Energy Security Improvement Impact Analysis

1. Energy Security Improvement Impact Analysis • Todd Schatzki • Principal • June 12, 2019

2. Agenda • Overview of Assignment and Approach • Structure of Real-Time and Day-Ahead Market Models • Changes in Energy Inventory • Assumptions, Scenarios and Impacts Analyzed Energy Security Improvement Impact Analysis | June 12, 2019

3. Overview of Assignment and Approach Energy Security Improvement Impact Analysis | June 12, 2019

4. Assignment • Analysis Group has been asked to analyze the impacts of the Energy Security Improvements (ESI) being proposed by ISO New England (ISO-NE) • Our work is intended to inform stakeholders about the expected impacts of the proposed rules on a variety of market outcomes • Our current analysis focuses on quantitative analysis of the impacts of the ESI on energy market outcomes ‒ this work will: • Evaluate particular winter scenarios (not evaluate expected outcomes across a wide range of probability-weighted scenarios) • Illustrate particular mechanisms by which ESI may change market outcomes, drawing on particular examples from the model runs Energy Security Improvement Impact Analysis | June 12, 2019

5. Approach to Analysis • Develop a production cost model to simulate the New England day-ahead and real-time energy markets (including real-time reserves) • Evaluate market outcomes under particular scenarios • Scenarios reflect combinations of market conditions related to weather, natural gas demand and prices, resource mix, etc. • Provide information on change in market outcomes under these different scenarios • Change in economic impacts (prices, production costs, total payments) • Changes in operational/system impacts (fuel inventory, reserve shortages) • Provide information on incentives for improved energy security created by ESI Energy Security Improvement Impact Analysis | June 12, 2019

6. Overview of Today’s Presentation • ISO-NE has provided an overview of the Impact Analysis at prior Market Committee (MC) meetings • These presentations provided a high-level overview of the scope of analysis, approach and scenarios to be considered • Today’s presentation provides greater detail on the analysis • Data and assumptions • Approach and methods • Impacts to be analyzed • Scenarios Energy Security Improvement Impact Analysis | June 12, 2019

7. Overview of Modeling Approach: Model Components • Demand & Supply • Load • DA: Bid & Forecast • RT: Actual • Supply • Energy (reflecting marginal cost of supply) • ESI Ancillary Services (reflecting RT LMP volatility, cost of securing fuel) • Results • Settlement • LMPs • Operating Reserves • ESI Ancillary Services • Total Costs • Resource use Market Optimization • MDAM / DA • Energy • ESI Ancillary Services • Opportunity costs (current market) • Real-Time • Energy • Operating reserves • Opportunity costs • Fuel Delivery Constraints • Natural Gas Supply System • Fuel oil replenishment System • Resource Fuel Inventory • Oil Inventory • Initial inventory • Replenishment • LNG Contracts Energy Security Improvement Impact Analysis | June 12, 2019

8. Structure of Real-Time and Day-Ahead Market Models Energy Security Improvement Impact Analysis | June 12, 2019

9. Integration of Day-Ahead and Real-Time Markets • Both the DA and RT markets will be analyzed using a production cost model • Model simulates outcomes of New England energy markets (including real-time reserves) • Model minimizes the cost of meeting electricity demand (load) and other constraints (e.g., reserves, ESI, AS) • Supply submits energy offers reflecting production and opportunity costs • Accounts for certain key operational constraints, including fuel inventory • Analysis compares outcomes under current market rules and proposed ESI • AG is developing the model to incorporate proposed ESI design • ESI AS products cannot be modeled using existing production cost models • Model developed using linear programming software • Given time constraints, model makes certain simplifications • Transmission constraints • Daily commitment Energy Security Improvement Impact Analysis | June 12, 2019

