Hurdle Rates

WECC Energy Imbalance
Market: Hurdle Rate
Development Lessons
WECC MWG
June 18, 2012
Jack Moore, Sr. Consultant
Arne Olson, Partner

Key Takeaways
EIM Background: Why hurdle rates were so
important for EIM analysis
Impact: Hurdle rates can significantly affect flow
across major interfaces
Comparison: Hurdle rate vs. Wheeling rates in tariff
Hurdle Rate process: Importance of first addressing
other (non-transactional) factors that affect flows
Hurdle Rate Level of detail : More precision may not
mean more accuracy
2

Context:
EIM Project Goals and Approach
Overall Goal:
Estimate the societal benefits of implementing an EIM
throughout the West (excluding CAISO and AESO)
Approach:
Societal Benefit
of EIM =
West-wide
production cost
without EIM -
(Benchmark Case)
West-wide
production cost
with EIM
(EIM Case)
Inter-BA transactions were a key driver of the
benefits we were seeking to model
Developed hurdle rate to apply Benchmark Case
(GridView production simulation run)
3

Hurdle Rates can impact regional
flows on major interfaces
“Hurdle Rates” are price adders, in
$/MWh, that production simulation
models use to inhibit trade between
zones
Can greatly affect flows over major
interfaces depending on relative
prices in adjacent zones
• Depending on fuel & CO2 prices,
coal vs. gas, local demand and heat
rates, hurdle rates can make a big
difference in relative cost
Goal: want to represent
institutional and issues that effect
dispatch decisions & resulting
regional transactions
4

Hurdle Rates vs. Wheeling Rates
Many transactions don’t pay wheeling rates on a
transaction basis because they own intertie transmission
or have long-term service
Hurdle rates should also capture other
barriers to trade not reflected in
wheeling rates
• Pancaked losses
• Inefficiencies due to illiquid markets
• Need to use resources to serve native load
Also is interactive: hurdle rates on one
path can affect flows on other paths
Approach: benchmarked simulation to
actual 2006 path flows
• Started with OATT rate schedules & losses, but then adjust as
feasible to make simulation more similar to historical flows
5

Hurdle rate development process:
Benchmark everything else first
1. Define zonal boundaries (for applying hurdles)
2. Select monitored paths to monitor inter-zonal flows
(must have historical data for comparison)
3. Select historical benchmark year to simulate
4. Remove as many (non-hurdle) differences as
possible between historical data and benchmark
simulation
• Transmission, loads & generation, but also hydro levels,
coal & nuclear maintenance schedules, etc.
5. Start with wheeling rates, or other relevant initial set
of hurdle rates
6. Adjust iteratively until satisfied or no longer observing
improvement
6

Precision:
Selecting right level of detail
Possible in production simulation to benchmark with
extremely precise level of detail
• E.g., difference hurdle rates for HLH vs. LLH
Challenge is that more precision may not capture
barriers to trade more accurately, and entail more
work for development
• In extreme case, could specify every hour, but then would be
capturing idiosyncratic issues, not more lasting institutional
barriers & patterns
• Even developing a single set of hurdle rate for the full year
takes multiple iterations, so plan accordingly
• Could deviate from the one hurdle rate for all hours on a
particular path if have strong data & story that explains the
dynamic
7

