Ancillary Services: Technical and Commercial Insights July 2007 Brendan Kirby Prepared For CONTENTS Page 1. INTRODUCTION.........................................................................................................1 2. ENERGY AND CAPACITY: NECESSARY BUT INSUFFICIENT......................... 2 2.1 ENERGY................................................................................................................3 2.2 CAPACITY............................................................................................................3 2.3 FREQUENCY CONTROL....................................................................................5 2.4 ANCILLARY SERVICES.....................................................................................7 3. ANCILLARY SERVICES FOR POWER SYSTEM RELIABILITY..........................8 3.1 SERVICES FOR NORMAL CONDITIONS.........................................................9 3.1.1 Regulation...............................................................................................10 3.1.1.1. Up and Down Regulation.........................................................11 3.1.1.2. Response Accuracy..................................................................12 3.1.2 Load Following vs. Fast Energy Markets...............................................14 3.2 SERVICES FOR CONTINGENCY CONDITIONS...........................................17 3.2.1 Spinning Reserve....................................................................................18 3.2.2 Non-Spinning Reserve............................................................................19 3.2.3 Supplemental or Replacement Reserve..................................................19 3.2.4 Contingency Reserve Deployment Frequency and Duration..................19 3.2.5 Frequency Responsive Reserve..............................................................20 3.3 OTHER SERVICES.............................................................................................21 3.3.1 Voltage Control...................................................................................... 21 3.3.2 Black Start...............................................................................................23 4. ANCILLARY SERVICE PRICES..............................................................................24 4.1 REGULATION COST DRIVERS.......................................................................24 4.2 CONTINGENCY RESERVE COST DRIVERS.................................................25 4.3 COOPTIMIZATION............................................................................................26 4.4 REGULATION AND CONTINGENCY RESERVE MARKET PRICES..........27 4.5 REACTIVE POWER AND VOLTAGE SUPPORT COMPENSATION...........30 4.6 BLACK START COMPENSATION...................................................................33 5. SELLING MULTIPLE SERVICES............................................................................34 5.1 ANALYSIS METHODOLOGY..........................................................................34 5.2 ASSUMPTIONS...................................................................................................35 5.3 MODELING RESULTS.......................................................................................36 6. THE VALUE OF FLEXIBILITY................................................................................41 6.1 COMPARING TWO POWER PLANTS.............................................................41 7. CONCLUSIONS..........................................................................................................44 ii LIST OF FIGURES Figure Page 1. Capacity is required to meet load, provide regulation and contingency reserves, and to cover the unavailability of other generation and load forecast errors (capacity reserves)........................................................................................................................4 2. Power system frequency is tightly controlled in North America under normal conditions. ....................................................................................................................6 3. Frequency control is accomplished centrally under normal conditions. ......................6 4. Generator governors provide immediate response to restore system frequency under contingency conditions. ...............................................................................................7 5. Response time and duration characterize required ancillary service response.............8 6. Regulation is a zero-energy service that compensates for minute-to-minute fluctuations in total system load and uncontrolled generation while load following compensates for the slower, more predictable changes in load..................................10 7. Up/down and total regulation are equivalent..............................................................12 8. This coal fired power plant follows AGE regulation commands poorly. ..................13 9. PJM uses a pass/fail test to certify, and pay, generators that supply regulation.........14 10. Participation in energy markets requires maneuverability for all but base load units.15 11. In this simple example load following is required from an expensive peaking generator but energy is only an incidental product.....................................................16 12. System frequency plummets in response to a major