Performance-based regulation: Maximizing value through markets

Transmission system operators must maintain a close balance of electrical supply and demand. Any imbalances in supply and demand are measured through a calculated Area Control Error (ACE). System operators typically employ an ancillary service known as “regulation” in order to counteract short term deviations in the supply and demand balance and thereby control the ACE on a real time basis. Regulation has historically been provided by generation resources capable of altering their output automatically in response to a control signal received from the system operator. As the supply of power generation transitions to newer technologies, the demands on ACE control and the capabilities of regulation resources have also shifted. Optimal regulation control must consider these capabilities, and potential limitations, to ensure full utilization of resources on control. Changes to traditional control systems and market structures can help to maximize the use of regulation resources to lower the total cost of regulation while maintaining reliable system control. These changes should focus on the performance of each resource and provide compensation that aligns with that performance. The current regulation structure in PJM provides uniform payments to all resources after they meet the minimum testing requirements. This structure has led to a response characteristic that does not place the highest priority on accuracy of the response and the benefits to system control. PJM must compensate for this less-than-optimal performance on the part of some resources by procuring a higher level of regulation capacity to ensure compliance with the NERC reliability criteria. Higher regulation MW requirements directly increase the cost of the regulation service and require more units to operate away from their most economically efficient energy setpoints. The changes to PJM´s regulation market focus on procuring the resources that have the highest value to system control. T- e current market only considers value based on a low cost. However, to properly calculate value, both cost and the accuracy of response relative to PJM´s control signals (i.e. “performance”) must be considered. By increasing the overall performance of the regulation resources, the total amount of regulation MW needed will drop. This results in more units, especially those with low regulation performance, operating primarily in the energy market which utilizes these resources more efficiently. With each resource operating in the market where it provides the most value, lower overall cost for both regulation and energy can be achieved. All resources, including demand response, have access to the regulation market. The performance-based changes will tend to transition the resources providing regulation from those with slower response characteristics to those with fast ramp rates and shorter turn-around times. As additional high-performing resources connect to the system over the next several years, the use of traditional steam units for regulation will likely be limited. The implementation of performance-based regulation also aligns with the increased need for regulation to effectively manage the rapid supply swings that can occur with higher penetration of intermittent resources. Better performance in the regulation market will counteract the need to raise the amount of regulation procured that would otherwise occur with these supply changes. Therefore, now is the right time to implement these changes to fully capture both the operational and market benefits of performance-based regulation compensation.