Transcript Net CONE Adjustment to Initial Price Lock-In

MARCH 12, 2014
Capacity Demand Curve
ISO’s Recommended Curve and Net CONE
Robert Ethier
VICE PRESIDENT, MARKET DEVELOPMENT
Contents
–
–
–
–
–
Background and Overview
Recap of Demand Curve Objectives
Key Issues Highlighted by Stakeholder Process
Summary of Proposal
Recommended Demand Curve
• Detailed Features
• Performance
• Performance Sensitivities
– Net CONE
– Adjustment to Initial Price Lock-In
2
Background and Overview
• On January 24, FERC issued an order requiring that the ISO file
a sloped demand curve by April 1:
– The ISO must “submit its proposed [sloped] demand curve by April 1,
2014, to allow sufficient time for implementation prior to FCA 9.”
– Discussions began with the NEPOOL MC on February 6
• Scope includes a system-wide sloped demand curve, Net
CONE, deletion of pool-wide Inadequate Supply/Insufficient
Competition rules, and changing the administrative payment
rate for zonal IS/IC/Carry Forward rules to Net CONE
– Changes incorporated in posted Tariff language
• ISO is also including a change to the length of the initial price
lock-in, from 5 to 7 years
3
•
Recap of Demand Curve Objectives
Reliability
– Maintain 1-in-10 LOLE target on a long-term average basis
– Rarely drop below a “minimum acceptable” reserve margin corresponding to a 1-in-5
LOLE level where ISO-NE might intervene in the market
• 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
• 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, with cap no greater than 2x Net CONE
• Other
– Reduce susceptibility to market power
– Minimize contentiousness and uncertainty from administrative parameters
4
Key Issues Highlighted in Stakeholder Process
• Brattle has noted that there are a range of curves that appear
to be reasonable based on objectives and analysis
• ISO agrees with Brattle demand curve objectives
• When selecting its proposed curve and Net CONE, the ISO
placed significant weight on three issues:
– Cap value, and consequences if an FCA was not competitive
• Limit risk with non-competitive FCA
– Intercept of demand curve and Net ICR
• Provide reasonable assurance of meeting 1-day-in-10 target
– Consequences of errors in Net CONE
• Reliability degrades quickly when short, while cost of buying more is
relatively modest
5
Summary of Proposal
•
Net CONE uses Combined Cycle technology
•
•
$11.08/kW-mo (rounded to $11.1 in presentation)
Cap at 1.65 x Net CONE
•
Reliability index of 1-in-7
–
•
Kink at 0.7 x Net CONE
•
Reliability index of 1-in-16
–
•
$7.70/kW-mo
Net ICR ≈1.27 x Net CONE
•
Reliability index of 1-in-10
–
•
$18.27/kW-mo
$14.07/kW-mo
ISO is also including a change to the length of the initial price lock-in, from 5 to
7 years
6
Recommended Demand Curve
•
Key Changes from Brattle’s
Initial Candidate
– Updated Net CONE value from
$8.32/kW-m to $11.1/kW-mo
– Lowered cap from 2×Net CONE
to 1.65×Net CONE
• Helps mitigate supplier market
power
• Reduces exposure to very high
prices
• Closer to PJM and NYISO
curves at 1.5×Net CONE and
1.6×Net CONE, respectively
Price at Cap: $18.27
Price at NICR: $14.07
– Rest of curve slightly rightshifted to maintain resource
adequacy
7
The Curve’s Features Support the Design Objectives
– Shape: convex
• Avoids low-reliability outcomes
• Recognizes declining marginal value
– Cap: 1.65 × Net CONE starting at 1-in-7
• High enough to attract new entry
• Low enough to help mitigate potential
market power & exposure to very high
prices
• Minimum at 1x Gross CONE to prevent
curve collapse and under-procurement if
projected E&AS is high and Net CONE is
consequently underestimated
– Kink: 0.7 × Net CONE at 1-in-16
• Tuned to meet reliability objectives in
combination with cap point
• Produces curve with price at NICR equal
to about 1.25×Net CONE
– Toe: $0 price at 1-in-100
• Maintains convex shape
Demand Curve Parameter Values
Cap
Kink
Foot
Prices
% of Net CONE
$/kW-m (w/ Net CONE = $11.1)
1.65x
$18.3
0.7x
$7.7
0.0x
$0.0
Corresponding Quantities in FCA7
Reliability Index (1-in-x)
Reserve Margin
% of NICR
MW
1-in-7
10.6%
-1.4%
32,516
1-in-16
14.5%
2.1%
33,648
1-in-100
21.5%
8.3%
35,711
Note: Price cap is subject to a minimum price of 1x Gross CONE.
