The document discusses key aspects of designing ancillary services markets in India. It outlines a phased approach with phase I including only frequency support services and phase II expanding to include frequency control, network control, and system restart services. It also discusses expected features of the Indian market such as procurement through a day-ahead bidding process, payment based on scheduled and actual dispatch, and use of multi-part tariffs. Additionally, the document covers international best practices regarding pricing methods, contract durations, and the need for effective regulatory monitoring.

1. Creation & Implementation of a Market Design
for Ancillary Services
Conference on
The Need for Regulatory & Policy Framework for
Ancillary Services & Alternative Energy Options
In the Indian Power Scenario
Organized by
Independent Power Producers Association of India
Knowledge Partner
ICRA Management Consulting Services limited
New Delhi April 11, 2013

2. Presentation structure
• Expected Ancillary Services (AS) Mechanism in India
• Key aspects of Ancillary Services Market Design
• Mode of Procurement
• Price discovery
• Tariff structure
• Duration of contracts
• Effective monitoring
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3. Expected Ancillary Services (AS) Market Structure in India
• Phase I (As proposed by NLDC)
– Under phase – I only one service under Frequency Support Ancillary Service
(FSAS) is expected to be launched , limited to generation side services.
• Phase II (Expected)
– Frequency Control Ancillary Services
• Primary (Local automatic control: generators and loads)
• Secondary (Central automatic control: generators)
• Tertiary (Manual control: generators and loads)
– Network Control Ancillary Services (NCAS)
• Voltage Control Ancillary Services (NCAS)
• Power Flow Control Ancillary Services (NCAS)
– System Restart Ancillary Service (SRAS)
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4. Expected AS Market Structure in India: Triggering of FSAS
50.10 • SLDCs are apex bodies responsible for
optimum scheduling and despatch of
50.00 electricity at a state level
Target Grid
49.90 Frequency • SLDCs/Utilities would have a window of time
to balance load and generation before FSAS
This range provides
49.80
flexibility to utilities
kicks in at a specified frequency (say, 49.65
to take corrective Hz) if they do not intend to procure energy
actions to balance from the AS market
49.70 load and generation
Trigger point for • For example, an over drawl / loss of
49.65 generation of about 700 MW would result in
Ancillary Services
drop from 50 Hz to 49.65 Hz in the NEW-NE
49.60 grid
• Power Number is the sustained change in MW of
load-generation balance that result s in a change in
frequency of 1 Hz. • FSAS process would be initiated by NLDC at
• Power Number for the NEW-NE grid is about 2000 the specified frequency
MW per Hz.
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5. Expected AS Market Structure in India :
Day Ahead Bid process and dispatch
Power Accredited
NLDC
Exchanges Generators
1 Forecast the Required 2 Conducts Day Ahead Bid for providing Ancillary
Quantity (MW) - Tentative Bidding 3 Services
Notify withdrawal (if any) at
Notifies anonymous area-
least 3 hours before
6 5 wise bids to NLDC 4 dispatch
Dispatch notification of
selected bids 6 time Notifies bidders 7
blocks prior to dispatch immediately about the bids 9 Supply Power
Provides complete details of
8 the bidders
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6. Expected AS Market Structure in India : Payment Mechanism
Utilities/Ent Power AS Power
RLDC RPC
ities Exchanges Generators
3
1 Computation
Obtains data of UI and
ancillary
payment
2 7
Energy AS Charges /
Accounting 5 Make Penalties
(MU) based on 4 Notifies payment for
scheduled & drawls under
actual dispatch payment
UI & AS to UI 8
information AS Charges /
Account
Penalties
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Payment from
UI Pool
Account
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7. Key aspects of Ancillary Services Market Design
Mode of Procurement Mandatory, Bilateral, Competitive Bids, Spot Market
Price discovery Pay as bid, Uniform pricing, Normative tariff
Tariff structure Fixed, Capacity, Utilization, Utilization Frequency, Opportunity
Cost
Duration of contracts Short term, Long term
Effective monitoring To ensure fair competition, Price cap
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8. Procurement methods used in AS markets
• Countries follow different approaches in procuring Ancillary Services
• Ancillary Service requirement is typically estimated by ISO
• Ancillary Services such as Primary Frequency Control (through speed
governors) and Basic Voltage Control are mandated by the regulators in
some countries /markets
• Secondary and Tertiary Frequency controls are procured through
tendering process or through spot market by the ISO or through bilateral
contracts by utilities.
• Black Start or System Restart services are procured through competitive
bidding where it is not mandatory.
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9. Procurement of Ancillary Services in Select Markets1
SN Ancillary Service Compulsory provision Bilateral Tendering Spot market
contracts process
1 Primary frequency Spain, PJM Australia, Germany, Great Australia, New
control France, New Britain, New Zealand
Zealand Zealand, Sewden
2 Secondary - France Germany, New Australia, Spain,
frequency control Zealand PJM
3 Basic voltage control Australia, Spain, Germany, France, New Great Britain -
France, Great Britain, New Zealand
Zealand, PJM, Sewden
4 Enhanced voltage - France, Australia, Spain, -
control Germany Great Britain
1. Based on Paper by Rebours, Kirschen, Trotignon and Rossignol –
A Survey of Frequency and Voltage Control Ancillary Services - Part II: Economic Features
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10. Pricing Ancillary Services
• Regulators have different approaches for pricing Ancillary Services such as
mandating ancillary services with no explicit cost, a regulated (normative)
price , uniform pricing and pay as bid price
• In Uniform pricing method, all successful bidders are paid the price of
highest bid accepted
• In Pay as bid pricing bidders are paid at the price they have bid
• Most of the US markets use uniform pricing for frequency control ancillary
services
• Countries such as Great Britain , France and Germany have adopted pay
as bid pricing
• CERC’s consultation paper (2010) has suggested uniform pricing for
Ancillary Services in India
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11. Pricing method used in various countries1
S. Ancillary Service None Regulated Pay as bid price Common
No. Price Clearing Price
1 Primary frequency Spain, PJM New Australia, France, Germany, Australia
control Zealand Great Britain, New Zealand,
Sewden
2 Secondary - - Australia, Spain, PJM, France, Australia, Spain,
frequency control Germany, New Zealand, PJM
Great Britain, Sewden
3 Basic voltage control Australia, Spain, PJM, Great France, Great Britain, New -
Germany, Sewden Britain Zealand
4 Enhanced voltage - Spain Australia, France, Germany, -
control Great Britain
1. Based on Paper by Rebours, Kirschen, Trotignon and Rossignol –
A Survey of Frequency and Voltage Control Ancillary Services - Part II: Economic Features
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12. Uniform Pricing Versus Pay-as-Bid Pricing
Marginal Cost of A Uniform Price Auction1 Total Consumer Demand Pay as Bid Auction1
7
7 Uniform Market Clearing Price Average Price
6
6
5 5
$/MWh
$/MWh
4 4
3 3
2 2
1 1
0 0
A B C D E F B D C E F A
MW MW
• Proponents for uniform pricing argue that under competitive conditions, market
prices are unlikely to be different between uniform price and pay-as-bid price; as
utilities may bid higher than their marginal cost in pay-as-bid price1
• Theoretically, Pay-as-bid price is effective incase utilities bid based on their marginal
cost
1. Source - Uniform-Pricing versus Pay-as-Bid in wholesale Electricity Markets : NYISO 12

