute Reserves demand curve for the NYCA and the 30-Minute Reserves demand curve for Long Island.

The current Regulation Service Demand Curve is composed of two segments. Each segment has a distinct pricing point, $250 for up to 25 MWs of shortage and $300 for 25 MWs or more of shortage. "This approach does not adequately conform to actual operating practices," NYISO said.

"In practice, system operators treat shortages of a few MWs as a trade-off of Regulation Service for energy MWs since these shortages are typically of short duration. Unless the system is short at least the number of MWs that could be provided by a gas turbine unit ('GT'), the system operator will not commit such resources to provide energy to meet a shortage in real-time," NYISO explained.

"Therefore, the NYISO proposes changing the Regulation Service Demand Curve from two to three segments to better reflect these operations. The first segment will be for a shortage up to 25 MWs with the price of $80; this pricing point represents a small shortage traded off for energy and is priced consistent with the historic value of energy. The second segment will be for a shortage of at least 25 MWs but fewer than 80 MWs with the price of $180. The third segment will be for a shortage of 80 MWs or greater with the price of $400. 80 MWs represents the point at which operators would consider activating GTs, and the $400 price point reflects the average cost of starting and operating a GT for an hour. The $180 price point for the middle MW value is an interpolation of the other two dollar-values," NYISO said.

The current value of the demand curve for NYCA total 10-minute reserves is $150. "This value is less than the cost of starting a GT," NYISO said.

"Operational practices indicate that when this category of Operating Reserves is short, the ISO should start a 30-minute GT to back down an on-line flexible resource and create the 10-minute reserve product. In order to achieve this desired outcome, the NYCA 10-minute reserves demand curve should be increased to $450 to reflect the cost of starting a GT (similar to the Regulation Service Demand Curve proposal). This value differs from the proposed Regulation Service value to indicate an operational preference for 10-minute Operating Reserves and to ensure the market solution does not have any undesirable trade-offs of 10-minute reserves for Regulation Service," NYISO told FERC.

The 30-Minute Reserves demand curve for Long Island, currently set at $300, "serves little purpose as currently constructed," NYISO added. "The $300 value is similar to the cost of starting a quick start resource. However, no resources need to be committed to meet this requirement, since it is satisfied by both spinning and non-spinning resources on Long Island. Therefore, the NYISO proposes to reduce this value to $25 to reflect a more accurate market value for this product," NYISO said.

NYISO said that an analysis showed that the proposed revisions would result in an annual reduction in uplift by approximately $100,000, and a decrease in overall production costs of up to $2 million annually.

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