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CAISO to Soon File Tariff Changes to Cease Virtual Bidding at Interties
August 30, 2011
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The California ISO will soon be submitting a filing with FERC to remove from its current market design the ability for parties to submit virtual bids at the interties, with such activity to be prohibited as soon as early November 2011 (ER11-4384).
In the interim, to limit what CAISO called market inefficiencies, CAISO has sought a waiver of current tariff provisions such that it would not be required to raise the virtual bidding position limits at the interties to levels above 5 percent.
Absent a waiver from FERC, the tariff requires the virtual bidding position limits for the interties to increase automatically as of October 1 from 5 percent to 25 percent.
CAISO is seeking the waiver, and the future cessation of virtual bidding at interties, due to uplift associated with balanced virtual bids. CAISO said that convergence bidding on the interties increases market uplifts by increasing the real-time imbalance energy offset.
"[T]hese issues are symptomatic of a fundamental current market design shortcoming which requires settlement of intertie transactions in the hour ahead scheduling process while internal supply and demand are settled later in the real-time dispatch. Stakeholders and the ISO have not been able to identify an alternative near term option that effectively addresses the identified issues without creating new market efficiency issues or reliability concerns," CAISO said.
Specifically, CAISO said that the differences in the hour ahead scheduling process and real-time dispatch prices incent virtual bidding strategies that do not serve to converge day-ahead and real-time prices but that contribute to the real-time imbalance energy offset costs allocated to load serving entities and exports.
"The ISO has found that since the start of the ISO locational marginal pricing-based market in 2009, the hour-ahead scheduling process prices have been consistently lower than the real-time dispatch prices. Once convergence bidding was adopted, the persistent average price differential has encouraged the virtual bidders that are not allocated the cost of the real-time imbalance energy offset (i.e., market participants that engage in virtual bids but do not have load or exports) to use internal virtual demand bids and virtual intertie bids in manner that has contributed to the increase in the real-time imbalance energy offset. Through this strategy, a market participant is able to supply (sell) and clear virtual demand (buy) at the same energy price, excluding the impact of congestion and losses in the day-ahead market. In real-time, the market participant is then able to liquidate (sell) virtual demand at the real-time dispatch price, while the intertie supply is liquidated (bought) at the hour-ahead scheduling process price, excluding congestion and losses. This results in the ISO net payment for energy MWh quantity bought by the ISO market through the real-time dispatch multiplied by the difference between the hour-ahead scheduling process price and the real-time dispatch price. While this appears to be a bidding strategy to arbitrage between two prices, the apparent arbitrage does nothing to converge the prices between the hour-ahead scheduling process price and the real-time dispatch price," CAISO said.
In a recent blog posting, citing Department of Market Monitoring data, Constellation NewEnergy said that real-time imbalance energy offset charges, "have totaled about $76 million since February 2011, with about $44 million of that caused by convergence bidding."
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