Spot pricing of electricity and ancillary services in a competitive California market Page: 2 of 10

Spot Pricing of Electricity and Ancillary Services in a Competitive
California Market
Afzal S. Siddiqui, Chris Marnay, and Mark Khavkin
Environmental Energy Technologies Division
Ernest Orlando Lawrence Berkeley National Laboratory
Berkeley, California 94720
email: ASSiddiqui~lbl.gov

Abstract
Typically, in competitive electricity markets, the verli-
cally integrated iilities that were responsible for ensur-
ing system reliability in their own service territories, or
groups of territories, cease to exist. The burden falls to
an independent system operator (ISO) to ensure that
enough ancillary services (AS) are available for safe,
stable, and reliable operation of the grid, typically de-
fined, in part, as compliance with officially approved
engineering specifications for minimum levels of AS.
In order to characterize the behavior of market partic-
ipanis (generators, retailers, and an ISO) in a com-
pelitive electricity market with reliability requirements,
spol markets for both electricity and AS are modeled.
By assuming that each participant seeks to maximize
its wealth and that all markets clear, we solve for the
optimal quantities of electricity and AS traded in the
spol market by all participants, as well as the market
clearing prices for each.
Keywords: Ancillary services, competitive electric-
ily markets, equilibrium pricing.
1. Introduction
Once thought of as a "natural monopoly" industry,
i.e., one in which cost perpetually declines with out-
put, thereby rendering competition infeasible, the elec-
tric power sector is now undergoing policy and regu-
latory changes intended to foster competition. In the
U. S., the electric power industry has predominantly
been vertically integrated with its various functions
conglomerated under the auspices of an investor-owned
utility company that holds an exclusive franchise to
provide services to a certain geographic area. Accord-
ing to [1], the four main electricity supply functions
provided by a utility are:
* generation: conversion of primary energy to elec-
tricity.

. transmission: transportation of electricity along
meshed high-voltage wires to substations.
" distribution: transportation of electricity along
low-voltage wires to customer meters.
" retailing: arrangements for billing and demand
management.
California was among the first U. S. states to deregu-
late its electric power sector. Similar to electricity mar-
ket reforms in other regions of the world, the changes
in California's industry included unbundling the vari-
ous services previously offered by its three major in-
cumbent investor-owned electricity utilities. Now, in-
stead of allowing these utilities to control all aspects
of electricity supply, California state legislators passed
Assembly Bill (AB) 1890 which separates the industry
into:
1. a competitive part, consisting of the generation
and retail functions, and
2. a regulated monopoly structure that retained con-
trol over the transmission and distribution sys-
tems.
Two non-profit corporations were created: the Cali-
fornia Independent System Operator (CAISO) and the
California Power Exchange (CalPX). The former pro-
vides system control to all electricity suppliers, while
the latter operates forward competitive energy markets
from which distribution companies must buy electric-
ity for their retained retail customers for a transitional
period, and into which generators sell. In addition, the
CAISO manages a real-time imbalance energy market,
which is essentially a spot market for wholesale elec-
tricity. AS are required under North American Elec-
tric Reliability Council (NERC) and Western System
Coordinating Council (WSCC) rules to balance energy
and safeguard the reliability of the grid. AS are also
procured by the CAISO in competitive day- and hour-
ahead markets.

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Siddiqui, A.S.; Marnay, C. & Khavkin, M. Spot pricing of electricity and ancillary services in a competitive California market, article, November 1, 2000; California. (digital.library.unt.edu/ark:/67531/metadc724831/m1/2/ocr/: accessed October 18, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.

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