Transcript capacity - ISO New England

Market Reform Proposals
Pete Fuller
NEPOOL Markets Committee
March 12, 2013
Today’s Discussion
 A bit of background
 The building blocks: energy, ancillary
services, capacity
 A cohesive approach to the overall market
design
 Next steps
1
Qualifier
 As currently structured and administered, FCM is
deeply flawed:
 Mitigation policies should provide the marginal
existing resource a reasonable opportunity to
recover all of its annual fixed costs
 A demand curve that recognizes the
incremental value of additional capacity is
essential, especially in the absence of a supply
curve based on long-run costs
 Reliability reviews of existing resource offers
(delist bids) should be eliminated; all
constraints that are to be enforced through
planning or operability criteria should be
specified in the auction requirements
2
Background – The Cost of Doing Business
Berkshire Power
Fore River
Bridgeport Energy
W Springfield 3
W Springfield GT1&2
Milford Power
NRG - Middletown
NRG - Montville
NRG - Norwalk Harbor
PSEG - BH2
PSEG - New Haven
$-
Potential price in FCA8
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$/kW-month
Fixed O&M
Total Fixed Cost
Range of FCM prices, FCA2-FCA7
Sources: Unit costs: ISO-NE RMR Agreements, http://www.iso-ne.com/genrtion_resrcs/reports/rmr/index.html
FCA2-7 prices: ISO-NE website, http://www.iso-ne.com/markets/othrmkts_data/fcm/cal_results/index.html
Potential FCA8 prices: UBS, “New England: The Next Bust and Boom,” November 6, 2012. “… beginning with the ‘17/18 auction (held in
Feb ‘14), FERC has mandated the floor be removed resulting in a substantial degradation in capacity prices (at best $0.99/kWmnth), however, given the over-supply, the auction prices could be much lower (closer to spot prices of ~$0.20/kw-mnth of late).”
3
Background – Fuel Diversity Benefits
At times of peak load – the periods that most influence Loss of Load Probability
and ICR – oil and coal continue to be relied upon
• on-site fuel storage is an inherent characteristic for these resources
What’s powering New England
through the peak?
Look at fuel usage during high
electricity demand on the peak
of a summer day in 2011. Oilfired resources produced 14%
of electric energy during the
peak but produced only 1% of
electricity
over the entire year.
Source:
ISO New England 2013 Regional Energy Outlook, http://www.iso-ne.com/committees/comm_wkgrps/strategic_planning_discussion/materials/2013_reo.pdf
4
The Building Blocks
 Energy
 Ancillary Services
 Capacity
5
Real-Time Energy – the Foundation
 RT Energy prices need to reflect the full cost
(and/or value) of meeting demand and reserves
at any given moment
 This signal is critical to both supply and demand
sides of the market
 RT price exposure is a primary driver for efficient
hedging behavior
 DA Energy Market – hedge on a daily basis
through a centralized financial mechanism
 Standard and customized hedges are also
available in the market through bilateral
contracts
 RT prices discipline behavior of suppliers with
DA schedules
6
Ancillary Services
 Provide access for ISO to the flexibility and
responsiveness needed to balance and manage
real-time load dynamics and contingencies
 “It is important not to confuse the capacity
product with operating reserve products. The
capacity product is not an operating reserve
product.” (Patton, 2/19/13)
 Not all resources need to have high ramp rates,
short start times, etc, but it is important that
some do
 LFRM, augmented by real-time reserves cooptimized with energy (plus regulation) provide
the operating flexibility to maintain real-time
reliability
7
Capacity
 Capacity as a planning mechanism
 Capacity requirements (ICR) are based on risk of
disconnecting firm load – due to resource deficiency – in
all hours, with most risk residing in peak load hours
 As a result, the delivery of capacity should be measured
in all hours, or a subset of hours reflecting the highest
risk of resource deficiency
 Capacity as an economic mechanism
 Capacity market: the ‘balancing market’ through which
resources can seek to recover fixed costs not covered by
energy or ancillary service margins
Capacity price ≤ Total annual costs – (Energy & Ancillary margins) + Risk
 Mitigation policy uses the wrong conceptual benchmark
for capacity market offers
8
An Alternative to ISO-NE’s Performance
Incentives Proposal
 Address energy market pricing problems in the
energy market
 Increase RCPFs to allow for automated redispatch in the event of reserve scarcity
 Reflect reliability commitments in energy prices
 Eliminate, or put a price on, all ‘unpriced
operator actions’
 Real-time prices that reflect the full cost (and/or
value) of meeting reserve constraints provide the
same incentive as ISO’s proposal for suppliers to
be available
 Likely to be more efficient than ISO proposal
since they will reflect actual conditions rather
than a proxy rate
9
An Alternative, continued
 The ‘penalty’ for unavailability/non-performance
is buying back the DA obligation in real-time
 Making scarcity pricing visible to buyers increases
efficiency of incentives and hedging
 Patton (2/19/13) raises concerns with ISO’s
proposal that loads will not bid efficiently DA,
DA prices may be suppressed, and there may
be inefficient incentives to self-commit gen
 Efficient real-time price formation in the
energy market avoids these concerns
 Additional hedges or options to limit the volatility
of energy costs should be commercial products,
not regulatory products
10
An Alternative, continued
 Make the capacity product a capacity product
 Procure enough to meet resource adequacy
criterion
 Primary obligation is to offer capability to the
E&AS markets every day
 Measure performance that is within the control of
the resource owner, ie, how available is the
resource’s full capability in the daily markets?
 Focus on high-load hours where most of the
resource deficiency risk resides
 EFORp: probability that a resource will not be
available due to forced outages or forced
deratings when there is a demand on the unit to
generate during defined peak hour periods
11
An Alternative, continued
 Structure the capacity market to reward
resources that exceed their target availability and
penalize those that under-deliver
 Target could be the resource’s long-run
average availability, or a class average
 Extended forced outages would necessarily
result in economic consequences
 PJM’s Peak-Hour Period Availability mechanism
uses this framework (PJM Manual 18)

“[The Peak-Hour Period Availability] provision establishes a means to
assess whether generation resources committed as capacity actually are
available at expected levels during peak periods, and credits or charges
resources to the extent they exceed or fall short of that expected
availability. This will provide generation owners a significant added
incentive to ensure that their capacity resources are available when they
are most needed, and provide loads greater assurance that their
payments for capacity will help maintain peak period reliability.”
12
An Alternative, continued
 Eliminate Peak Energy Rent deduction
 Viewed as an option, PER has a strike price at a
22,000 heat rate
 Current PER is based on real-time delivery & pricing,
even though ~90% of the market clears DA and
does not see RT pricing
 De-couple energy price options from the capacity
product
 The capacity product is in response to the
requirement to have resources at least equal to ICR
 Options and other hedges should be pursued in
commercial transactions, not regulatory constructs
 Appendix A (mitigation) and FERC anti-manipulation
rules are more than adequate to address concerns
13
with real-time pricing behavior
An Alternative, continued
 Capacity market price formation
 Investors need a reasonable degree of
price/revenue certainty
 Prices need to average, over time, the longrun net cost of the marginal resource
 Revise mitigation approach
 Establish reference prices for existing
resources based on long-run average costs
 Suppliers may discount their offers in
response to actual or perceived competition
 A sloped demand curve (recommended by FERC,
Patton, etc) would also temper year-to-year price
volatility for investors, and enhance reliability
14
Next Steps
 Consulting with a number of stakeholders
 Significant interest from all segments of
NEPOOL and the regulatory community
 Plan is to develop sufficient design detail to
include in the ISO/Analysis Group evaluation
15
Thanks for your consideration.
16