Challenges and Opportunities to Bring Prices to

Devices
Nivad Navid, Senior Member
Midwest ISO, Market Development and Analysis Department
P.O. Box 4202, Carmel Indiana, 46082-4202
Abstract The current trends encourage the expansion of
demand response in power system operation. Although
operational strategies for various demand response classes
(industrial, commercial and residential) are different, a set of
common opportunities and challenges face the integration of
demand response resources into energy market and operating
reserve mechanisms.
I. INTRODUCTION
Current market mechanisms in Regional Transmission
Operator (RTO) or Independent System Operator (ISO) are
oriented around wholesale energy transactions. The main
players in the wholesale markets are generation resources, Load
Serving Entities (LSE) and brokers. Demand Response
Resource (DRR) participates in this market as a generation
resource through LSE or other agents such as aggregators with
a diverse business relationship with LSEs. The possibility of
large industrial or commercial load participation in the
wholesale market exists (as an exception).
Demand response can be represented in wholesale markets as a
supply resource or a demand resource. Each alternate approach
has its own difficulties. As a supply resource, the output of a
demand response resource cannot simply be measured through
revenue quality meters as a generator is. Whats required to
measure demand response is to consider the counterfactual:
what would have been consumed by the end-use customer but
for the fact that the resource was called by the system operator
and the load dropped off. These Measurement & Verification
(M&V) protocols are permeated with accuracy issues. On the
other hand, if used as a demand resource, the M&V issues are
nonexistent. The prevalent issues are: how is the wholesale
Locational Marginal Prices (LMP), and possibly the other
wholesale price components mentioned below, translated to
retail dynamic rates, and how can the system operator expect
retail customers to respond to time varying LMPs (which can
vary every 5 minutes in the real-time market)? Its probably
not reasonable to expect much price sensitivity in the real-time
markets but if there is some elasticity, how does the system
operator account for this in his Security Constraint Unit
Commitment (SCUC) and/or Security Constraint Economic
Dispatch (SCED) algorithms to avoid excessive commitment
and dispatch.
II. OPPORTUNITIES
Load reduction can be viewed as an effective tool to
alter the need for expensive generation resources supplying the
energy needs or ancillary services. Figure 1 demonstrates the
basic principal for this statement as the intersection of the
altered demand curve and the supply curve.

Figure 1: Impact of DRR on Clearing Prices
The immediate impact is the reduction in the cleared prices
which can be complemented by reduction in congestion
charges. The operational cost of DRR during the deployment
period could be very small. However, differing the energy
consumption (as a whole or in parts) to other periods could
cause some discomfort to the users or some charges to specific
users (e.g., industrial load will lose some production
opportunity for not consuming the energy).
When DRR participates in providing reserves (e.g.,
contingency reserve) it will provide the required reserve
978-1-4577-2159-5/12/$31.00 2011 IEEE
capacity without any interruption of energy and will be
deployed only in the rare contingency events. Add to this list a
range of flexibilities that controllable load can provide to the
system reliability.
III. CHALLENGES: BUSINESS STRUCTURE
Load reduction from demand resources is a critical
component of efficient market operation. This load reduction,
while represented in the wholesale market by the market
participant (typically the LSE or aggregator), occurs at the end-
use customer level (retail customer). Retail customers are under
the jurisdictional control of the retail regulatory body (typically
state commissions). Hence, the level of demand response
participation at the wholesale level critically depends upon state
or retail regulatory bodies. At times this demand response
participation can be at odds with the regulatory compact
between the LSE and the retail regulatory body. These
aforementioned issues need to be successfully addressed to see
increased demand response participation.
IV. CHALLENGES: COMPLEX CHARGE / PRICE MECHANISM
DRR control (or response) strategies are based on
shifting / differing part of load to other periods [1]. Assuming
the full recovery of the saved energy, the benefit to LSE will be
the LMP difference between the periods that load is cut and the
recovery period. However, this is not the full picture. In a
wholesale energy market there are multiple charges. First of all,
real-time LMP has three components: energy, congestion and
losses. Shifting energy could impact congestion and losses.
Second, in a two settlement system one should look at the
impacts on day ahead and real-time prices not only the real-
time components. Third, there are a number of scenarios that
other charges or payments in the form of uplifts or make-whole
payments are administered by RTO. The contribution of these
changes to LSE should be considered, too. Forth, the changes to
the ancillary services and their charges need to be accounted
for. Fifth, LSEs are not purchasing their entire needs from the
market. Over half of their needs are fulfilled through bilateral
transactions with their specific financial parameters. If needed,
changes in Financial Transmission Right (FTR) and capacity
charges need to be considered.
V. CHALLENGES: UNIQUE BEHAVIOR
DRR dynamics have unique characteristics that
distinguish it from conventional generation resources. Post
deployment of the DRR there is a transitory period in which
DRR will consume more energy compare to the scenario that
there was not any deployment. The magnitude of the excess
energy and its dynamics is driven by a number of factors
including type of load, deployment strategy, the weather
conditions and the time of the day. This excess energy can be
viewed as an extra load added to the system which in turn will
alter the market clearing prices both in day ahead and real time
as long as it exists. Practically the LMP can be increased. On a
system level other loads will have to pay for this potential
increase in the same token that they benefited from deployment
of the DRR which could reduce the LMPs. In small penetration
level of DRRs this could be viewed as a wash out however,
when DRRs have significant role in clearing prices the
optimization processes in Day Ahead and Real Time should
take into account the excess energy which will alter the
deployment strategies.
VI. CONCLUSIONS
There is no magic black box to convert real-time
LMP to a retail value. RTO posses some tools in wholesale
market level, however it lacks sufficient information and
influence in the business model between LSE and end users.
This paper attempts to address some of the opportunities to
fill the gap between real-time (or Day Ahead) LMP and the
end-user/rate-payers costs/savings.
REFERENCES
[1] Load Model and control of residential appliances, Nivad
Navid, PhD thesis McGill University, Montreal, 1995.
[2] Challenges in Mapping of Wholesale to Retail Prices, Nivad
Navid and Michael Robinson Presented at IEEE PES GM
Detroit 2011.
BIOGRAPHY
Nivad Navid is consulting engineer in Market Development
and Analysis department at Midwest ISO. Nivad held various
positions in MISO working on reliability, market and seams
projects. Before joining MISO, he held positions in Siemens,
CAE Electronics and Power engineering consultants. He has
broad experience ranging a wide variety from the utility
operation to the system planning, operation, reliability,
security and design. He received his PhD from McGill
University, Montreal, Canada. He is a senior member of
IEEE.