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Electric Avenue – Summer Power Prices Spike In New York City

Last Friday (July 19th, 2013) temperatures in New York City rose to 100 degrees Fahrenheit for the second day in a row. At 4:00 PM that day the New York Independent System Operator (NYISO) recorded a new State record peak power demand of 33,956 MW.  In New York City (known as “Zone J”) real time power prices jumped as high as $1485/MWh. Today we examine the power price volatility.

Independent System Operators (ISOs) control electric power systems in most populated areas of the US. These organizations are responsible for operating power markets in large regions with millions of customers. The ISO’s don’t all operate the same way – some fall under the jurisdiction of the Federal Energy Regulatory Commission (FERC) and some like the Texas “ERCOT” system do not. The ISO we are describing today (NYISO) is responsible for operating the New York State power market. We will take a look at what happened in New York City last Friday in a minute but first we will describe how the NYISO determines power prices.

The principal objective of power market system operators is reliability – keeping the lights on. Secondary to that ISO’s perform a critical real time balancing role in the electricity markets by calling on additional power when needed and shedding generation capacity as demand declines. To carry out this role to the best advantage of customers, the NYISO operates a real time energy market. The energy market brings together generators and utilities (known as load serving entities – LSE’s) in a competitive bidding process that determines the resources used to meet demand.

The bidding process for the NYISO has two time sensitive phases. The first of these is the Day Ahead Market (DAM) that allows generators and LSE’s to submit bids to buy and sell power during the period up until 5:00 AM on the day before power is dispatched. The NYISO prepares a system load forecast based on forecast weather and other load factors. Using the system load forecast and known system transmission constraints, the NYISO then runs a computer model to determine the optimal schedule of generation and load for the day ahead. The resulting day ahead schedule (published at 11:00 AM on the day before power is dispatched) represents a binding commitment for successful load and generation bids and indicates the prices at which those transactions were cleared. The prices represent the clearing price at which generator offers met LSE bids for each hour in the day ahead. These prices are then adjusted for system constraints – usually transmission congestion – to arrive at a specific power price for each location on the power grid – the Locational Marginal Price or LMP. Generators and LSE’s are then financially committed to their day ahead obligations during the actual power day at the appropriate LMP.

However, since day ahead commitments are only based on the best available forecast of power market needs, they have to be adjusted during the power day to reflect actual load and available generation. This task is accomplished through the second phase of the energy market – the real time balancing market. The real time market is also a competitive bidding market that generators can bid their available capacity into. Real time market bids can be made up to 75 minutes before the actual dispatch hour. Then at 45 minutes before the actual dispatch hour the NYISO posts hour ahead market schedules and pricing for each 15 minute interval during the dispatch hour. The real time dispatch mechanism then automatically dispatches available capacity to meet actual load and generates clearing prices at 5 minute intervals. If a generator is unable to meet their day ahead commitment during the real time hour then they are charged real time prices for the megawatts that they fail to deliver. If an LSE requires more power than they purchased in the day ahead market then they must pay for that power at real time prices. If the system operator does not have enough generation bids to meet load then they can require additional generators to dispatch their units at real time market prices.

After the actual power is dispatched the settlement system sorts out who is owed what based on whether they met or exceeded their day ahead commitments and had to buy or sell at real time prices. Settlements use the clearing LMP prices established by the day ahead and real time markets for the most expensive generating asset required to meet demand during each hour.  In effect, the most expensive asset sets the price for all the other generation assets.   In the case of the real time market, clearing prices can escalate rapidly when there is not enough power to meet demand.

Now that we’ve learned how the NYISO system arrives at market prices – it is time to look at what happened in New York City last Friday. During the summer the city is not able to meet it’s own power needs without calling on resources from outside. During a heat wave like that experienced last week, unexpected increases in load or loss of generating resources cause real time price spikes.

The chart below shows the day ahead and real time load and price situation in New York City last Friday (July 19, 2013) when temperatures reached 100 degrees Fahrenheit. The chart has two axes – the system load data is measured on the left axis in megawatts (MW) and system prices are measured on the right axis in dollars per megawatt hour ($/MWh). The horizontal axis is time in hours and minutes – representing the entire 24 hours of July 19, 2013.

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