Demand Curve Slope
Cap to Kink
(Steep Section)
Kink to Foot
(Flat Section)
Change in Price ($/kW-m)
$10.5
$7.7
Change in Quantity (MW)
1,132
2,063
Slope ($/kW-m per 100 MW)
$0.93
$0.38
Note: MW quantities based on FCA7; due to supply elasticity, price
impacts from a 100 MW shift in supply-demand would be less
than the slope suggests.
8
Performance
Simulation Results
Price
Reliability
Price * Quantity
Average
Standard
Deviation
Frequency
at Cap
Average
LOLE
Average
Reserve
Margin
Reserve
Margin
Standard
Deviation
Frequency
Below
NICR
Frequency
Below
Minimum
Acceptable
Average
20th
Percentile
80th
Percentile
($/kW-m)
($/kW-m)
(% of draws)
(Events/yr)
(%)
(%)
(% of draws)
(% of draws)
($mil)
($mil)
($mil)
ISO Recommended Curve
$11.1
$4.7
15.5%
0.10
13.3%
2.5%
32.1%
7.5%
$4,404
$2,690
$6,615
Initial Candidate Curve
$11.1
$5.3
6.4%
0.10
13.2%
2.5%
32.0%
7.6%
$4,395
$2,620
$6,386
9
Performance Sensitivities
Simulation Results
Price
Reliability
Price * Quantity
Average
Standard
Deviation
Frequency
at Cap
Average
LOLE
Average
Reserve
Margin
Reserve
Margin
Standard
Deviation
Frequency
Below
NICR
Frequency
Below
Minimum
Acceptable
Average
20th
Percentile
80th
Percentile
($/kW-m)
($/kW-m)
(% of draws)
(Events/yr)
(%)
(%)
(% of draws)
(% of draws)
($mil)
($mil)
($mil)
$11.1
$4.7
15.5%
0.100
13.3%
2.5%
32.1%
7.5%
$4,404
$2,690
$6,615
Shocks 50% Smaller than Base Case
$11.1
$3.3
3.0%
0.087
13.3%
1.3%
22.4%
0.1%
$4,423
$3,158
$5,725
Shocks 50% Greater than Base Case
$11.1
$5.4
23.6%
0.136
13.1%
3.6%
36.0%
16.9%
$4,384
$2,349
$6,988
$7.3
$3.6
2.3%
0.060
15.5%
2.0%
7.6%
0.6%
$2,970
$1,921
$3,764
$14.7
$4.2
42.6%
0.176
11.0%
2.9%
64.0%
28.3%
$5,747
$4,109
$7,074
Base Case
Recommended Curve w/ Base Case Assumptions
Shock Sensitivities
Net CONE Sensitivities
True Net CONE is 33% Less than Administrative
Net CONE
True Net CONE is 33% Greater than
Administrative Net CONE
10
Net CONE
• Technology
– The ISO agrees with Brattle that it is appropriate to use Combined
Cycle technology as the basis for Net CONE
• Appropriately balances considerations, including lowest cost generation
being actively developed in region
• Net CONE
– The ISO supports the final Brattle value of $11.08/kW-mo as the
appropriate value for net CONE
• Reflects reasonable assumptions
• Reflects stakeholder feedback
11
Adjustment to Length of Initial Price Lock-In
• The ISO proposes to change the maximum length of the initial
price lock-in available to new resources
– Change is a complement to reduction in the cap price
• The ISO is concerned about lack of confidence in the market,
and the consequences for competitive entry
– New England’s capacity market has history of very low prices and
administrative intervention, which deters investors
– Undoing that perception will require multiple auctions with
competitive new entry
– Modestly extending the available lock-in period reduces that risk
– Need for lock-in will be reevaluated after series of successful auctions
• Proposal to increase from 5 to 7 years
12
How Longer Lock-In Helps Compensate for
Lowered Cap Price
•
New entrants/developers are
concerned about market stability and,
with the current lock-in, may require a
very high price to enter; a low cap
threatens to prevent entry
•
If this is true, a longer lock-in could
compensate for a lower cap. For
example:
–
–
–
•
If Net CONE estimates are accurate but entrants
haircut post-lock-in prices by about 50%, they would
enter with a 5-year lock-in if price ≥ 2×Net CONE.
Thus they would enter with our initially proposed cap
of 2x, but not 1.65x.
With a 7-year lock-in and the same post-lock-in
haircut, the CC would be willing to enter at 1.61×Net
CONE (same NPV).
This is consistent with the final proposed cap of
1.65xNet CONE; would be lower if adjusted for a
longer lock-in’s effect on risk and cost of capital.
This example supports proposal to offer
a 7-year lock-in along with the lower
price cap.
13
14