10. Overview of Modeling Approach: Current Markets & ESI Day t+2 Day t+5 Case Model Day Day t Day t+1 Day t+3 Day t+4 Real-Time EAS Day-Ahead Energy Day t Business as Usual (BAU) Real-Time EAS Day-Ahead Energy Day t+1 Real-Time EAS Day-Ahead Energy Model runs December through February Day t+2 Real-Time EAS Multi Day-Ahead Energy Day t DA AS Energy Security Improvements (ESI) Real-Time EAS Multi Day-Ahead Energy Day t+1 DA AS Real-Time EAS Multi Day-Ahead Energy Day t+2 DA AS Note: DA AS refers to GCR, EIR, and RER Energy Security Improvement Impact Analysis | June 12, 2019

11. Overview of Modeling Approach: Current Markets & ESI Day t+2 Day t+5 Case Model Day Day t Day t+1 Day t+3 Day t+4 Real-Time EAS Day-Ahead Energy Day t Business as Usual (BAU) Real-Time EAS Day-Ahead Energy Day t+1 Real-Time EAS Day-Ahead Energy Model runs December through February Day t+2 • Model Incorporates Current Features of Day-Ahead and Real-Time Markets • Day-Ahead: Energy Only with Opportunity Costs • Real-Time: Energy and Operating Reserves with Opportunity Costs • Two-part settlement Real-Time EAS Multi Day-Ahead Energy Day t DA AS Energy Security Improvements (ESI) Real-Time EAS Multi Day-Ahead Energy Day t+1 DA AS Real-Time EAS Multi Day-Ahead Energy Day t+2 DA AS Note: DA AS refers to GCR, EIR, and RER Energy Security Improvement Impact Analysis | June 12, 2019

12. Overview of Modeling Approach: Current Markets & ESI Day t+2 Day t+5 Case Model Day Day t Day t+1 Day t+3 Day t+4 • Model Incorporates New Energy Security Improvement Features • Day-Ahead: ESI Ancillary Services • Multi-Day-Ahead Market • Real-Time: Energy and Operating Reserves with Opportunity Costs • Two-part settlement (sequential, across multi-day period) Real-Time EAS Day-Ahead Energy Day t Business as Usual (BAU) Real-Time EAS Day-Ahead Energy Day t+1 Real-Time EAS Day-Ahead Energy Day t+2 Model runs December through February Real-Time EAS Multi Day-Ahead Energy Day t DA AS Energy Security Improvements (ESI) Real-Time EAS Multi Day-Ahead Energy Day t+1 DA AS Real-Time EAS Multi Day-Ahead Energy Day t+2 DA AS Note: DA AS refers to GCR, EIR, and RER Energy Security Improvement Impact Analysis | June 12, 2019

13. Day-Ahead Market • New ESI ancillary services (AS) • GCR • 10 and 30 minute products (10 minute spin and non-spin combined) • Resource-specific Claim 10 and Claim 30 capability • EIR and RER • EIR will reflect difference between DA cleared load and DA forecast load • RER quantity – per ISO’s June/July presentations • Eligibility requirements – per ISO’s June/July presentations • Supply of energy and ESI AS limited to resource’s capacity • Price caps (i.e., penalty costs of not meeting requirement) differ across products Incorporates multiple features of ESI Energy Security Improvement Impact Analysis | June 12, 2019

14. Day-Ahead Market • Energy offers, reflect the marginal cost of supplying energy • Fossil resources reflect fuel, variable O&M, emission costs given resource-specific specifications (e.g., fuel type, heat rate, emission rates) • Dual-fuel optionality is modeled • Emission costs for MA GWSA compliance based on expected allowance price Resource offers Illustrative Resource Supply Curve Variable Operating Costs ($/MWh) Cumulative Capacity (MW) Energy Security Improvement Impact Analysis | June 12, 2019

