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GDF SUEZ Proposes Increasing ERCOT Value of Lost Load to $25,000 due to Use of Cumulative Distribution Function in Operating Reserves Demand Curve
GDF SUEZ Energy North America, Inc. has proposed increasing the Value of Lost Load (VOLL) used to create the Operating Reserve Demand Curve (ORDC) in ERCOT due to what GDF called "unintended consequences" of the use of the cumulative distribution function to design the curve.
The Public Utility Commission of Texas previously agreed to use the cumulative distribution function (or "real" curve) for the ORDC, rather than the "piecewise" linear curve.
GDF said that this change, "has resulted in unintended consequences that mitigate much of the intended benefits of the ORDC."
"This result is due to the probability that is applied to the VOLL which, at the minimum contingency level of 'X,' is only 50%. This issue reveals two negative consequences: (1) significant value is taken out of the overall construct -- as much as 50% of the expected ORDC value, and (2) prices jump from $4,500/MWh to $9,000/MWh when the supply stack moves from 2001 MW to 2000 MW."
"There are two possible solutions to this issue. The first is to develop an effective piecewise linear curve. The second solution, which is a simpler and more direct approach, is to increase the VOLL," GDF said.
"GDF SUEZ suggests that the Commission sets the VOLL to $25,000/MWh, versus the $9,000/MWh level currently proposed, to ensure that effective scarcity pricing levels are reached in the ORDC."
While recommending an increase in the VOLL, "GDF SUEZ also recommends that overall ORDC prices (i.e., both the ORDC adder and LMP together) be capped at this time so prices cannot exceed $9,000$/MWh [sic]."
GDF said that with the change to VOLL, "the market would have a smoother curve with no abrupt price jumps and would, therefore, provide a positive contribution to both real-time pricing and the Peaker Net Margin ('PNM'). It is the belief of GDF SUEZ that, while the projected contribution during the record weather year of 2011 appears large (PNM additional contribution over $375,000), most of this value, especially in the shoulder months, would be arbitraged away due to generator behavior through modification of their bidding strategies and asset flexibility. This resulting reduction in the higher value, however, would also result in an increase in operational reliability because more generation would be available to react to potential emergencies."
Specifically, GDF said that a VOLL of $25,000 would have added $79,000 to PNM in 2012, versus $27,000 when using a VOLL of $9,000.
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