EXAMINING ANCILLARY SERVICES

104 Pages·2012·7.97 MB·English

NRR198-05
UNBUNDLING GENERATION AND TRANSMISSION SERViCES
FOR COMPETITIVE ELECTRICITY MARKETS:
EXAMINING ANCILLARY SERVICES
by
Eric Hirst and Brendan Kirby
RIDGE NA TIONAL LAS ORA TORY
Oak Ridge, Tennessee 37831
for
THE NA TIONAL REGULA TORY RESEARCH INSTITUTE
The Ohio State University
1080 Carmack Road
Columbus, Ohio 43210-1002
Phone: [phone]
Fax: [phone]
Website: www.nrrLohio-state.edu
January 1998
DISCLAIMER NOTICE
This report was prepared by Lockheed Martin Energy Research, Corp. (Energy
Research) on behalf of the U.S. Department of Energy (DOE), as an account of work
sponsored by The Ohio State University and Research Foundation. Neither Energy Research,
DOE, the U.S. Government, or any person acting on their behalf: (a) makes any warranty or
representation, express or implied, with respect to the information contained in this report; or
(b) assumes any liabilities with respect to the use of or damages resulting from the use of
information contained in the report.
This report was prepared with funding provided by participating member commissions of
the National Association of Regulatory Utility Commissioners (NARUC). The views, opinions,
findings, conclusions, or recommendations expressed herein do not necessarily state or reflect
the views, opinions, findings, conclusions, recommendations, or policies of the NRRI, the
NARUC, or NARUC member commissions.

EXECUTIVE SUMMARY
Ancillary services are those functions performed by the equipment and people
that generate, control, and transmit electricity in support of the basic services of
generating capacity, energy supply, and power delivery. The Federal Energy
Regulatory Commission (FERC) defined such services as those "necessary to support
the transmission of electric power from seller to purchaser given the obligations of
control areas and transmitting utilities within those control areas to maintain reliable
operations of the interconnected transmission system."
The nationwide cost of ancillary services is about $12 billion a year, roughly 10
percent of the cost of the energy commodity. More important than the cost, however, is
the necessity of these services for bulk-power reliability and for the support of
commercial transactions.
FERC's landmark Order 888 included a pro forma tariff with provisions for six key
ancillary services. The Interconnected Operations Services Working Group identified
another six services that it felt were essential to the operation of bulk-power systems.
Several groups throughout the United States have created or are forming independent
system operators, which will be responsible for ensuring that appropriate amounts of
these ancillary services are available for reliability and commerce.
To date, the electricity industry (including traditional vertically integrated utilities,
distribution utilities, power marketers and brokers, customers, and state and federal
regulators) has paid insufficient attention to these services. Although the industry has
made substantial progress in identifying and defining the key services, much remains to
be done to specify methods to measure the production, delivery, and consumption of
these services; to identify the costs and cost-allocation factors for these services; and
to develop market and operating rules for their provision and pricing.
Developing metrics, determining costs, and setting pricing rules are important
because most of these ancillary services are produced by the same pieces of
THE NA TIONAL REGULA TORY RESEARCH INSTITUTE -11/
equipment that produce the basic electricity commodity. Thus, the production of energy
and ancillary services is highly interactive, sometimes complementary and sometimes
competing. In contrast to today's typical time-invariant, embedded-cost prices,
competitive prices for ancillary services would vary with system loads and spot prices
for energy (Figure S-1).
12
10
-
8
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-::iE
~ 6
w
0
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D.. 4
2
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2000 3000 4000 5000 6000 7000 8000 9000
SYSTEM LOAD (MW)
Figure The cost to consumers for eight generation-provided ancillary services as
a function of system load for a hypotheticai utility system.
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The individual ancillary services differ substantially in their features,
competitiveness, provision, and pricing. Operating reserves, for example, can likely be
provided by competitive markets. The primary supplier cost for this service is the
opportunity cost associated with foregone energy sales; significant fuel costs are
incurred only when these reserves are called upon to respond to the loss of a major
generation or transmission outage.
Injection and absorption of reactive power, on the other hand, must be provided
close to the location where the voltage control is needed. Therefore, it may not be
feasibie to create competitive markets for this service. Rather, the pricing and provision
of voltage control may continue to be regulated. Capital costs are the dominant costs
for this service for both generators and transmission equipment. Opportunity costs
arise only when generators are operating at or near full real-power output and are
called upon to increase reactive-power output beyond the level associated with the
unit's rated power factor. Such operation would require a reduction in the output of real
power.
Although FERC has regulatory responsibility for bulk-power markets, state
regulators may have a keen interest in these ancillary-service issues. Public utility
commissions may choose to get involved in the formation of independent system
operators to ensure that suitable levels of reliability are maintained within their states
and that market structures promote full and open competition. This report, aimed at
state regulatory authorities, provides an overview of the twelve ancillary services plus
details on two of those services, operating reserves and voltage support.
THE NA TfONAL REGULA TORY RESEARCH INSTITUTE - V

TABLE OF CONTENTS
Page
LIST OF TABLES ix
LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
PREFACE xiii
ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. xv
CHAPTER
1 INTRODUCTION................................................... 1
2 DEFINITIONS OF ANCILLARY SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 5
3 CHARACTERISTICS OF ANCILLARY SERVICES ............................ 13
Can the Service Be Unbundled? ................................ 13
System-Operator Role ........................................ 15
Location ................................................... 17
Needed for Reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18
Competitive Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 20
4 COSTS AND PRICING PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23
Challenges ................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23
Individual Services ........................................... 26
Summary ................................................ " 36
5 OPERATING-RESERVE BASICS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 39
Application of Operating Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 40
NERC and Regional Definitions and Requirements . . . . . . . . . . . . . . . . .. 40
Data on Generator Outages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 45
6 EMERGING ISSUES ON OPERATING RESERVES ........................... 49
Technical Basis for Reserve Requirements ....................... . 49
Paying for Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 50
Future Data Needs ......................................... " 51
Mixing Functions Within Operating Reserves . . . . . . . . . . . . . . . . . . . . . .. 52
THE NATIONAL REGULA TORY RESEARCH INSTITUTE - VII
TABLE OF CONTENTS - continued
Page
CHAPTER
7 VOLTAGE-CONTROL BASICS .......... , ............................. 55
Transmission-System Voltage Control ..... , .... , . . . . . . . . . . . . . . . .. 58
Voltage-Control Equipment , ............. ,..................... 59
8 EMERGING ISSUES ON VOLTAGE CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 69
Technical Guidance and Compensation Rules. . . . . . . . . . . . . . . . . . . . .. 70
Requirements in a Restructured Industry ... , . . . . . . . . . . . . . . . . . . . . .. 71
9 CONCLUSiONS.................................................. 75
LIST OF ACRONYMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 81
REFERENCES ........................................................ 83
THE NATIONAL REGULA TORY RESEARCH INSTITUTE - VIII
LIST OF TABLES
Page
TABLE
2-1 Key ancillary services and their definitions ....................... . 6
3-1 Characteristics of key ancillary services ......................... . 14
4-1 Services that might be inciuded in systenl control ................. . ')7
1&..1
4-2 Cost-allocation and pricing basis for twelve ancillary services ........ . 37
4-3 Average ancillary-service costs ($/MWh) for twelve U.S. investor-owned
utilities ................................................ . 37
5-1 Size and number of generator outages (>500 MW) from three systems . 46
7-1 Characteristics of voltage-control equipment ..................... . 61
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