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Market Evolution Program. Regulatory Affairs Standing Committee Meeting September 11, 2003. Market Evolution Program agenda. Long Term Resource Adequacy Day Ahead Market. Long-Term Resource Adequacy Overview. Today’s Discussion: Recap from May 14 RASC meeting Description of Paths

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market evolution program

Market Evolution Program

Regulatory Affairs Standing Committee Meeting

September 11, 2003

1

market evolution program agenda
Market Evolution Program agenda
  • Long Term Resource Adequacy
  • Day Ahead Market

2

long term resource adequacy overview
Long-Term Resource Adequacy Overview
  • Today’s Discussion:
    • Recap from May 14 RASC meeting
    • Description of Paths
    • Recommendations from Feasibility Assessment
    • Long-Term Resource Adequacy Working Group Update
    • Next Steps

3

long term resource adequacy
Long-Term Resource Adequacy
  • Recap from May 14 RASC meeting:
    • Long-Term Resource Adequacy Working Group Feasibility Assessment (June 2003)
      • LTRA Objectives
      • LTRA Evaluation Criteria
      • Barriers to Investment
      • LTRA Paths and Options

4

long term resource adequacy paths
Long-Term Resource Adequacy Paths
  • Path A: Complete the initial market design and structures without an explicit Resource Adequacy Requirement (RAR)
    • Rely on results of improved energy and ancillary service markets alone (e.g. Pricing Team work, day-ahead market, multi-interval optimization, etc.)
  • Path B: Create Load Serving Entities (LSE) and assign a RAR to these entities
    • LSEs required to contract forward capacity requirements through bilateral contracts (different to bilateral contracts for energy)
    • IMO could administer a resource adequacy auction market (similar to NYISO and PJM) as a complementary element to LSE capacity contracts
  • Path C: Allow a central agency to procure adequate resources and allocate the resource acquisition costs to loads
    • IMO administers a resource adequacy auction market and secures forward capacity on behalf of loads (NYISO, PJM and ISO NE are developing)
    • As a mechanism of last resort (different to above), a government agency (e.g. OEFC) could contract forward capacity

5

recommendations from feasibility assessment
Recommendations from Feasibility Assessment

Fundamental recommendations relating to policy decisions:

1) Barriers to investment must be addressed to better ensure market entry to address long-term resource adequacy

2) The ‘market buyer’ must be defined (in particular, for small default electricity consumers)

3) Improvements to the current IMO-administered market design should be implemented, irrespective of the option to address long-term resource adequacy

4) Given the decision of who the market ‘buyer’ is, the ability and magnitude of spot prices to clear under shortage or near-shortage conditions must be addressed

5) The appropriate level of reliability must be decided

6

recommendations from feasibility assessment1
Recommendations from Feasibility Assessment

Timeframe for making decisions:

6) An option to address long-term resource adequacy needs to be recommended no later than the end of this year

  • In order to address potential inadequate future supply
  • Recognizing sufficient lead-time required to develop new resources
  • Provide potential investors with required signals

7

ltrawg update
LTRAWG Update
  • LTRAWG is in the final stages of completing a Strawman that builds on the recommendations and work from the Feasibility Assessment
  • LTRAWG has acknowledged that the 3 Paths may not be mutually exclusive
  • LTRAWG is examining what aspects of each Path could be workable and designed to work together within an integrated manner

8

market evolution program agenda1
Market Evolution Program agenda
  • Long Term Resource Adequacy
  • Day Ahead Market
    • DAM Chronology
    • DAM Features and Benefits
    • DAM Issues
    • Next Steps

9

day ahead market reprise
Day Ahead Market - Reprise
  • January - commence work on Day Ahead Market (DAM)
  • Feb 18 MAC - established Day Ahead Market Working Group (DAMWG)
    • ~ 28 members from all industry sectors (generators, loads, transmitter, distributors, marketers, OEB and OEFC)
    • meet every ~10 days - 22 meetings this year
  • April - recommend development of a comprehensive DAM that performs 2 functions...
    • Market - allow participants to buy and sell energy and sell operating reserve and lock-in prices and quantities day-ahead
    • Reliability - process to commit resources to meet forecast demand
    • preferred by DAM WG members
    • more closely aligned with DAMs in neighbouring markets
  • May 14 - Regulatory Affairs Standing Committee update

10

day ahead market progress since may 14 rasc
Day Ahead Market - Progress since May 14 RASC
  • late May - DAM hi-level design summary released (strawman r1)
  • June 11 MAC - MAC members provide consensus on recommendation to continue develop comprehensive DAM design
  • June and July - hi-level design concepts prepared and discussed
  • mid-August - DAM hi-level design released (strawman r2)
    • DAM WG devoted 2 full days to its review

11

market evolution program agenda2
Market Evolution Program agenda
  • Long Term Resource Adequacy
  • Day Ahead Market
    • DAM Chronology
    • DAM Features and Benefits
    • DAM Issues
    • Next Steps