15. Day-Ahead Market • Opportunity costs reflect cost of limit in fuel inventory • Opportunity cost bid adder increases likelihood that limited energy supply is used in highest value hours • Bid adder reflects net revenue of “last” unit of energy over multi-day horizon • Calculation of opportunity cost consistent with market rules • See: ISO-NE Materials from 11/2018 MC meeting • Current DA market allows opportunity costs to be included in energy market offers • With MDAM, no opportunity costs in DA market • Opportunity costs are in RT market, as well Opportunity Costs Energy Security Improvement Impact Analysis | June 12, 2019

16. Day-Ahead Market • Estimates opportunity costs vary over time • Positive opportunity costs when forecast load and natural gas prices imply supply from oil-fired resources are “in the money” (and oil supply is limited) • Otherwise, opportunity costs are zero • Figures are illustrative • Opportunity cost level • Quantity of resources with positive opportunity costs Opportunity Costs Illustrative Daily Peak Load and Opportunity Costs Illustrative Capacity of Economically-Postured Resources Capacity of Economically-Postured (MW) Mean Opportunity Cost ($/MWh) Daily Peak Load (MW) Energy Security Improvement Impact Analysis | June 12, 2019

17. Day-Ahead Market • Imports • Modeled as an offer supply curve • Certain resources modeled will modeled using historical supply • Variable renewables (wind, solar, hydro) and certain facilities with more complex offer logic (e.g., pumped storage) • Supply will reflect historical supply patterns • Virtual Supply (energy only) • Modeled as net of virtual load and supply (INCs and DECs) • Calibrated to reflect different types of offering behavior ‒ for example: • Infra-marginal demand/supply needed to meet forecasted load • Deviations to reflect under/over-supply Resource supply Energy Security Improvement Impact Analysis | June 12, 2019

18. Day-Ahead Market • New ESI ancillary services • Offer prices for AS reflect costs of settlement plus net cost of supplying service ‒ that is: • See ISO-NE ESI June 10, 2019 Presentation, slides 38-44. • Statistical analysis of historical prices used to measure expected payouts to the call option • Cost of supply (net of incremental expected profit from securing fuel) will vary across different types of resources (e.g., oil-fired resources, resources with forward LNG contracts) Resource offers Energy Security Improvement Impact Analysis | June 12, 2019

19. Real-Time Market • Market products include energy and two operating reserve constraints, 10- and 30-minute reserves • Same operational and plant specifications features as DA market • Resource bids will reflect resource and opportunity costs • Opportunity costs for energy and ESI Ancillary Services ‒ that is, supplying energy today can limit ability to supply energy tomorrow or cover an ESI position if resource is energy limited • Differences between DA and RT load • Normal daily variation • BAU results will reflect historical differences between DA and RT load • Shocks reflecting unexpected contingencies • Scenarios will consider larger shocks to load and supply Similar in many respects to DA market Energy Security Improvement Impact Analysis | June 12, 2019

20. Operational Constraints • Daily fuel inventory is resource-specific • Fuel inventory reflects resource-specific tank size ‒ affects: • Initial inventory • Daily fuel available • Replenishment potential • Inventory changes daily given use for generation and replenishment • Daily replenishment reflects multiple parameters: • Inventory floors that trigger replenishment • Delay in replenishment • Maximum daily replenishment • Inventory ceiling • Fuel inventory limits can bind unit output and create opportunity costs Resource-specific Constraints and Use Energy Security Improvement Impact Analysis | June 12, 2019

21. Operational Constraints Fuel Replenishment – Illustrative Resource-Level Examples Parameters will vary across resources given tank size and other resource characteristics Fuel Consumption Fuel Inventory (MWh) Replenishment Quantity Floor to Trigger Fuel Replenishment Lag in Replenishment Energy Security Improvement Impact Analysis | June 12, 2019

22. Operational Constraints • Gas system infrastructure constrains gas delivery • LDC Load varies by day, depending on weather and potential satellite LNG storage withdrawals • LNG supply fixed at maximum deliverable capacity ‒ model currently does not account for dynamic intraday constraints • Total fuel oil delivery system • Total daily fuel oil delivery constrained System Constraints Energy Security Improvement Impact Analysis | June 12, 2019

