Energy Interchange Markets–Often Designed to Fail

I participated on the NAESB IIPTF[1] while it met during 2003-2005.  I argued then that there should be a cash payment for inadvertent interchange and that the cash payment should be differentiated over time and across geography.[2]  About the same time I participated in the InPowerG discussion of ABT pricing of UI[3], making similar arguments.[4]

My concern before the IIPTF was that parties could game the market.  First the party could buying cheap electricity upstream of a constraint.  The party could then sell expensive electricity downstream of the constraint.  The party could then arrange a cheap but ineffectual parallel path around the constraint.  This issue was described in the title of my first published article[5] some 15 years earlier.

Most other markets would look at a set of transactions as forms of efficiency inducing arbitrage.  The purchases would raise the price in the cheap markets.  The sales would depress prices in the expensive market.  The transportation agreement would raise the price of transport, further lowering the price differential between the high priced area and the low priced area.  But, the rigid terms of most tariffs just produced a profit for those entities willing to operate in this shadowy market.  The name Enron evokes such shadowy images, especially when paired with the CaISO[6].

But CaISO was not the only advanced market that found itself subject to such arbitrage.  PJM suffered some of the same loop flow issues when Midwest generation contracted with AEP and VEP, effectively moving electricity south around the PJM internal constraints between low cost Pittsburgh and the high cost Washington/Baltimore area.  PJM provided a similar southern loop for marketers in New York, who bought cheap electricity at the Niagara frontier, moved it west and south and back east toward the New York City area.

In recent years, FERC has been advocating Memorandums of Understanding that create Energy Imbalance Mechanisms.  I believe these MOUs and EIMs will fail to improve the system, and could contribute to problems on the network unless the associated cash outs use geographically differentiated prices.  For instance, the disastrous 2012 July 30 & 31 blackouts in India have been attributed to the lack of geographic differentiation in India’s energy imbalance mechanism[7].  Customers and generators downstream of the constraint faced the same price (once high, once low) as customers and generators upstream of the constraint (again, once high, once low). [8]

From the discussions I have heard about the MOUs and the EIMs, they seem to be designed to fail, not learning from the experience in India of a similar pricing mechanism, ABT pricing of UI.  The MOUs and the EIMs need to price the energy imbalances on a geographically differentiated basis with a price that changes automatically with the spot conditions.


[1] North American Energy Standards Board Inadvertent Interchange Payback Task Force

[2] At least one party criticized my approach because I generally used an exponential formula, which nominally prevented the price from going negative.  My research for “Renewable Electric Power—Too Much of a Good Thing: Looking At ERCOT,” Dialogue, United States Association for Energy Economics, 2009 August, convinced me that negative prices could sometimes be appropriate.  Accordingly, I have recently used a hyperbolic sine as and a price adjustment factor.  The hyperbolic sine is the difference between two exponential formulas, one with a positive exponent, the other with a negative exponent.  See

[3] Availability Based Tariff and Unscheduled Interchange

[4] for a partial digest of those discussions.

[5] “Tie Riding Freeloaders–The True Impediment to Transmission Access,” Public Utilities Fortnightly, 1989 December 21.

[6] California Independent System Operator

[7] See my blog, which includes two separate comments added by Soonee, the CEO of the Indian grid operator.

[8] The price differential issues included reactive power generation and usage.  India’s ABT has a section that prices reactive energy, but not sufficiently to induce better responses from generators and loads.