IEEE Power & Energy Magazine - May/June 2016 - 75

circuit. A reliability market would be for reliability services
such as voltage control or congestion relief.) Fundamentally,
the gap between long-term investment (in power plant construction) and short-term energy commitments (meaning
regulatory approval for long-term power purchase agreements and no market vehicle for long-term sales) led to a
need for a mechanism to substitute for integrated planning
in the vertical utility model, thus creating capacity markets.
The TE community recognizes this and thus the appearance of the term "capacity market" in many of the relevant
literature and discussions.
Another gap is the one between long-term bilateral contracts for energy and the day-ahead/day-at-a-time markets
in the ISO markets. It is the responsibility of the contracting parties in the bilateral markets to ensure physical deliverability or to hedge against congestion and curtailment.
Market participants invest in sophisticated software tools to
deal with these issues. There is, for the most part, no way
to accomplish multiday arrangements in the ISO market or
to arrange for hedging (there are some hedging products
available as "virtual" transactions in some markets; for
instance, a swap of nodal prices is an effective congestion
hedge in the virtual day-ahead market). If TE in retail is to
come about including provisions for bilateral deals, this gap
will have to be addressed somehow.
There also has to be an alignment between the wholesale
market products and the relevant retail market products, with
the physical capabilities and responsiveness of the different
resources taken into account. Timing of bidding, market
submissions, and market closure/notification in the ISO
and DSO markets have to be aligned to allow participants
to make decisions and to allow the hierarchical markets to
operate in an integrated way. The article by Kristov et al. in
this issue alludes to this. Accomplishing this will require
not only market design and technical coordination but
regulatory coordination. The Supreme Court made it clear
in January of this year that the Federal Energy Regulatory
Commission (FERC) has the jurisdiction and authority to
regulate retail resources' participation in wholesale markets
in the case of challenges to FERC Order 745 on DR pricing.
In the same ruling, the court reaffirmed that state regulatory bodies hold sway over retail tariffs. Thus, FERC has to
approve wholesale product tariffs by an ISO including those
that will integrate DERs into wholesale markets. State regulators have to approve DSO market products that are local
and not integrated into wholesale markets, as well as how
dynamic pricing is applied to customers, how local capacity
markets should work, and so on.
A major issue that has not been addressed in any of the
articles or discussions arises from the different response
times and variability of the different resources. And an
important aspect of this arises from the Internet of Things
(IoT) and the probability that many DERs will operate fully
automatically in the market in a preprogrammed way or will
simply adjust to market prices without actually being bidders
may/june 2016

in the market. Favorite examples include home appliances
smart enough to delay operations based on dynamic pricing;
smart EV charging; and smart commercial heating, ventilation, and air-conditioning (HVAC) systems. Many DERs
will be capable of responding to controls and prices more
rapidly than conventional generation, and the ISO-DSO
markets and operations have to take this into account; the
DSO price is, in effect, a control signal to future smart enduse devices connected via the IoT. A control systems analysis of the market design and operation is needed.
Finally, another challenge will be faced by a high fraction
of participating resources that effectively have zero marginal
cost for a given market product. The wholesale markets in
the United States have, under FERC standard market design
and subsequent rulings, evolved to a bidding process for
generators that is largely driven by the marginal production
cost of the participating generators. So-called "strategic bidding" is a no-no that will draw the attention of the market
monitor. This approach is consistent with economic theory
and sound market design. Today, renewable resources such
as wind typically bid as price takers in the market, meaning
that a bid at zero will realize the market clearing price at the
highest bid from a conventional generator for the wind farm.
But, when there is excess generation (typically at night) from
wind, nuclear, and hydro resources (meaning total generation is greater than load), then some generation has to be
curtailed for basic reliability. Wind generators will bid negative prices to ensure that their bids are accepted so that they
can collect the production tax credit of US$35/MWh. Similar bidding behavior can occur from wind farms subject to
transmission curtailment.
Many DERs have a near-zero marginal cost of production;
adapting today's wholesale market paradigms to a distribution
market characterized by many resources with zero marginal
cost or only "convenience" costs (as with smart EV charging)
will likely require new thinking. The market may still clear
but with only a small subset of "conventional" resources such
as CHP driving the pricing; therefore, socially acceptable
results are not guaranteed.
Let's walk through a (very) simple example of wholesale
market and end use participant behavior and effects. At a
given instant in time, there is an imbalance between generation and load as load is a little higher than the generation in the wholesale region. The ISO sees this and calls for
more generation that, in the process, increases the spot or
real-time price for energy by buying power from a generator
in the real-time market. It may take the generator 5 min to
respond to this call. But if that price increase is "published"
by the ISO, and a DER on the distribution system such as a
BESS "sees" it and is paying for/getting paid for energy at
the spot price, it might respond in seconds by stopping charging or starting discharging. Similarly, a depot of electric
delivery vans might suspend charging. The net effect is that
the imbalance is restored before the generator responds. If
enough DERs respond like this autonomously, an imbalance
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Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - May/June 2016

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