Monitored Paths Used for
Phase 1 and 2 Hurdle Rate Calibration
(Shown with Phase 2 zone map)
Zone
Name
Zone Description
1 BC British Columbia
2 AB Alberta
3 BPA
BPA + SCL + TWPR + GCPD
+ CHPD + DOPD
4 NWE Northwestern Energy + WAUW
5 NNV
Northern Nevada
(Sierra Pacific Power)
6 PACE PacifiCorp East
7 WACM WAPA Rocky Mts.
8 PSCO Xcel Colorado
9 CA CAISO + CFE
10 NEVP NV Energy
11 AZPS APS
12 NM New Mexico
13 PSE Puget Sound Energy
14 AVA Avista
15 PGN Portland General Electric
16 PACW PacifiCorp West
17 IPC Idaho Power
18 WALC WAPA Lower Colorado
19 SRP Salt River Project
20 TEP Tucson Electric Power
21 BANC BA of N. CA+ Turlock ID
22 EPE El Paso Electric
23 LADWP LA Dept. of Water & Power
24 IID Imperial Irrigation District
Zone 1 Zone 2
Northwest-BC (P3)
COI
(P66)
ID-Northwest
(P14)
Path C
(P20)
PDCI
(P65)
West of
River (P46)
MT-Northwest (P8)
MT-ID
(P18)
IPPDC
(P27) Tot 2B
Tot 2C (P34) Tot 2A
(P35)
(P31)
EOR
(P49)
Bridger We
(P19)
Tot 3
(P36)
No. NM
(P48)
So. NM
(P47)
8

Incremental Improvement in
Simulating Historical 2006 Flows
Results of sequential runs
shows incremental
improvement in historical
year simulation
• Overall average flows now 0.1%
below historical
• Small reductions to absolute
value of difference in simulated
vs. actual flows
Accuracy varies by path
• Accuracy is very good for Westside
paths
• East side flows still higher than
historical, despite large hurdle
rates
• Non-economic factors in model
likely limit greater precision
% Difference from Actual Average Hourly
Flow over 17 WECC Paths (MW)
Avg Hourly Flow
vs. Actual (% Difference)
15%
12%
9%
6%
3%
0%
-3%
-6%
Absolute Value of Hourly Difference in Flow
Average over 17 WECC Paths (MW)
Avg Abs Value of Flow
vs. Actual (MW)
550
500
450
400
350
300
0.1%
below
actual
9

Benchmarking Simulation versus
2006 Actual Hourly Flows
2006 Actual Flows Phase 2 Simulation Flows
Path Flows (MW)
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
P3: NORTHWEST-BC (S-N)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
P8: MONTANA-NORTHWEST (E-W)
3,000
2,000
1,000
0
-1,000
-2,000
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
2,500
2,000
1,500
1,000
500
0
P19: BRIDGER WEST (E-W)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
10,000
8,000
6,000
4,000
2,000
-2,000 0
-4,000
P65+P66: COI & PDCI (N-S)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
P14: IDAHO-NORTHWEST (E-W)
3,000
2,000
1,000
0
-1,000
-2,000
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
2,000
1,500
1,000
500
0
P36: TOT 3 (N-S)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
P46:WEST OF RIVER (WOR) (E-W)
10,000
8,000
6,000
4,000
2,000
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
1,000
500
0
-500
-1,000
P34: TOT 2B (N-S)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Path Flows (MW)
1,000
500
0
-500
-1,000
P31: TOT 2A (N-S)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
(Path flow primary direction in parenthesis)
10

Seasonal Benchmarking:
Average Path Transfers during HLH
11
2006 Historical Flows Phase 2 Simulation Phase 1 Simulation
Path Flows (MW)
2,000
P3: NORTHWEST-BC (S-N)
1,500
1,000
500
0
-500
Winter Spring Summer Fall
Path Flows (MW)
P8: MONTANA-NORTHWEST (E-W)
2,000
1,500
1,000
500
0
Winter Spring Summer Fall
Path Flows (MW)
2,000
P19: BRIDGER WEST (E-W)
1,500
1,000
500
0
Winter Spring Summer Fall
Path Flows (MW)
6,000
5,000
4,000
3,000
2,000
1,000
0
P65+P66: COI & PDCI (N-S)
Winter Spring Summer Fall
Path Flows (MW)
P14: IDAHO-NORTHWEST (E-W)
1,400
1,200
1,000
800
600
400
200
0
Winter Spring Summer Fall
Path Flows (MW)
1,200
1,000
800
600
400
200
0
P36: TOT 3 (N-S)
Winter Spring Summer Fall
Path Flows (MW)
P46:WEST OF RIVER (WOR) (E-W)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Winter Spring Summer Fall
Path Flows (MW)
400
300
200
100
0
-100
-200
P34: TOT 2B (N-S)
Winter Spring Summer Fall
Path Flows (MW)
600
500
400
300
200
100
0
P31: TOT 2A (N-S)
Winter Spring Summer Fall