loss of generation and the generation/load balance must be restored quickly......................................................17 13. A series of coordinated contingency reserves restore the system generation/load balance immediately following a major contingency.................................................18 14. System operators differ in how often they deploy contingency reserves but events are usually relatively short................................................................................................20 15. Real and reactive power production capabilities are interrelated in synchronous generators....................................................................................................................23 16. Regulation costs are dominated by generator opportunity costs. Cost at night can be higher than during the day..........................................................................................25 17. Monthly average regulation prices are typically (but not always) somewhat lower than energy prices.......................................................................................................27 18. Ancillary service prices in all markets follow a pattern where regulation is most expensive and replacement reserve is least expensive................................................28 19. Regulation is always the most expensive ancillary service as shown by these 2005 monthly average ancillary service prices....................................................................29 20. June 2005 average hourly ancillary service prices show a consistent pattern............29 21. The optimal production of energy and ancillary services varies from hour to hour and is different in different regions as shown in this 2005 simulation..............................38 22. One week of response in May 2005 for the California plant shows a full range of operating modes..........................................................................................................39 23. This engine driven generating plant has higher efficiency at all loads and lower efficiency degredation with increased ambient temperature than the combustion turbine driven generating plant...................................................................................42 iii LIST OF TABLES Table Page 1 Definitions of key ancillary services.....................................................................9 2 Comparison of regulation and load following characteristics............................10 3 Annual average and maximum ancillary service prices from four markets for five years.............................................................................................................30 4 Regional Comparison of ISO/RTO Arrangements for Reactive Power Compensation.....................................................................................................32 5 Delivered $/mmBTU gas prices for California, Enerfax prices for Texas and New York............................................................................................................35 6 Selling ancillary services increases profits by 17% to 250% in this 2005 modeling simulation...........................................................................................37 7 The greater flexibility of the engine driven generating plant results in greater ancillary service profits when compared with the combustion turbine driven generating plant...................................................................................................43 iv ACRONYMS ACE area control error AEP American Electric Power AGC automatic generation control BAAL balancing authority area control error limit BPA Bonneville Power Administration CAISO California Independent System Operator CPM control performance metric CPS control performance standard (1&2) DCM disturbance control measure DCS disturbance control standard ERCOT Electric Reliability Council of Texas FCM forward capacity market FERC Federal Energy Regulatory Commission FRR frequency responsive reserve GSU generator step-up transformer IPP independent power producer ISO-NE Independent System Operator of New England ISO Independent System Operator LGIA Large Generator Interconnection Agreement LGIP Large Generator Interconnection Procedures LIPA Long Island Power Authority LMP locational marginal price MAAC Mid-Atlantic Area Council MAIN Mid-America Interconnected Network MISO Midwest Independent System Operator MVA million volt-amps MVar million volt-amps reactive MW megawatt MWh megawatt-hour of energy NERC North American Electric Reliability Council NPCC Northeast Power Coordinating Council NYISO New York Independent System Operator OATT Open Access Transmission Tariff PJM PJM Interconnection L.L.C. PSC Public Service Commission PUC Public Utility Commission RMR reliability must run generator RTO regional transmission organization SCE Southern California Edison TO transmission owner UFLS under frequency load shedding UVLS under voltage load shedding VAR volts-amps reactive WECC Western Electricity Coordinating Council v EXECUTIVE SUMMARY This white paper has two primary goals. First, it provides background material including what ancillary services are, why they exist, what is required to provide them, what the cost drives are, and their market prices. Second, it provides modeling results that show how an engine driven generating plant can increase