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Workshop on GT Viability in the NEPOOL Market

Workshop on GT Viability in the NEPOOL Market. Presented by Andrew P. Hartshorn Prepared for NEPOOL Markets Committee Meeting February 13, 2001. GT VIABILITY WORKSHOP Overview.

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Workshop on GT Viability in the NEPOOL Market

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  1. Workshop on GT Viability in the NEPOOL Market Presented by Andrew P. Hartshorn Prepared for NEPOOL Markets Committee Meeting February 13, 2001

  2. GT VIABILITY WORKSHOP Overview • This presentation describes in more detail the assumptions behind the GT viability analysis: • The historical reserve quantity and price data used in the analysis. • The assumptions made about the shape of the reserve supply curve. • How the historical reserve quantity and price data are used to derive the 10-minute and 30-minute reserve prices using the demand curve. • The results of the GT viability analysis. LECG

  3. 2 LECG, LLC

  4. GT VIABILITY Initial Reserve Data • A snapshot of the real time dispatch was taken in each hour of year 2000. The snapshots identified the level of total reserves available and total reserves required by reserve type. • Data for posted 10-minute NSR and 30-minute operating reserve prices were collected for the same period of time. • The tables show data for three hours representing the three potential relationships between 10-minute and 30-minute reserve prices. LECG

  5. Price Relationship Count 10 Min > 30 Min 8128 30 Min > 10 Min 62 10 Min = 30 Min 147 GT VIABILITY Historical Price Relationship • The most common relationship is one where the 10-minute price is higher than the 30-minute price. • When the posted 30-minute price was greater than the posted 10-minute price the posted 30-minute price was cascaded up to the 10-minute price. • Other price adjustments made as part of the assumptions included capping energy prices at $1000/MWh and 30-minute reserve prices at $100/MWh. LECG

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  7. GT VIABILITY Initial Reserve Data • The total quantity of 30-minute reserves available was then estimated for each of the price relationships identified • If the posted 30-minute price < posted 10-minute price: The quantity of 10-minute reserves in excess of those designated were necessarily offered at prices above the posted price for 30-minute reserves. • If posted 30-minute price  posted 10-minute price: A horizontal supply curve at the 10-minute clearing price has been assumed for all 10-minute reserves in excess of those designated as 10- or 30-minute resources. LECG

  8. P Residual 10-Minute Reserve Available $0.05 P10 ? Residual 30-Minute Reserve Available $0.00 P30 Q 1745 Q30req 3433 Qta 1165 Q10req 7 LECG, LLC

  9. GT VIABILITY Supply Curve Shape • Why was a horizontal supply curve assumed? • The observed reserve clearing prices and designated reserve levels only identify one point on the supply curve. • Some assumption must be made about the shape of the supply curve for lower and higher reserve quantities. • Choosing a horizontal supply curve at times when the 30-minute posted prices and requirements were below the demand curve results in lower reserve prices and conservative estimates of GT revenues. • Similarly, for the few occasions when the 30-minute posted prices and requirements were above the demand curve a revised 30-minute price was determined by interpolating down to the demand curve using a vertical supply curve, again resulting in lower reserve prices and conservative estimates of GT revenues. • The alternative to making these assumptions would be to reconstruct the actual supply curve for each interval. LECG

  10. Reserve Demand Curve $120.00 10-Minute Requirement = 1200 MW $100.00 $80.00 30-Minute Requirement = 1700 MW Price ($/MW) $60.00 $40.00 $20.00 30-Minute Requirement + 500 = 2200 MW $- 0 500 1000 1500 2000 2500 3000 3500 Quantity of Replacement Reserve 9 LECG, LLC

  11. GT VIABILITY Demand Curve Assumptions • The demand curve used to determine the price of 30-minute reserves was defined according to the following specifications: • A maximum price of $100 would be reached at the historical 10-minute reserve requirement. • A price of $50 would be reached at the historical 30-minute reserve requirement. • A price of $1.35 would be reached at the historical 30-minute requirement plus 500 MW. • A price of $0.10 would be reached at the historical 30-minute requirement plus 1,200 MW. • Note that the graph on the prior page assumes a 1,200 MW 10-minute requirement and a 1,700 MW 30-minute requirement. Individual demand curves were calculated for each real-time dispatch interval based on the actual reserve requirements in that real-time dispatch interval. LECG

