Southwest Power Pool’s Board Approves Tariff Language for New ‘Day 2’ Market

The governing board of the Southwest Power Pool has approved tariff language for a major improvement to the regional transmission organization’s power market, slated for implementation in 2014.
 
The proposed tariff, which will be filed with federal regulators later this month, will incorporate what is known as a “Day 2” market, and marks an important step forward for consumers in SPP’s nine-state footprint. 
 
To appreciate this requires a bit of an explanation of what exactly it means for SPP to move from a “Day 1” to a “Day 2” market design (A March 1, 2011, presentation to the Louisiana Public Service Commission offers a backgrounder on Day 2 markets and their benefits).
 
A Day 1 market, which SPP operates today, is a bilateral contracts market in which wholesale power is traded between buyers and sellers, and the grid operator calls on various generators from time to time to either step up generation or ramp down in order to maintain reliable power grid operations.
 
In a Day 2 market, greater economic efficiencies are achieved as all of the power plants in the region will be required to participate in a region-wide, least-cost energy dispatch market.  
 
Locational marginal pricing, or LMP, is incorporated to provide transparent price signals allowing economic dispatch and more efficient investment in new transmission and generation. LMP assigns a cost to transmission congestion, so a developer of new generation has an incentive to build where that plant will help alleviate, rather than contribute to, grid congestion. By assigning a price to congestion, LMP also helps provide an important price signal for efficient investment in new transmission lines.
 
Moving to a Day 2 market also requires the regional transmission organization to operate two new energy markets; a real-time spot market for wholesale power (providing an important tool for maintaining reliable power grid operations) and a day-ahead forward market for power allowing market participants to optimize their power sales and purchases. This market design allows a more efficient use of the transmission system and lowers the generation reserve margins required to maintain system reliability.
 
Other important features of the Day 2 market design include integrated ancillary services market (another important aspect of ensuring power grid reliability) and a system of congestion rights, which allow users of the transmission system to hedge against the risk of transmission congestion costs.
 
SPP’s enhanced market design is projected to generate annual benefits of $45 million to $100 million. In addition to these significant economic benefits, a Day 2 market provides important environmental benefits such as lower emissions due to improved generation efficiencies and greater integration of clean energy resources.
 
These developments in SPP offer a clear indicator of how the benefits of well-regulated organized competitive power markets are increasingly being recognized, leading to greater acceptance of competitive reforms in electricity throughout the country. Progress is being made, and more and more consumers are being rewarded with the economic and clean energy benefits of competition in electricity.

Joel Malina | February 8, 2012