12

day ahead market features participation
Day Ahead Market - Features Participation:
    • Participants with physical resources
    • Importers and Exporters
    • Virtual buyers and sellers - parties without physical resources
      • ‘virtual’ offer (bid) to sell (buy) in the DAM also implies an obligation to buy (sell) back in the real-time market (RTM) at RTM prices
  • Three-part offers/bids:
    • Separate fixed and variable components of energy offer/bid
  • Multi-pass dispatch and commitment engine:
    • DAM schedules are financially binding and consistent with transmission constraints
    • Optimized solution...
      • over 24-hour period (hourly granularity)
      • amongst three-part offer/bid components
      • energy and operating reserve markets solved simultaneously

13

day ahead market features pricing
Day Ahead Market - Features Pricing
  • DAM WG conclusion - a day-ahead market under a uniform pricing regime would be costly to implement and maintain, complex and confusing, and is not recommended.
  • Strawman positions:
    • Nodal pricing should be implemented in the DAM to reflect the actual cost of serving load at each location
    • Suppliers and selected customers subjected to nodal prices
      • selected customers include appropriately metered loads that opt to pay nodal price and dispatchable loads
    • Remaining (most) loads would pay a ‘uniform’ price - weighted average of nodal prices
    • A system of internal transmission rights will allow participants to hedge nodal price differences
  • Note - requires that nodal pricing also be applied to the real-time market to maintain pricing consistency between markets

14

day ahead market benefits
Day Ahead Market - Benefits
  • DAM provides an improved point of convergence for forward products
    • DAM prices are transparent and predictable
      • DAM less volatile than RTM
      • greater liquidity in DAM
      • nodal pricing assigns value to congestion efficiently
      • DAM prices converge to RTM prices
  • DAM allows participants to reduce exposure to real-time volatility
    • price certainty - participants have financial commitment for quantities bought/sold in DAM
    • operational certainty - DAM results allow participants to make critical operating decisions in advance of real-time

15

day ahead market benefits1
Day Ahead Market - Benefits
  • DAM improves reliability
    • Allows for direct participation of loads in market
      • additional opportunity for demand side responses - allows price-sensitive loads to participate in market without being dispatchable on 5-minute basis
    • Improved commitment process for all resources (generators and loads)
    • Intertie transactions implemented and priced day-ahead
      • moves transactions to DAM from real-time market
      • reduces uncertainty associated with intertie trading
      • should reduce the number of failed intertie transactions and IOG payments in real-time market

16

market evolution program agenda3
Market Evolution Program agenda
  • Long Term Resource Adequacy
  • Day Ahead Market
    • DAM Chronology
    • DAM Features and Benefits
    • DAM Issues
    • Next Steps

17

day ahead market issues
Day Ahead Market - Issues
  • For a DAM to be effective:
    • Pricing Issues must be addressed...
      • Both the RTM and DAM prices need to represent the actual costs of serving loads as reflected by competitive market prices.
      • Each of the mechanisms that currently distort market prices must be corrected.
    • Structural Issues must be addressed...
      • Buy-side - ‘market-buyers’ required for default supply customers
      • Supply-side - market power issues need to be addressed

18

market evolution program agenda4
Market Evolution Program agenda
  • Long Term Resource Adequacy
  • Day Ahead Market
    • DAM Chronology
    • DAM Features and Benefits
    • DAM Issues
    • Next Steps

19

day ahead market next steps
Day Ahead Market - Next Steps
  • In the coming months...
    • Complete final elements of high-level design
    • Complete significant parts of the detailed design
    • Begin writing market rules
  • Expecting significant interaction with and contributions from stakeholders:
    • DAM WG
    • MAC - October 8
    • RASC, MOSC, ITSC
    • ad hoc meetings with stakeholder groups

20

supplemental slide 1 market buyer proposals
Supplemental Slide 1 - ‘Market-Buyer’ proposals
  • A number of industry organizations and stakeholders have recently put forth proposals to increase load participation in the market, particularly for default supply customers...

EDA - Beyond Bill 210

    • Contemplates an aggregator that will facilitate a contract-based approach to default supply
    • All consumers, large or small, should have option of entering in to fixed price contracts or taking spot price
    • The security of long term contracts will provide incentives for investment in new sources of supply

AMPCO - DAM Position Paper

    • OEB should allow LDCs to procure SSS energy through the DAM
    • Dispatchable load participation will be enhanced by providing similar reciprocal treatment, as for generators, for commitment costs, and market payments for demand reduction

22

supplemental slide 2 market buyer proposals
Supplemental Slide 2 - ‘Market-Buyer’ proposals

Toronto Board of Trade - A Healthy Electricity Market

  • SSS should introduce default suppliers, selected through a competitive bidding process, to provide multi-year fixed price supply
  • Change should be implemented immediately;
    • in the short-term to reduce subsidy to finance price freeze,
    • in the long-term will provide stable prices for transition to eliminating price-cap in 2006
  • Customer education at all levels is required to restore confidence in a market-based electricity system -- OEB should take leadership role
  • Enhances investment in new sources of supply

23

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