  12. GT VIABILITY Supply Curve Assumptions • Two reserve supply curve scenarios were analyzed: • The first scenario assumed that the supply of reserves would not have been affected by changes in replacement reserve targets at the unit commitment stage. • The second scenario assumed that changes in replacement reserve targets at the unit commitment stage would result in a MW for MW reduction in real-time supply of reserves • A 400 MW commitment change was assumed for data before September 15th. • A 250 MW commitment shift was assumed for data from September 16th. • To model the impact of these changes in unit commitment targets, the 400 MW or 250 MW were subtracted from the total available reserves before projecting the total available quantity onto the demand curve. If less than 400 MW of 30-minute reserves were available the remainder was subtracted from available the 10-minute reserves. LECG

  13. GT VIABILITY Observed Outcomes in the Results • There were four outcomes that together describe all hours of the year in each of the supply curve shift scenarios. • Case 1 : The 30-minute price is set by the demand curve price at total available reserves excluding spare 10-minute reserves. • Case 2: The 30-minute price is set by the demand curve price at total available reserves (no spare 10-minute reserve was available). • Case 3: The 30-minute price is set by the demand curve price at total available reserves including spare 10 minute reserves. • Case 4: The 30-minute price is set by the 10-minute reserve price and the quantity purchased is reverse interpolated from the demand curve. • There were a number of instances where the posted 30-minute price and quantity was above the demand curve. In every case where this occurred the interpolation down to the demand curve resulted in these hours becoming a Case 1 outcome. LECG

  14. GT VIABILITY Illustration Definitions • Qta: total available reserve excluding spare 10-minute reserves • Q30req: total 30-minute reserve requirement • Q30h: total reserve purchased given demand curve model • Qta+spare: total available reserve including spare 10-minute reserves • P10req: posted 10-minute reserve price • P30req: posted 30-minute reserve price • P10h: 10-minute reserve price determined using the demand curve model • P30h: 30-minute reserve price determined using the demand curve model • Pta: price on the demand curve associated with Qta • Pta+spare: price on the demand curve associated with Qta+spare LECG

  15. Case 1 -- Total Available Sets Price, Spare > 0 P P10req,10h $0.57 Pta,30h $0.09 Pta+spare $0.02 P30req $0.00 1745 Q30req 3339 Qta,30h 6722 Qta+spare Q 14 LECG, LLC

  16. GT VIABILITY Case 1 • The 30-minute price is set by the demand curve price at a quantity equal to the total available reserves excluding spare 10-minute reserves. • The posted 10-minute price is greater than the posted 30-minute price and the interpolated price from available reserves (excluding the additional 10-minute reserves). • The interpolated demand curve price is greater than the posted 30-minute price. • Shifted supply curve observations -- 2986 out of 8337 or 35.82% • No-shift observations -- 4181 out of 8337 or 50.15% LECG

  17. Case 2 -- Total Available Sets Price, Spare = 0 P Pta,ta+spare,10h,30h $0.10 P10req,30req $0.02 1743 Q30req 3187 Qta,ta+spare,30h Q 16 LECG, LLC

  18. GT VIABILITY Case 2 • The 30-minute price is set by the demand curve price at a quantity equal to the total available reserves (no spare 10-minute reserve was available). • The posted 10-minute price equals the posted 30-minute price and the interpolated price from available reserves is greater than both the posted 10-minute and posted 30-minute prices. • Supply curve shifted observations -- 281 out of 8337 or 3.37% • No-shift observations -- 291 out of 8337 or 3.49% LECG

  19. Case 3 -- Total Available + Spare 10-Minute Reserves Sets Price P Pta $0.10 Pta+spare,10h,30h $0.06 P10req $0.05 P30req $0.00 1745 Q30req 2957 Qta 4848 Qta+spare,30h Q 18 LECG, LLC

