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Electricity Pricing Breakdown: Ancillary Services Cost Components (Article 4 of 5)

January 20, 2014

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.

GDF SUEZ Pyramid

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 - ERCOT

Regulation Down Charge pays operators who can provide frequency regulation service to reduce generation output. This variable carries a market-based risk that can be hedged through bilateral transactions.

Regulation Up Charge pays operators who can provide frequency regulation service to increase generation output. This variable carries a market-based risk that can be hedged through bilateral transactions.

Non-Spinning Reserve Charge pays generators who are standing by, ready to run, within a 30-minute notice. This variable carries a market-based risk that can be hedged through bilateral transactions.

Responsive Reserve Charge supports grid reliability by ensuring generation reserves are available in the event two of the largest units trip offline. This variable carries a market-based risk that can be hedged through bilateral transactions.

Administrative Charges pay for the overhead and operational expenses involved in running ERCOT. This variable carries a non-market-based risk that can be mitigated through risk premiums and/or contract language. Note that this cost component is subject to changes in the law.

Ancillary Service Capacity Replaced – Failure to Provide is the fee charged to qualified scheduling entities for failure to provide ancillaries. This variable carries a non-market-based risk that can be mitigated through risk premiums.

Base Point Deviation Payment is a credit generated from penalties on generators who deviate from ERCOT dispatch instructions. This credit carries a non-market-based risk and is determined by usage.

Black Start Capacity Charge pays generators who have the ability to self-start units without energy from the grid. This variable carries a non-market-based risk that can be mitigated through risk premiums.

Congestion Revenue Rights: ISO Amounts is a component that allocates auction revenues to qualified scheduling entities based on load ratios. This credit carries a hybrid of market-based and non-market-based risk and is determined by usage and price depends on auction reserves. Congestion Revenue Rights: Zonal Amount is a component that allocates auction revenues to qualified scheduling entities based on zonal load ratios. This credit carries a hybrid of market-based and non-market-based risk. It’s determined by usage and price ranges depending on auction revenues and zone.

Cost Allocation for Ancillary Services Procurement covers cost adjustments for market-based ancillary services cancelled or procured by ERCOT. This variable carries a non-market-based risk and pricing is based on usage.

Day-Ahead Market Make-Whole Charge is a provision for generators offering in the day-ahead market. This variable carries a non-market-based risk and pricing is based on usage.

Emergency Response Service Charge, also known as interruptible load service, is designed to cover emergency operating procedures to prevent rolling blackouts. This variable carries a non-market-based risk and pricing is based on usage.

Emergency Power Increase Charge pays generators who are asked to increase output on an emergency basis. This includes unannounced testing. This variable carries a non-market-based risk and pricing is based on usage. Reliability Must-Run Charge pays reliability must-run generators to provide voltage support or stability or to help manage localized transmission constraints. This variable carries a non-market-based risk and pricing is based on usage.

Reliability Unit Commitment (RUC) Capacity Shortfall Charge is a fee collected for not procuring energy in support of load obligations. It covers the cost of being short on energy in real time. This variable carries a non-market-based risk that can be hedged. For index products, this variable is a required pass-through item.

RUC Clawback Payment is a payment to qualified scheduling entities for overpayments made to generators for RUC deployments. This credit carries a non-market-based risk and pricing is based on usage.

RUC Decommitment is a charge to qualified scheduling entities to compensate generators for cancelling a RUC deployment. This variable carries a non-market-based risk and pricing is based on usage.

RUC Make-Whole Uplift is a charge to qualified scheduling entities to compensate generators for providing RUC services that cannot be collected directly from shortfall charges. This variable carries a non-market-based risk and pricing is based on usage. Renewable Portfolio Standards support the purchase of renewable energy to meet state mandates. This variable carries a market-based risk that can be hedged and pricing is based on usage.

Unaccounted for Energy is a charge by the grid operator to recover lost energy not otherwise accounted for. This variable carries a hybrid of market-based and non-market-based risk that can be hedged. Pricing is based on usage and is determined by a percentage of energy prices.

Uplift Charge (Real-Time and Day-Ahead Partial Payments) is a fee applied to qualified scheduling entities by ERCOT to cover defaulting counterparties. This variable carries a non-market-based risk that can be mitigated through risk premiums. Pricing is determined by usage.

Voltage Support Charge is the fee to maintain transmission voltage levels for reliability purposes. This variable carries a non-market-based risk that can be mitigated and pricing is based on usage.

Real Time Revenue Neutrality Adjustment Charge is a fee imposed to maintain ERCOT neutrality. This variable carries a non-market-based risk And pricing is based on usage.