23. Changes in Energy Inventory Energy Security Improvement Impact Analysis | June 12, 2019

24. Impacts on Energy Security • The proposed Energy Security Improvements potentially change market participant resource decisions and economic offers in ways that improve energy security • ESI ancillary services purchase options on energy supply • RT offers may change due to increased RT opportunity costs of energy use • i.e., supplying energy today affects ability to supply AS tomorrow • Prior to delivery day, resource owners change fuel arrangements in anticipation of need to cover DA AS positions (e.g., LNG forward contracts, additional fuel oil in tank or more robust fuel oil replenishment arrangements) • MDAM improves inter-temporal allocation of limited energy across multi-day period Potential impacts given conceptual design Energy Security Improvement Impact Analysis | June 12, 2019

25. Real-time Opportunity Costs • Resources with limited energy supply face an opportunity cost when using energy to generate electricity • Use of limited inventory constrains ability to generate power the next day • Use of inventory limits ability to cover an ESI product’s position the next day • RT offers currently include opportunity costs • At present: opportunity costs reflect energy only • With ESI: opportunity costs reflect energy and ESI AS products • Methodology to determining opportunity costs is otherwise similar conceptually to existing opportunity cost calculations Energy Security Improvement Impact Analysis | June 12, 2019

26. Short-Term Fuel Arrangements • In the short-term (e.g., day-ahead), resources can make decisions that affect their ability to cover a day-ahead ESI position • Purchase incremental fuel oil (replenish to higher levels, with greater frequency, etc.) • Purchase day-ahead gas (e.g., for resources with an EIR position) • These decisions have certain consequences and costs that can be captured by the model • E.g., lack of incremental fuel oil can limit the ability to supply energy or cover a day-ahead ESI position (ESI position can be limited to available fuel inventory) • Changes in fuel arrangements to be captured by different parameters for fuel replenishment Energy Security Improvement Impact Analysis | June 12, 2019

27. Fuel Arrangements in Advance of Winter • In advance of the winter, resources can make decisions that affect their ability to cover a day-ahead ESI position • Forward contract with LNG terminal (Canaport, DOMAC) • Incremental increase in initial fuel oil inventory • Forward LNG Contract • General approach will be consistent with analysis performed for Interim Compensation Treatment program • Particulars will differ given market structure differences • LNG contract options are limited • Need to avoid excess exercise ‒ i.e., exercising call option with small gain foregoes option to exercise call later for large gain • ESI offers reflect marginal costs at LNG contract commodity charge plus an opportunity cost to avoid excess exercise Energy Security Improvement Impact Analysis | June 12, 2019

28. Modeling of Changes in Energy Inventory • RT opportunity costs integrated into the model structure • Analysis will capture response of fossil units to program incentives • At present, model will not capture response of other units (e.g., pumped storage, battery storage, pondage hydro) to these incentives • Changes in fuel procurement modeled through differences in relevant assumptions • Incremental fuel oil procurement – change assumptions regarding initial storage levels and replenishment timing/rate • Forward LNG contract ‒ gas-only resources hold the option to procure fuel through a forward LNG contract (similar to dual-fuel, but with limit on LNG supply) • Further detail on approach to evaluating “economics” of decisions to increase energy inventory will be provided in July Model approach will vary across types of actions Energy Security Improvement Impact Analysis | June 12, 2019

29. Changes in Energy Inventory • Potential changes not analyzed at present: • Operational changes to limited energy resources: • Pumped storage • Pondage hydro • Biomass and potentially other resources with fuel supply limits • Resource owners’ capital investments to improve fuel security ‒ e.g., dual fuel • New services (fuel supply) ‒ e.g., on-site LNG storage • Changes in resource exit/entry decisions precipitated by ESI (alternative resource mixes are considered) Model will not account for all potential inventory changes Energy Security Improvement Impact Analysis | June 12, 2019