13. Issues in Uniform Pricing model for multi product FCAS
• Multiple products under FCAS (from Regulation to Replacement) can be
procured either sequentially or simultaneously. (Relevant for Phase-2 in India)
• Under Uniform Pricing model, sequential bidding may result in adverse
selection where a better quality resource (e.g. Regulation reserve) is priced
lower than a poor quality resource (e.g. Replacement reserve). Such a
situation is called “Price Reversal”.
• To address “Price Reversal”, California market has implemented simultaneous
bidding with rational buyer approach. Rational buyer approach minimizes the
overall procurement cost while considering technical constraints.
• Incase of Pay as bid approach, both sequential and simultaneous bidding did
not show any such adverse impacts.
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14. Tariff Structure for Phase-1: Multi Part Vs Single Part
• Multi Part: Typically - Capacity charges + Usage charges
• Multi Part system is more common across the world
• Bids for Ancillary Services are selected based on their capacity charges and
dispatched based on their “usage charges” in real-time
• Multi Part structure is likely to make Ancillary Services more bankable as it
would mitigate the risk of non- off take of power
• Single Part tariff may get easier agreement from the discoms who would
ultimately pay for the Ancillary Services
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15. Tenures of Ancillary Services
Indicative tenures for Phase-1 Indicative tenures for Phase-2
• Day ahead markets • Day ahead & Intra-day markets
– FSAS – FCAS: Regulation services
– FCAS: Spinning reserve
• Monthly contracts
– FCAS: Backup reserves
• Long term contracts
– SRAS: System Restart
– VCAS: Voltage Control Services
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16. There is a need for effective monitoring by regulators
• Risk of cartel formation: It is known that markets for Voltage Control suffer from
high market concentrations because of location specific requirement.
• During 2010, Italian Competition Authority has fined three generating plants
providing VCAS in the Central – South Zone who were found to be acting in cartel.
• Price caps: In specific cases, regulators may impose price caps
• Price reversals: It is required to identify price reversals and correct design flaws. In a
price reversal situation an inferior quality service (e.g. Secondary Reserve) may
receive a higher price than a higher quality service (e.g. Regulation)
• Such reversal was witnessed in California, New England and New York markets.
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17. Thank You

18. Prepared for IPPAI by
ICRA Management Consulting Services Limited
For further details, please contact
R. Raghuttama Rao
MD, IMaCS
raghuttama.rao@imacs.in
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