profits by selling ancillary services and energy in dynamic hourly markets. Unlike the paper itself, this executive summary provides conclusions before foundation in order to first highlight the potential value. Selling ancillary services as well as energy can greatly increase a generator’s profitability as shown by the modeling results presented in Table E1. A 100 MW hypothetical gas- fired engine-driven generating plant was modeled for all of 2005 operating in four regions: California, Texas, western New York, and Long Island. The plant was first modeled only selling energy. Next it was modeled optimizing the hourly sale of energy and three ancillary services: regulation, spinning reserve, and non-spinning reserve. Profits increased by 17% to 250%. Results will differ for a real plant but the simple simulation shows that there is significant profit potential. See chapter 5 for details. Table E1 Selling ancillary services in addition to energy increases profits in each of the regions studied in the 2005 simulation of a 100 MW hypothetical engine driven generating plant. Annual profits in $ millions California Texas Western NY Long Island Energy Only $1.6 $6.3 $2.9 $16.4 Energy when selling AS $0 $4.1 $1.1 $14.0 Regulation $1.7 $2.1 $2.8 $4.4 Spin $1.5 $1.3 $0 $0.1 Non-Spin $2.3 $3.9 $0.4 $0.7 Total With Energy & AS $5.4 $11.3 $4.3 $19.1 Additional Profit $3.9 $5.1 $1.5 $2.7 Increase 250% 81% 51% 17% This increased profit potential comes from the integrated sale of energy and three ancillary services. Seven ancillary services are commercially significant as possible income sources for generators: regulation, load following, spinning reserve, non-spinning reserve, supplemental or replacement reserve, voltage support and black start. All are procured by system operators to support grid reliability. Five are typically traded in hourly markets (regulation, load following, spinning, non-spinning, and replacement reserves).1 Two are procured through longer term, often negotiated, agreements (voltage support and black start). Two services are used continuously to support normal operations (regulation and load following). Three services continuously stand ready to respond if other power system equipment fails (spinning, non-spinning, and replacement reserves). The services, brief descriptions, and their market properties, including rough price ranges, are shown in Table E2. 1 Load following is obtained from sub-hourly energy markets. vi Table E2 Properties of key ancillary services Service Description Price Range* Service Response Speed Duration Cycle Time Market Cycle (average/max) $/MW-hr Normal Conditions Regulating Online resources, on automatic generation control, that can respond rapidly to system- Reserve operator requests for up and down movements; used to track the minute-to-minute fluctuations in system load and to correct for unintended fluctuations in generator output to comply with Control Performance Standards (CPSs) 1 and 2 of the North American Electric Reliability Council (NERC 2006) 35-40 ~1 min Minutes Minutes Hourly 200-400 Load Similar to regulation but slower. Bridges between the regulation service and the hourly Following or energy markets. Fast Energy 10 min to ~10 minutes 10 min to hours Hourly - Markets hours Contingency Conditions Spinning Online generation, synchronized to the grid, that can increase output immediately in Reserve response to a major generator or transmission outage and can reach full output within 10 min to comply with NERC’s Disturbance Control Standard (DCS) Seconds to <10 Hours to 6-17 10 to 120 min Hourly min Days 100-300 Non-Spinning Same as spinning reserve, but need not respond immediately; resources can be offline Reserve but still must be capable of reaching full output within the required 10 min Hours to 3-6 <10 min 10 to 120 min Hourly Days 100-400 Replacement Same as supplemental reserve, but with a 30-60 min response time; used to restore or spinning and non-spinning reserves to their pre-contingency status Supplemental Hours to 0.4-2 Reserve <30 min 2 hours Hourly Days 2-36 Other Services Voltage The injection or absorption of reactive power to maintain transmission-system voltages Control within required ranges Seconds Seconds Continuous Year(s) $1-$4/kvar-yr Black Start Generation, in the correct location, that is able to start itself without support from the grid and which has sufficient real and reactive capability and control to be useful in energizing pieces of the transmission system and starting additional generators. Months to Minutes Hours Year(s) - Years * Prices are approximate ranges in $/MW-hr for 2005 and include California, ERCOT, and New York. See Table 3 and Table 4 for more detail. Essentially all generators can profit by selling ancillary services. Generators with greater flexibility can profit more than less flexible units. Detailed production cost modeling results, shown in Table E3, show that a flexible engine driven generating plant can earn more profits than a less flexible combustion turbine plant. The engines’ high part-load vii efficiency improves its ability to provide regulation. This is in addition to greater profits due to the higher engine efficiency, lower efficiency degradation with increased ambient temperature, and the lower capacity degradation at higher altitudes. Table E3 The greater flexibility of the engine driven generating plant results in greater ancillary service profits when compared with the combustion turbine driven generating plant. 