Seasonal Benchmarking:
Average Path Transfers during LLH
12
2006 Historical Flows Phase 2 Simulation Phase 1 Simulation
Path Flows (MW)
1,500
P3: NORTHWEST-BC (S-N)
1,000
500
0
-500
Winter Spring Summer Fall
Path Flows (MW)
P8: MONTANA-NORTHWEST (E-W)
2,000
1,500
1,000
500
0
Winter Spring Summer Fall
Path Flows (MW)
2,500
P19: BRIDGER WEST (E-W)
2,000
1,500
1,000
500
0
Winter Spring Summer Fall
Path Flows (MW)
6,000
5,000
4,000
3,000
2,000
1,000
0
P65+P66: COI & PDCI (N-S)
Winter Spring Summer Fall
Path Flows (MW)
P14: IDAHO-NORTHWEST (E-W)
1,400
1,200
1,000
800
600
400
200
0
Winter Spring Summer Fall
Path Flows (MW)
1,200
1,000
800
600
400
200
0
P36: TOT 3 (N-S)
Winter Spring Summer Fall
Path Flows (MW)
P46:WEST OF RIVER (WOR) (E-W)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Winter Spring Summer Fall
Path Flows (MW)
500
400
300
200
100
0
-100
-200
P34: TOT 2B (N-S)
Winter Spring Summer Fall
Path Flows (MW)
700
600
500
400
300
200
100
0
P31: TOT 2A (N-S)
Winter Spring Summer Fall

Thank You!
Energy and Environmental Economics, Inc. (E3)
101 Montgomery Street, Suite 1600
San Francisco, CA 94104
Tel 415-391-5100
Web http://www.ethree.com
Arne Olson, Partner (arne@ethree.com)
Jack Moore, Sr. Consultant (jack@ethree.com)

Appendix

Hurdle Rates Used for
Phase 2 Study
Benchmark Case Hurdle
Rates (2010 $/MWh)
Difference from
Tariff Rate + Losses
From To Forward Backward Forward Backward
AB BC $4.72 $3.63 ($5.98)
BPA BC $3.26 $3.63 ($5.98)
NWE BPA $14.72 $3.26 $7.50
IPC BPA $11.36 $3.26 $7.50
BPA NNV $6.44 $6.04
BPA CA $11.44 $7.29 $5.00
NWE WACM $12.22 $7.27 $5.00
PACE NNV $5.06 $6.04
PACE WACM $10.06 $7.27 $5.00
WACM PSCO $14.77 $4.22 $7.50
NNV CA $6.04 $3.88
PACE AZPS $12.56 $3.62 $7.50 ($1.00)
PACE LADWP $40.00 $9.68 $34.94
WACM WALC $14.77 $3.64 $7.50
NNV NEVP $6.04 $3.03
NEVP CA $8.03 $3.88 $5.00
PACE NEVP $12.56 $2.03 $7.50 ($1.00)
NEVP WALC $3.03 $3.64
AZPS CA $9.62 $3.88 $5.00
AZPS NM $2.12 $5.43 ($2.50)
PSCO NM $9.22 $5.43 $5.00
NM WALC $5.43 $3.64
Benchmark Case Hurdle
Rates (2010 $/MWh)
Note: In EIM Case, hurdle rates shown in blue text above are applied during unit commitment but set to zero during
dispatch. Rates in gold text (related to a zone not participating in the EIM) are maintained during both unit
commitment and dispatch.
Difference from
Tariff Rate + Losses
From To Forward Backward Forward Backward
AVA BC $4.07 $3.63 ($5.98)
AVA BPA $4.07 $3.26
IPC AVA $11.36 $4.07 $7.50
NWE AVA $14.72 $4.07 $7.50
AVA PACW $4.07 $5.06
BPA LADWP $8.94 $9.68 $2.50
WACM NM $14.77 $5.43 $7.50
PACE WALC $12.56 $2.64 $7.50 ($1.00)
PACE IPC $5.06 $3.86
PSCO WALC $11.72 $3.64 $7.50
WALC CA $8.64 $3.88 $5.00
PACW CA $10.06 $3.88 $5.00
PACE CA $40.00 $9.68 $34.94
IID CA $4.13 $3.88
LADWP CA $9.68 $3.88
CA BANC $3.88 $5.99
AZPS IID $2.12 $4.13 ($2.50)
AZPS LADWP $9.62 $9.68 $5.00
AZPS SRP $2.12 $2.98 ($2.50)
AZPS TEP $2.12 $4.88 ($2.50)
AZPS WALC $2.12 $3.64 ($2.50)
15

