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Locational Capacity Demand Curves in ISO-NE

Locational Capacity Demand Curves in ISO-NE. Samuel A. Newell Kathleen Spees Ben Housman. June 11, 2014. ISO New England Markets Committee. Contents. Introduction Framework for Local Curves Import-Constrained Zones Export-Constrained Zone Next Steps Appendix.

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Locational Capacity Demand Curves in ISO-NE

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  1. Locational Capacity Demand Curves in ISO-NE Samuel A. Newell Kathleen Spees Ben Housman June 11, 2014 ISO New England Markets Committee

  2. Contents • Introduction • Framework for Local Curves • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  3. IntroductionReminder: FERC Status and Proposed System Curve Approved System Curve FERC Status • On April 1, ISO-NE and NEPOOL submitted a proposed system curve before FERC, to be in effect by FCA 9 (2018/19) • FERC approved the proposed curve on May 30, 2014 • Our task now is to develop demand curves for each capacity zone, to be in effect by FCA 10 (2019/20) System Curve • The approved system curve is a simple straight-line curve (see right) • We use this curve as the starting point for the local curve discussion Sources and Notes: See ISO-NE and NEPOOL filing and attached Newell/Spees Testimony, before FERC April 1, 2014, Docket No. ER14-1639-000. Quantity and reliability parameters consistent with FCA7.

  4. IntroductionProcess for Developing Zonal Curves • Our approach is similar to that for developing a system demand curve • At this initial meeting today, we present and evaluate initial options • Starting point is the system curve adapted to zones (simplest option) • Also show flatter (and steeper) curves to address price sensitivity • Present sensitivity scenarios to facilitate discussion of options • Over the summer, we will work with you to develop a proposal • Invite stakeholder questions, comments, and alternative curves for analysis (see schedule on slide 23) • Refine results into proposed local curves by September

  5. IntroductionLocal Demand Curve Objectives • Reliability • Maintain reliability near or above 0.105 LOLE (1-in-9.5) LOLE local reliability target • Rarely drop below a “minimum acceptable” reserve margin below which ISO-NE is more likely to intervene, which we are defining as max of TSA or 1-in-5 at the local level • Efficient Prices • Long-run average price at Net CONE, consistent with a market capable of attracting sufficient merchant entry to attain reliability objectives at least cost • Short-run prices consistent with current fundamentals, going above Net CONE during shortage and below Net CONE during surplus • Rationalize prices according to the incremental value of capacity (if possible) • Mitigate Price Volatility • Reduce price volatility impact from lumpiness and small movements and uncertainties in supply, demand, and transmission (no bimodal price distribution) • Few outcomes at the administrative cap • Other • Reduce susceptibility to market power • Minimize contentiousness, complexity, and uncertainty from administrative parameters

  6. IntroductionStarting Point for Zonal Candidate Curves Importing Zones (see right) • Simplest option is to adapt system curve to zones (details on slides 14-15) • Preliminary recommendation is to adopt this zonal curve as-is, or a flatter curve that will further mitigate price volatility (but not below the volatility experienced system wide) Exporting Zone • Maintain vertical constraint at MCL Local Net CONE • Same as system (see detail on slide 13) • Periodic CONE studies to review need for higher local net CONE in importing zones, to be estimated separately if local Net CONE is likely to be >15% above system NEMA Initial Candidate Curve Zonal Starting Point Curve Preliminary Recommended Range

  7. Contents • Introduction • Framework for Local Curves • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  8. Framework for Local CurvesZonal Auction Clearing Structure ISO-NE Zonal Capacity Structure • Zonal capacity market structure will remain essentially unchanged with local demand curves: • Simultaneous clearing in system and sub-zones • Export zones may have a lower clearing price if export constraint binds • Importing zones may have a higher price if import constraints bind • Difference is that minimum quantity procured in zones will vary with price (rather than a vertical minimum constraint at LSR) System Demand Curve Reflects total ISO-NE demand near NICR including four zones plus Rest-of-System Exporting Zone “Maximum demand curve” near MCL prevents excess supply from being procured in export-constrained zone. Maine Importing Zones “Minimum demand curve” near LSR+TTC ensures a sufficient quantity is sourced locally in import-constrained zones. NEMA/B SEMA/RI CT