12 Engines 2 Combustion Annual Profits in $ millions Turbines Capacity at plant site 100 MW 79 MW Energy Only Profit $1.5 $0.6 Energy and Ancillary Services Energy Profit -$0.4 -$0.5 Regulation $1.8 $0.7 Spinning Reserve $2.3 $1.4 Non-spinning reserve $2.1 $1.8 Total Profit* $5.8 $3.3 Additional Profit $4.3 $2.7 *Includes startup costs for cycling Ancillary services are capacity services, not energy services. Even the services which trade in hourly markets (regulation and the contingency reserves) are capacity services. Costs are primarily generator opportunity costs based on capacity that must be withheld from the energy market. Ancillary service prices are consequently volatile. Ancillary service prices are volatile (Chapter 4) and often high. A generator should continually reevaluate its position in the energy and ancillary service markets. Figure E1 shows that the optimized example plant constantly moved between energy and the ancillary services in the modeled year. While the underlying physical needs of the power system remain constant, reliability and market rules are in flux as restructuring continues. Some rules do not perfectly reflect the power system’s physical requirements. When a generating technology supports power system reliability but is not compensated appropriately by current market rules, work to change those rules. Market designers are typically receptive to serious market participants, especially when the market participants are technically correct. Prices paid for regulation, for example, do not currently reflect the quality of regulation provided. Generator owners with units that follow automatic generator control (AGC) signals more closely, and therefore reduce the overall amount of regulation needed, should argue for rule changes that appropriately compensate them. viii 600 Non-Spin 480 Spin 360 Regulation 240 Energy With Ancillary Services 120 Energy Only 0 January February March April May June July August September October November December Figure E1 This 2005 California generator constantly moves between volatile energy and ancillary services markets in order to maximize profits. ix 1. INTRODUCTION Power systems require ancillary services to maintain reliability and support their primary function of delivering energy to customers. Ancillary services are principally real-power generator control capacity services the system operator uses over various time frames to maintain the required instantaneous and continuous balance between aggregate generation and load. Seven ancillary services are discussed in this report. Two are used continuously under normal conditions: regulation and load following (or fast energy markets). Three only respond intermittently to reliability events but they must continuously stand ready to respond: spinning reserve, non-spinning reserve, and replacement or supplemental reserve. Two additional services are discussed: voltage support and black start. Voltage support is the provision of dynamic reactive power. Voltage support is the only non-real-power service. Black start involves having the capability to start the generator without support from the power grid and subsequently having enough real and reactive power capability and control to be useful in restarting the rest of the power system. Ancillary services are not new. The functions have been provided by vertically integrated utilities since power systems began to be formed a century ago. With restructuring it has become necessary to more carefully define, measure, and pay for these services. Ancillary services introduce an additional level of complexity and the potential for additional revenue for generation owners. Provision of ancillary services interacts with the provision of energy and capacity. Maximizing revenue requires optimizing the joint production of all available services. Fundamental power system reliability requirements are quite stable. Ancillary service and energy market rules are not. While this report discusses current market rules its primary focus is on the underlying physical requirements. Understanding the underlying physical power system reliability requirements can help identify when market and reliability rules should be changed to help system operators take advantage of the unique capabilities of maneuverable generators. This report is organized into an executive summary and seven chapters. Chapter 1 is this introduction. Chapter 2 provides a brief discussion of energy and capacity as a background for understanding ancillary services. Chapter 3 discusses the ancillary services themselves, why the power system needs each, and the physical requirements for supplying them. Chapter 4 discusses ancillary service prices, the cost components for each service, why prices are so volatile, and provides historic hourly price information from several markets. Chapter 5 discusses the interactions among the ancillary services. Example modeling results are presented showing how profits can be maximized by selecting how much of each ancillary service to sell during each hour of a study year. Chapter 6 examines the value of flexibility by comparing profits from a flexible engine driven generating plant with those from a less flexible combustion turbine plant utilizing detailed modeling of one year of operations at a specific example location. Chapter 7 provides conclusions. 1