Ancillary Services Cost Components - PJM
January 20, 2014
Electricity Pricing Breakdown: Ancillary Services Cost Components (Article 4 of 5)
Electricity Pricing Breakdown is a new series in Market Monitor designed to give buyers a better understanding of the many cost components that drive the total price large commercial and industrial customers ultimately pay for electricity.
The last article in the series focused on capacity costs. In market structures where capacity is a factor, this pricing variable helps ensure enough power to maintain grid reliability during periods of peak demand.
This week’s edition focuses on the components involved in ancillary services, which are required to ensure reliable operation of the power system. These variables are located in the upper portion of the energy pyramid and can make up anywhere from 3 percent to 7 percent of the total electric bill.
Ancillary services cost components vary from market to market and can be presented differently by each supplier. This article outlines the variables that GDF SUEZ Energy Resources includes in its pricing proposals in the four competitive markets the company serves.
Each cost component is covered in detail, outlining its purpose and the type of risk it carries. Risk can be categorized as market-based, meaning the value is determined by market forces; non-market-based, meaning the value is determined by tariff or settlement protocol; or a hybrid of market-based and non-market-based factors. The article also covers how the risk can be mitigated – hedged or through risk premiums/credits or in contract language – and how pricing is determined.
When reviewing product offers, keep in mind that other suppliers may categorize certain charges differently or omit them entirely from a proposal.
In PJM, for instance, transmission enhancement charges are sometimes included with transmission costs and renewable portfolio standards are sometimes excluded completely. Credits are another example. GDF SUEZ Energy Resources returns many credits to customers in the fixed price/index adder or as a pass-through item. However, some suppliers retain these credits and omit them from pricing proposals altogether.
To conduct an accurate comparison, be sure to account for all of the costs involved in ancillary services in your market and understand how the supplier has treated them in the pricing offer. For an in-depth look at the ancillary services cost components included by GDF SUEZ Energy Resources by region, click on one of the four competitive markets below:
Ancillary Services Cost Components- PJM
Regulation and Frequency Response Service covers the cost to balance resources and maintain grid frequency, allowing generators to ramp up and down instantaneously. It’s used primarily to correct short-term changes in electricity use that could impact grid stability. This component carries a market-based risk that can be hedged. Pricing is determined by usage patterns.
Synchronized/Spinning Reserve is a charge to allow generators and demand-response resources that have the capability to ramp up within 10 minutes to balance generation resources. It’s used to supply power if the grid has an unexpected need for additional generation resources on short notice. This variable carries a market-based risk and pricing is determined by usage.
Day-Ahead Scheduling Reserve, which is also known as non-spin, is a fee that allows generators and demand-response resources that have the capability to ramp up within 30 minutes to balance generation resources. It’s used to ensure that generation and demand-response resources can meet reserve requirements on a forward basis. This variable carries a market-based risk and pricing is determined by usage.
Operating Reserve is a charge that helps deliver adequate operating reserve by providing spot-market support, ensuring pool-scheduled generation, and making certain demand resources are guaranteed to fully recover their daily offer amounts. Day-ahead operating reserves are assessed to all day-ahead load schedules. Real-time/balancing operating reserves are assessed on deviations between day-ahead and actual usage.
Pricing depends on zone, product type, and usage. In all cases, day-ahead operating reserves are much less volatile and less expensive than balancing operating reserves.
Reactive Supply and Voltage Control from Generation and Other Sources is a charge paid to generators to maintain acceptable voltage levels on the transmission grid. This variable carries a non-market-based risk and pricing is based on demand.
PJM Scheduling, System Control & Dispatch Service covers the administrative fees associated with the overhead of running the independent system operator. This variable carries a non-market-based risk and pricing is based on usage.
Transmission Owner Scheduling, System Control, & Dispatch Service is a fee paid to transmission owners for operating the transmission system. Pricing is based on usage.
Black Start Service is a fee paid to generators that have the ability to self-start without the aid of the existing transmission grid. Its purpose is to ensure reliable restoration of the grid following a shutdown of the PJM transmission system. This variable carries a non-market-based risk.. Pricing is based on demand and varies by zone.
It’s important to note that costs for this particular component are expected to change materially starting in 2015. Many existing black start units have announced plans to retire, and PJM is currently seeking proposals to ensure adequate services.
Generation Deactivation/Reliability Must Run is a make-whole payment to generators that have announced intent to retire but are required to remain online for reliability purposes. This variable carries a non-market-based risk. Pricing is based on demand and varies by zone.
Note that with a fixed-price product, GDF SUEZ Energy Resources provides this cost component as a pass-through charge to customers. This delivers customers the benefit of any reduction or elimination of the cost and provides transparency in a component that cannot be hedged. Some suppliers claim to fix the cost of generation deactivation – which, in many cases, is zero – by referencing the Material Adverse Change in contract language. In such an agreement, charges can be billed. However, if those charges are reduced or eliminated during the contract term, the difference is typically not returned to the customer.
Transmission Enhancement Charges cover costs paid to transmission owners for enhancements to constrained areas in the PJM grid. This charge can result in a credit when transmission owners include enhancement costs in their rates. It carries a non-market-based risk that can be mitigated through risk premiums. Pricing is based on demand and varies by zone and customer usage patterns.
When considering pricing offers, it’s important to understand how a supplier categorizes this particular cost component. GDF SUEZ Energy Resources considers transmission enhancements an ancillary services charge. However, it is not uncommon for a supplier to include this variable as a transmission cost component.
Auction Revenue Rights are entitlements allocated to firm transmission service customers from revenues generated from the annual Financial Transmission Rights auctions. This variable carries a market-based risk that can be mitigated through risk premiums or credits. Pricing is based on demand and varies by zone and customer usage patterns.
Marginal Loss Overcollection Credit is a settlement mechanism for the overcollection of line losses. Locational marginal pricing is set based on the marginal megawatt flowing over a transmission path, but actual costs paid to generators are based on average flow on a transmission path. This variable carries a hybrid of market-based and non-market-based risk that can be mitigated through risk premiums or credits. Pricing is based on usage and is highly correlated with market prices.
Marginal Loss De-rate is designed to avoid double counting of losses on transmission facilities that are both included in the PJM network model and in the utility state filed tariff loss factors. This variable carries a hybrid of market-based and non-market based risk that can be hedged or mitigated through risk premiums or credits. Pricing is based on usage and varies by zone and with market prices.
Note that this component can be presented by suppliers by lowering the retail adder with the loss multiplier containing the full tariff losses or by lowering the loss multiplier and correspondingly increasing the retail adder.
Renewable Portfolio Standards is the charge to compensate for renewable energy purchases mandated to meet state minimum requirements. This variable carries a hybrid of market-based and non-market-based risk. Pricing is based on usage and varies by state.
Note that some suppliers treat renewable portfolio standards as a separate pass-through line item. In some states, this component is charged directly by the utility.