  9. Framework for Local CurvesReflecting Zonal Imports in the Demand Curve • It is a matter of convention whether to include TTC in x-axis (i.e. capacity supply imported into the zone from Rest-of-System) • Including TTC in the x-axis is functionally equivalent to excluding TTC • We recommend applying PJM’s convention of including TTC in the x-axis because it intuitively reflects capacity as the “reserve margin” above local peak load (i.e. demand curve width scales in proportion to local peak load) • An alternative approach would be to draw the curve through LSR (as in NYISO), but the approaches are functionally equivalent in a simultaneously-solved optimal auction clearing mechanism Demand Curve with TTC (PJM Approach - Recommended) Demand Curve at LSR + TTC • Supply curve defined as imports (at system-wide price) plus local supply • Intuitive demand curve shows “reserve margin” over local peak load • X-axis would be approximately 133% and 135% of local peak load in both NEMA and CT respectively TTC LSR Notes: Imports are paid the system clearing price. LSEs receive CTRs that are calculated as the difference between charges to LSEs with capacity load obligations and payments to capacity resources. TTC = Total Transfer Capability (i.e. transmission import/export limit) LSR = Local Sourcing Requirement LSE = Load Serving Entity CTR = Capacity Transfer Right

  10. Framework for Local CurvesImpact of System on Importing Zone Prices Import Constraints Binding PJM DPL-South 2012/13 • Prices in import-constrained zones are equal or greater than prices in the Rest-of-Pool (or any parent-level LDA) • If the zone is import constrained (top chart) then the zone will price separate and a local resource will be marginal • If the zone has abundant local supply (bottom chart) then the price will clear with system and import capability will be only partly used Abundant Local Supply PJM SWMAAC 2012/13 Sources: PJM auction clearing data and parameters http://www.pjm.com/markets-and-operations/rpm/rpm-auction-user-info.aspx

  11. Framework for Local CurvesMonte Carlo Modeling Approach in Zones Supply Curve Blocks Model Structure • We use the same Monte Carlo simulation model at the system and locally, with 1,000 random draws on local supply and demand • Run a local auction clearing mechanism to calculate resulting price, quantity, and reliability results in each draw • Supply adjusts so long-run average price equals true Net CONE by location Differences in Zones (vs. System) • Offer “blockiness” is a bigger factor in zones (each unit is a bigger fraction of the zone) • Evaluate curve performance assuming that true Net CONE is 10% higher in import-constrained zones (10% lower in export-constrained zones), but administrative Net CONE is equal to the system value Individual Blocks Have size and location from FCA 7 offer stack, but with randomly shuffled merit order. Shocks to Supply and Demand Sources and Notes: Supply shocks calculated as the standard deviation in offers below the cap over FCAs 1-7, based on ISO-NE FCA offer data. Demand shocks calculated as the standard deviation in NICR, LSR, and MCL over FCAs 1-7, from ISO-NE, Summary of Historical ICR Values, posted at: http://iso-ne.com/markets/othrmkts_data/fcm/doc/summary_of_icr_values%20expanded.xls

  12. Contents • Introduction • Framework for Local Curves • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  13. Import-Constrained ZonesAdditional Challenges in Importing Zones • Smaller sizerelative to realistic fluctuations in supply and demand, means: • One large plant can make the difference between the price cap and floor if the curve is too steep • Greater susceptibility to low reliability events • Greater price volatility (mostly upside price volatility, with downside price volatility mitigated by system-wide price) • Two types of reliabilitymust be considered, with the current Local Sourcing Requirement (LSR) set at the max of: • Local Resource Adequacy (LRA) Requirement, set at the local supply quantity that would result in local loss of load event (LOLE) of 0.105 events/year in an import-constrained zone • Transmission Security Analysis (TSA) Requirement, which ensures that local supply will be sufficient to protect transmission security in the event of deterministic contingency scenarios • Net CONE estimation erroris more likely in smaller zones: • Same factors as in the system, plus • Idiosyncratic siting, gas availability, or environmental factors, which may affect some individual zones but not the system (or they may be difficult to discover or estimate in CONE studies if there are few or no comparable projects built)

