“Too Much of a Good Thing” Revisited

In “Renewable Electric Power—Too Much of a Good Thing: Looking At ERCOT,” Dialogue, United States Association for Energy Economics, 2009 August, I looked at the impact that wind was having on the dispatch prices in ERCOT, the Independent System Operator for much of Texas.  Prices were negative during about 23% of the month of April 2009 in West Texas, the region dominated by wind generation and during about 1% of the month in the rest of ERCOT, a region dominated by fossil generation.

This week my Dialogue article was brought back to mind by two messages I received, one on the IEEE list server PowerGlobe the second a ClimateWires article sent to me by a friend.  Both dealt with the issue of “grid operation during very high levels of wind energy”, the subject line of the IEEE PowerGlobe message.  The ClimateWires article deals with Bonneville Power Authority’s reaction to such situations.

My reaction to both messages is that we need a true spot price for electricity.  I once heard that a spot commodity price was for the commodity delivered on the spot out of inventory, before more of the commodity can be produced.  We don’t have an inventory of electricity, but we do have an inventory of production plant.  So, combining the concepts, the spot price of electricity would be applicable to deliveries made before we can change the operating levels of our production plants.  That may mean a different price for each second.  Certainly a different price for each minute.

But a spot price should apply to a different quantity than might the dispatch prices developed by independent system operators (ISOs) like ERCOT.  The dispatch prices should apply to quantity specified by bidders in the ISOs.  Any variation from that quantity, up or down, should be priced at the spot market.  Further, the spot price should be allowed to vary greatly from the dispatch price.  Otherwise the weighted average price of the total delivery might be seemingly insignificantly different from the dispatch price, as shown in the following table.

Description MWH Price Extension
Dispatch 100 $40.00  $     4,000.00
Spot -5 $30.00  $      (150.00)
Metered 95 $40.53  $     3,850.00


The basic assumption is that the generator committed to providing 100 MWH at a price of $40.00/MWH, and that the ISO accepted that price.  As it turned out, there actually was a surplus, such that the spot price was reduced to $30.00/MWH.  For some reason, which irrelevant for this analysis, the generator only delivered 95 MWH through the meter during this period.  Thus, the generator effectively bought 5 MWH in the spot market to achieve its dispatch obligation of 100 MWH.  The effect was that the 95 MWH that were actually delivered had a unit price of $40.53/MWH.  Some would say that the generator got lucky in this situation.  An arrogant generator might say that he was smart and dispatched down his generator.  The point that I am trying to make with the table is that the average price experienced by the generator is only 1.3% different from the $40.00/MWH dispatch price.

Effect on Average Price of Spot Volumes and Spot Prices

Given 100 MWH Dispatched at $40/MWH


  -$50 $30 $40 $200 $2,000
-10 $50.00 $41.11 $40.00 $22.22 -$177
-5 $44.74 $40.53 $40.00 $31.58 -$63.16
0 $40.00 $40.00 $40.00 $40.00 $40.00
5 $35.71 $39.52 $40.00 $47.62 $133.33
10 $31.82 $39.09 $40.00 $54.55 $218.18


The next table shows the effect of making a variety of spot transactions at a variety of prices, including negative prices and prices many times the dispatch price.  I note that the average price stays at the $40.00/MWH dispatch price when the spot price stays at $40.00/MWH or when the spot delivery stays at 0 MWH.  The average price from the first table appears in this table at the price of $30.00/MWH and a spot delivery of -5 MWH.

Generators prefer to be in the top left portion of the table or the bottom right, first where they are short when prices are low and second when they are long when prices are high.  Consumers prefer to be in the top right portion of the table or the bottom left, first where they consume less than the amount entered into the auction and the auction price is high and second where thy consumer more than the amount entered into the auction and the auction price is low.