  20. GT VIABILITY Case 3 • The 30-minute price is set by the demand curve price at a quantity equal to the total available reserves including spare 10 minute reserves. • The posted 10-minute price is greater than the posted 30-minute price and the interpolated price from total available reserves including the additional 10-minute reserves is greater than both the posted 10-minute price and the posted 30-minute price. • Shifted Observations -- 3252 out of 8337 or 39.01% • No-shift Observations -- 2002 out of 8337 or 24.01% LECG

  21. Case 4 --10 Minute Reserves Sets Price, Reverse Interpolate Quantity P Pta $0.10 P10req,10h,30h $0.05 Pta+spare $0.04 P30req $0.00 1745 Q30req 3109 Qta 5273 Q30h 5312 Qta+spare Q 20 LECG, LLC

  22. GT VIABILITY Case 4 • The 30-minute price is set by the 10-minute reserve price and the quantity purchased is interpolated from the demand curve. • The posted 10-minute price is greater than the posted 30-minute price. The interpolated price from available reserves (excluding the additional 10-minute reserves) is greater than the posted 10 minute price and the interpolated price from available reserves (including the additional 10 minute reserves is less than the posted 10 minute price. The 30-minute price is therefore set by the posted 10-minute price. • The total quantity of reserve purchased is interpolated from the demand curve using the posted 10-minute price. • Supply curve shifted observations -- 1818 out of 8337 or 21.81% • No-shift observations -- 1863 out of 8337 or 22.35% LECG

  23. Case 5 -- 30 Price Above Demand Curve, 10 and 30 Prices Equal P P10req,30req,10h $0.45 Pta,ta+spare,30h $0.08 3968 Qta,ta+spare,30h Q Same as Case 1 22 LECG, LLC

  24. GT VIABILITY Case 5 • Cases where the posted 30-minute reserve price and requirement are above the demand curve are transformed into Case 1 when the vertical interpolation onto the demand curve is performed. • After interpolating the 30 minute price and quantity down to the demand curve, the posted 10-minute price is greater than the demand curve price and a Case 1 outcome exists. LECG

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  26. ANCILLARY SERVICES REVENUES Results • Ancillary service revenues for 10-minute and 30-minute GTs under each of the demand curve shift scenarios and two outage rates are shown on the previous page. LECG

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  28. ANCILLARY SERVICES REVENUES Results • The table summarizes the reserve revenue calculations by level of replacement reserves for the shifted supply curve scenario. Most of the revenues from providing 10-minute reserves comes when less than 1,000 MW of replacement reserves was available in real time. LECG

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  30. ANCILLARY SERVICES REVENUES Results • This table summarizes the reserve revenue calculations by month for the shifted supply curve scenario. • We have not adjusted the reserve revenues to reflect any weather or temperature related effects although the summer of 2000 was mild. LECG

  31. INCREMENTAL ENERGY REVENUES Assumptions • The incremental cost of energy for the GT was derived using the following information: • Natural gas spot prices for Boston City Gate provided by Energy Intel. • Heat rate of 11,000 Btu/kWh. • Variable O&M of $2.50/MWh. • Real-time energy prices were modeled using actual year 2000 real-time energy prices: • Real-time energy prices greater than $1,000 on May 8th were reduced to $1,000 for this analysis. LECG

  32. INCREMENTAL ENERGY REVENUE Methodology • The GT would earn a margin on energy sales if the sum of fuel cost and variable O&M was less than the real-time energy price. However, we have already assumed a revenue stream for the GT in the reserves analysis. The GT would only want to generate energy if the margin on the energy sales was greater than the 10-minute reserve price. • Therefore, the incremental energy revenue (over and above reserve revenue) was determined by subtracting fuel cost, variable O&M and ancillary service revenue from the real-time energy price in every hour. • In every hour where the incremental net revenue is positive, it was assumed that the GT would generate energy instead of providing reserves. LECG

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  34. INCREMENTAL ENERGY REVENUE Results • The tables show the incremental energy revenues associated with the base case project (11,000 Btu/kWh heat rate). • The left table shows the incremental energy revenue for either a 10-minute or 30-minute GT with a 5% outage rate under each of the demand curve shift scenarios. • The right table shows the incremental energy revenue for either a 10-minute or 30-minute GT with a 10% outage rate under each of the demand curve shift scenarios. LECG