Hurdle Rates Used for
Phase 2 Study (continued)
Additional Hurdle Rates
(continued from previous slide)
Benchmark Case Hurdle
Rates (2010 $/MWh)
Difference from
Tariff Rate + Losses
From To Forward Backward Forward Backward
BPA PACW $3.26 $5.06
BPA PGN $3.26 $1.62
BPA PSE $3.26 $0.96
BPA BANC $8.94 $5.99 $2.50
NM EPE $5.43 $5.63
TEP EPE $4.88 $5.63
IPC NNV $11.36 $6.04 $7.50
IPC PACW $11.36 $5.06 $7.50
IPC PGN $11.36 $1.62 $7.50
NEVP LADWP $8.03 $9.68 $5.00
NNV LADWP $40.00 $9.68 $33.96
NWE PACE $14.72 $5.06 $7.50
PACW PGN $5.06 $1.62
AVA PGN $4.07 $1.62
TEP NM $2.38 $5.43 ($2.50)
SRP CA $7.98 $3.88 $5.00
SRP TEP $2.98 $4.88
SRP WALC $2.98 $3.64
WALC TEP $3.64 $4.88
WALC IID $3.64 $4.13
WALC LADWP $8.64 $9.68 $5.00
Note: In EIM Case, hurdle rates shown in blue text above are
applied during unit commitment but set to zero during dispatch.
Phase 2 calibrated bidirectional
hurdle rates for 64 different
interfaces (vs. 25 in Phase 1)
For new interfaces for
Phase 2 (esp. in NW and AZ)
stayed close to OATT tariff rates
unless flow results available to
indicate otherwise
In calibration, added $2-8
premium to tariff rates to
reduce certain flows:
• N-S flows on East side
• MT/ID into NW
• CA imports
• For PACE->CA, used large hurdle
rate to make flows resemble 2006
actual when IPP gen is offline
16

Creation of 2006 Benchmark Case
WECC 2020 PC0 case rolled back to 2006 by removing
major generation and transmission to create a 2006
system topology
• System changes made by WECC staff
• Not possible to precisely reconfigure PROMOD database back to
2006 – may be small inaccuracies where upgrades are complex
(e.g., north of Salt Lake City)
Incorporated historical data from WECC and NREL: Fuel
prices, hydro availability, hourly wind & load profiles
Modified reserve requirements
Created 24 zones by assigning busses to a zone and
grouping lines that interconnect zones
Implemented hurdle rates that affect transactions
between zones & adjusted until major path flows and
gen dispatch match 2006 actual
17

Phase 2 Results
$141MM in annual
savings from EIM for
2020
• 0.7% reduction in
total production costs
• Ranges from $54-233MM
among all cases run
Lower overall savings
compared to Phase 1
• Phase 1 assumed more
optimization of operations
Millions of 2010$
150
100
50
0
Phase 2 EIM Benefits
(MM 2010 Dollars)
$50MM
$141MM
2006 EIM 2020 EIM
18