  14. Import-Constrained ZonesCurrently No Indication of Need for Local Net CONE • Location-specific Net CONE values for NEMA/Boston likely to be <5% higher than Rest-of-System Net CONE • No change in technical specifications • Assume NEMA/Boston plant located in Lowell, MA with labor rates estimated at 20% higher than Rest-of-System (Worcester, MA) • Slightly higher land costs • Differences in E&AS revenue offset not considered due to limited data available for NEMA/Boston capacity zone (but would likely reduce the Net CONE differential) • Connecticut and SEMA/RI Net CONE expected to be similar due to labor rates less than NEMA/Boston Indicative Estimate of Local Net CONE in NEMA/Boston

  15. Import-Constrained ZonesStarting Point: System Curve Applied Locally Starting point is to adapt the proposed system curve to importing zones • Cap is at MAX [1-in-5 LOLE (same as system) or TSA], and 1.6x Net CONE • Cap quantity corresponds to minimum acceptable reliability level below which ISO-NE would be more likely to intervene • Foot quantity is the same ratio above minimum acceptable in the system curve • Local Net CONE is assumed to be equal or greater than system Net CONE: • Estimate local Net CONE as a separate value only if likely to be 15% higher than system • Currently estimating <5% higher for CT, NEMA/Boston, and SEMA/RI NEMA Starting Point Curve Acronyms: TTC = Total Transfer Capability (i.e. transmission import/export limit) LSR = Local Sourcing Requirement TSA = Transmission Security Analysis LRA = Local Resource Adequacy

  16. Import-Constrained ZonesStarting Point: Parameter Values by Importing Zone NEMA Connecticut Notes: MWquantities based on FCA7; prices based on a Net CONE of $11.1/kW-m. Foot quantity based on the system demand curve foot-to-cap ratio of 1.1. TTC values were 2,600 MW CT, 4,850 MW NEMA in FCA& from http://iso-ne.com/markets/othrmkts_data/fcm/doc/summary_of_icr_values%20expanded.xls

  17. Import-Constrained ZonesComparison of Vertical to Sloped Curves • A vertical curve at the reliability requirement produces high price volatility and a high frequency of low reliability events, and makes the zones more susceptible to exercise of market power • Applying a sloped curve to the system only (leaving local zones vertical) partly mitigates the concerns, but local reliability concerns remain (CT not meeting LOLE target, CT and NEMA with relatively high frequency below TSA) • Applying the system sloped curve at the local level shows reasonably good performance • Price volatility is reduced to a standard deviation of $4.0 and $3.9/kW-m in NEMA and CT respectively (compare to $3.7/kW-m at the system level), and 15-17% frequency at the price cap • LOLE equal to 0.105 target in CT, and better than target in NEMA • Frequency below TSA is 11-12% Notes: Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

  18. Import-Constrained ZonesSteeper and Flatter Local Curves Steeper and Flatter Curves in NEMA • We compare performance relative to steeper and flatter local curves (no change to system curve) • Steeper Curve: • Higher price cap at 1.75x Net CONE provides better protection against low reliability events but increases price volatility • Flatter Curves: • Improve protection against exercise of local market power • Provide reduced price volatility (including better than system for CT in the 2x width case), and better reliability performance • Local load cost increase is small despite higher local quantity, with cost increase only 10% of Net CONE on MW sourced locally instead of outside • Making curves flatter may over-mitigate price signals relative to changes in fundamentals, one guideline may be that price volatility need not be mitigated below the $3.7/kW-m standard deviation realized at system level Notes: Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

  19. Import-Constrained ZonesPerformance at Different Local Net CONE Levels • Zones may have higher Net CONE (otherwise should not price-separate or remain import-constrained in the long term) • If Net CONE in an import constrained zone is substantially higher than the system Net CONE, defining the local demand curve based on system Net CONE will result in under-procurement and lower reliability • This issue is small if the difference in Net CONE is small, but is substantial for large differences • We recommend that if Net CONE in an import constrained zone is more than approximately 15% higher than system Net CONE, then the demand curve in that zone be based on the local net CONE True Net CONE as Varying % Above System Net CONE (Administrative Zonal Net CONE = System Net CONE in All Cases) Notes: Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

  20. Contents • Introduction • Framework for Local Curves • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  21. Export-Constrained ZoneDefinition of a “Maximum” Demand Curve “Minimum” Demand Curve (System and Import-Constrained Zones) New Problem • No other capacity market has used a demand curve in an export-constrained zone • MISO and ISO-NE have defined fixed maximum capacity limits in export constrained zones (i.e., vertical curve for export zones) Different Type of Constraint • Defines “maximum” demand curve constraint • Unlike “minimum” demand curves applicable for total system and import-constrained zones Possible Prices & Quantities Impossible Prices & Quantities “Maximum” Demand Curve (Export-Constrained Zones) Impossible Prices & Quantities Possible Prices & Quantities