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  36. INCREMENTAL ENERGY REVENUE Results • The table shows the monthly breakdown of incremental energy revenue under the shifted supply curve scenario. • Much of the incremental energy revenue would be earned in January, May and December. It is noteworthy how little incremental energy revenue would be earned in June, July and August. LECG

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  38. GT VIABILITY Base Case Results • Combining the reserve and energy revenues together, the tables show the total net revenues in $/kWyr for 10-minute and 30-minute GTs with 5% and 10% outage rates and each of the supply curve shift scenarios. • Based on a levelized revenue requirement of $54.47/kWyr the GT project would not be viable under any of the scenarios, based on 2000 prices. LECG

  39. GT VIABILITY Total Reserve Costs • Total reserve costs for the 8337 hours modeled are shown in the table for both shifted supply curve scenario and the no shift scenario. LECG

  40. GT VIABILITY Project Sensitivity • If the installation cost of the GT is reduced from $350/kW to $320/kW and the size of the project is reduced from 100 MW to 45 MW, the levelized revenue requirement is reduced to $50.66/kWyr. • The sensitivity case also assumes the heat rate is reduced from 11,000 Btu/kWh to 9,000 Btu/kWh. • Reducing the heat rate reduces the cost of generating energy which: • Increases the margin on hours where generating energy was the most profitable option in the base case. • Increases the number of hours where generating energy was preferable to providing reserves. LECG

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  42. GT VIABILITY Project Sensitivity • The total net revenues for the project sensitivity case are shown in the tables. • The 10-minute GT now meets its $50.66/kWyr revenue requirement at both the 5% and 10% outage rate under the shifted supply curve scenario. • The 10-minute GT does not meet the revenue requirement if there is no supply curve shift. LECG

  43. GT VIABILITY Mild Year Sensitivity • This entire base case analysis is derived from year 2000 reserve and energy prices. The 2000 summer was very mild. • To analyze the potential impacts of a “normal” summer, we reviewed the average clearing price of forward market contracts for Summer 2000 peak energy transacted before May 1st and compared them to the average peak energy price observed during the summer months of June, July and August. • The average forward market transaction for on-peak summer energy traded before May 1st was $94.17/MWh. • The average real-time energy price for on-peak summer hours was $45.71/MWh. • A second sensitivity case was created off the base case by multiplying each on-peak summer real-time energy price by 94.17/45.71 or 2.06. LECG

  44. GT VIABILITY Mild Year Sensitivity • When reviewing the results from the mild year sensitivity case it is important to note: • The sensitivity was based on the 11,000 Btu/kWh base case scenario. • A price cap of $1,000/MWh was kept in place so actual results in this sensitivity reflect an energy price ratio between the original and final real-time prices of something less than 2.06. • Reserve prices were not changed. • No allowance was made for potential changes in gas prices as a result of increased demand. • The variance effects of the incremental energy calculation may have been skewed by the multiplicative treatment of the real-time prices. The energy margin is very sensitive to the shape of the price duration curve. LECG

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  46. GT VIABILITY Mild Year Sensitivity • The total net revenues for the mild year sensitivity are shown in the tables. • The $54.47/kWyr revenue requirement for the base case project is now met under every 10-minute and 30-minute scenario regardless of outage rate or supply curve shift. LECG

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  48. GT VIABILITY Demand Curve Sets Reserve Price • The only element of the analysis that affected how often the demand curve set the 10-minute and 30-minute price was whether the supply curve was shifted or not. It did not depend at all on the type of GT modeled or the mild year sensitivity. • The table shows that the 30-minute reserve price was set by the demand curve much of the time whether the supply curve was shifted or not. The 10-minute reserve price was set by the demand curve 41.7% of the time if the supply curve was shifted and 26.4% of the time if the supply curve was not shifted. LECG

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  50. GT VIABILITY GT Capacity Factors • The GT capacity factors were affected by the supply curve shift, the heat rate of the GT and the mild year sensitivity. • The capacity factors have not been adjusted for outage rates. They are simply the percentage of hours in the year that the unit would have been selected for energy had it been available the whole of the year. • Note that the increase in capacity factor for the mild year sensitivity is very pronounced given that the only hours that changed in this case were the on-peak hours of June through August. LECG

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