30. Assumptions, Scenarios and Impacts Analyzed Energy Security Improvement Impact Analysis | June 12, 2019

31. Components of Analysis • Historical analysis • Used to benchmark model • Future cases • Baseline cases under different winter conditions • Scenarios • Changes to particular assumptions from base cases A range of analysis will be performed Energy Security Improvement Impact Analysis | June 12, 2019

32. Historical Analysis • Model and actual market outcomes compared for past winter periods • 2013/2014 • 2016/2017 • 2017/2018 • Model generally matches historical LMP, technology/fuel mix and fuel constraints on operations • Further details to be provided in July MC presentation Model benchmarked to historical periods Energy Security Improvement Impact Analysis | June 12, 2019

33. Future Cases • Future cases will use market conditions from past winters as a starting point • Load, variable renewable (solar, wind) output, and natural gas prices will be based on historical values from past winters • Values will be adjusted to account for changes in market conditions between past year and future year: • Load will be adjusted to account for growth (positive or negative) in load • Renewable output will reflect hourly output profile, scaled to account for changes in capacity • Natural gas prices will be unchanged, although sensitivity analysis may explore more severe (higher-priced) market outcomes Future cases rely on historical winter outcomes with adjustments Energy Security Improvement Impact Analysis | June 12, 2019

34. Future Cases • Base analysis will consider different levels of winter severity: • Low 2016/2017 (potentially 2018/2019) • Moderate 2017/2018 • High 2013/2014 • Resources – “Business as Usual” • Resources clearing in FCA 13 • Announced retirements (for FCA 14) • Resources from certain state procurements (e.g., OFSA assumptions of 1,400 MW off-shore wind) Future cases rely on historical winter outcomes with adjustments Energy Security Improvement Impact Analysis | June 12, 2019

35. Scenarios • Scenarios will be developed in response to stakeholder requests • Time constraints may limit ability to evaluate all requested • Will aim to evaluate high priority/most representative scenarios • Potential areas for sensitivity analysis • Future resource mixes • Winter severity • Load • Contingencies • Fuel availability • ESI procurement quantities A Range of Scenarios Will be Evaluated Energy Security Improvement Impact Analysis | June 12, 2019

36. Scenarios Contingencies • Unexpected shocks to load • Unexpected supply shocks (resource outages) • Fuel availability • Low / high fuel oil availability (e.g., replenishment rate / quantity) • Low / high NG supply ESI parameters • RER quantity • GCR, EIR, RER Strike Price Future resource mix • At-risk resource retirement • Expanded low-carbon resources • Off-shore wind • Canadian hydro Winter Severity • Multiple cold snaps • Extended cold snaps Load • High load • Higher winter peaking (electrification) • Potential Scenarios Reflect Assumption Changes Along Multiple Dimensions Energy Security Improvement Impact Analysis | June 12, 2019

37. Impacts Analyzed Economic Outputs • LMPs (Day-ahead, Real-time) • Production costs • ESI ancillary service prices/payments • Total customer payments • Economic, Operational and System Outputs Operational/System Outputs • Generation supply mix (technology/fuel) (MWh) • Energy inventory (MWh) • Economic posturing (change in supply or merit order given ESI) • Emissions Energy Security Improvement Impact Analysis | June 12, 2019

38. Next Steps • July • Preliminary results for historical analyses (benchmarking) • Preliminary results for future cases • August • Preliminary scenario results • Respond to stakeholder feedback from July results • September • Draft Report • October • Filing A Range of Scenarios Will be Evaluated Energy Security Improvement Impact Analysis | June 12, 2019

39. Todd SchatzkiPrincipal617-425-8250todd.Schatzki@analysisgroup.com Contact Energy Security Improvement Impact Analysis | June 12, 2019