  22. Export-Constrained ZoneComparison of Vertical and Sloped Curves in Maine • As in import-constrained zones, the export-constrained zone of Maine is also susceptible to price volatility, but the price volatility is mostly downward “spikes” during excess-supply conditions as compared with upward spikes in the zones and system • A sloped curve in Maine improves price volatility (from standard deviation of $4.4/kW-m to $4.1/kW-m) and reduces susceptibility to buy-side market power exercise (sell-side already mitigated by system-wide curve) • However, a sloped curve also slightly degrades system reliability by 0.002 LOLE because Maine MW in excess of MCL have reduced reliability value, and displace system resources that would have cleared. An even flatter local curve would begin to introduce more substantial reliability concerns due to the greater displaced system MW • On balance, the additional complexity of a sloped “maximum demand curve” in Maine may not be warranted Notes: System LOLE exceeds 0.100 in base case for 3 reasons: (1) slight difference in approach to translating system curve to zones (impact of 0.002), (2) applying a vertical curve in Maine in the base Case (impact of 0.002), and (3) change from 15% to 10% higher/lower Net CONE in zones (impact of 0.002). Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

  23. Contents • Introduction • Framework for Local Curves • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  24. Next Steps • Please submit questions, comments, or alternative proposed curves to ISO-NEby June 20, for Brattle response in the July MC meeting

  25. Contents • Introduction • Framework for Local Curves • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  26. Appendix B: Detailed Local ResultsSystem-Level Detailed Results Notes: System LOLE exceeds 0.100 in base case for 3 reasons: (1) slight difference in approach to translating system curve to zones (impact of 0.002), (2) applying a vertical curve in Maine in the base Case (impact of 0.002), and (3) change from 15% to 10% higher/lower Net CONE in zones (impact of 0.002). Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

  27. Appendix B: Detailed Local ResultsImporting Zones Detailed Results Notes: Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

  28. Appendix B: Detailed Local ResultsNEMA Results Vertical Curve for Zones (System Sloped) • Avg Price: $12.2/kW-m (SD = 4.3 W-m) • Avg cleared quantity +TTC as % of LSR + TTC: 107.4% (SD = 9.2%) • % of draws below TSA: 20.0% • AvgCost: $959 mil System Curve Adapted to Zones • Avg Price: $12.2/kW-m (SD = $4.0kW-m) • Avg cleared quantity +TTC as % of LSR + TTC: 110.2% (SD = 9.3%) • % of draws below TSA: 12.2% • AvgCost: $962 mil

  29. Appendix B: Detailed Local ResultsConnecticut Results Local Curve Vertical at LSR • Avg Price: $12.2/kW-m (SD = $4.3kW-m) • Avg cleared quantity +TTC as % of LSR + TTC: 104.1% (SD = 5.9%) • % of draws below TSA: 17.6% • AvgCost: $1,232 mil Local Curve Same Shape as System Curve • Avg Price: $12.2/kW-m (SD = $3.9kW-m) • Avg cleared quantity +TTC as % of LSR + TTC: 106.0% (SD = 5.9%) • % of draws below TSA: 11.3% • Avg Cost: $1,237 mil

  30. Appendix B: Detailed Local ResultsExporting Zone Detailed Results Notes: System LOLE exceeds 0.100 in base case for 3 reasons: (1) slight difference in approach to translating system curve to zones (impact of 0.002), (2) applying a vertical curve in Maine in the base Case (impact of 0.002), and (3) change from 15% to 10% higher/lower Net CONE in zones (impact of 0.002). Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

  31. Appendix B: Detailed Local ResultsMaine Results Local Curve Vertical at MCL • Avg Price: $10.0/kW-m (SD = $4.4 kW-m) • Avg cleared quantity as % MCL: 90.1% • % of draws above MCL: 0.0% • AvgCost: $289 mil Local Curve Same Shape as System Curve • Avg Price: $10.0/kW-m (SD = $4.1 kW-m) • Avg cleared quantity as % MCL: 93.4% • % of draws above MCL: 22.9% • AvgCost: $288 mil

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