Number 4 - HVDC price separation and fast reserves
HVDC price separation and fast reserves
The HVDC link causes the bulk of the locational price separation occurring in the New Zealand wholesale electricity market. Prices at the Benmore end of the link differ from prices at the Haywards end when it is operating at full capacity, or when power flows change direction and the link is temporarily switched off. Most frequently, however, price separation occurs when the link becomes the risk setter in either the fast instantaneous reserves (FIR) market or the sustained instantaneous reserves (SIR) market. Price separation occurs in these situations because the cost of acquiring additional reserves from one of the instantaneous reserves markets limits the amount of electricity transmitted on the HVDC link.
Figure 1: HVDC price separation and HVDC transfer
Figure 1 illustrates how price separation is related to transfer volumes on the link. The horizontal axis is the transfer from the South Island to the North Island, and the vertical axis is price separation across the link, calculated as the Haywards price minus the Benmore price. For each half hour of historical market data, a dot has been placed according to the transfer volume and price separation in that half hour, to make a 'scattergram'. Data from 2011 is plotted in blue and from 2008, in red.
A number of observations can be made from this graph. When the transfer is zero, i.e. the link is turned off, there can be price separation. At higher transfers, the chance of the HVDC link being the risk setter increases, resulting in price separation. There are two 'lobes' of blue on the right hand side of the graph, and a vertical line at just under 400MW north transfer. The two lobes probably correspond to high price separation at differing levels of transfer according to whether Pole 1 is able to assist in providing some self cover for the HVDC risk. The vertical line at 400MW is probably associated with price separation occurring during peak demand periods, with Pole 1 not available, as under these conditions the HVDC will be the risk setter when the transfer exceeds full dispatch of the largest North Island gas-fired generator at about 400MW.
Unsurprisingly the data for 2008 indicates the price separation is likely to occur in south transfer as well.
Figure 2: Importing island fast reserve price and HVDC price separation
Figure 2 plots the price in the FIR market in the island receiving energy from the HVDC link (vertical axis) against HVDC price separation (horizontal axis). A somewhat unexpected pattern emerges in that the price separation, when it occurs, is closely related to the FIR price. In 2011, most price separation occurred during north transfer as illustrated by the blue diagonal.In contrast, during 2008, most price separation occurred during south transfer. In south transfer, Pole 1 of the HVDC link is not enabled, so that price separation can usually occur whenever the transfer is greater than the normal South Island risk of the largest generator, itself much smaller in comparison to the North Island, at 120MW.
The restriction of HVDC transfer due to the cost of supporting reserves provides a possible mechanism for participants to exert some control over HVDC flows. A generator holding a significant portfolio of fast reserves in the receiving island can try to throttle the link by offering reserves at a high price.
This could have the effect of reducing HVDC transfers and increasing energy prices in the receiving island. The profitability of this strategy would depend on the participant's net position (purchases versus sales) in the receiving island reserves and energy markets.
The Authority has seen some evidence of this behaviour in both north and south transfer on the HVDC link. The ability to engage in this sort of strategic behaviour is expected to decline significantly when the HVDC Pole 3 is commissioned, and with further development of a national reserves market, using the new HVDC capability.