Transcript System-wide Demand Curve

Discussion Points:
ISO-NE Demand Curve Proposal
Markets Committee
February 9-10, 2016
System-wide Demand Curve
• Under the existing system-wide demand curve, the
price at NICR is nearly 20% more than Net CONE,
which provides an important safeguard against
underestimating Net CONE
• This important feature appears to have disappeared
completely from the ISO-NE proposal and ISO-NE
ought to consider shifting the curve to address that
ISO-NE filed Testimony on the Dangers of Underestimating
Net CONE in 2014
(Docket No. ER14-1639, April 1, 2014)
Q: What are the dangers of setting Net CONE too low?
A: First, unlike costs, which rise linearly with the quantity of capacity, reliability is a
highly non-linear function of capacity. As a consequence, the danger of setting the Net
CONE value below the true Net CONE is that the under-procurement of capacity will
have a large reliability effect. The Newell/Ungate Testimony shows that if Net CONE
were underestimated by 33%, the market would clear about two percent less capacity
on average, but shortages would be expected 50% more often.
A second danger of understating Net CONE is that if resources believe they cannot
earn their true Net CONE in the capacity market, developers will add significant risk
premiums to their offers, driving up the true Net CONE. There is evidence that the
FCM may be facing risk premiums today; the demand curve design should solve, not
exacerbate, this problem.
The Newell/Ungate Testimony indicates that the risk of under-procurement due to
perceived regulatory risk and consequent risk premiums may be greater in ISONE than
in other RTO markets due to New England’s lack of history of attracting merchant
entry since implementing the FCM.
ISO-NE filed Testimony (con’t)
Q: Why are the dangers of setting Net CONE too low much greater than setting it too
high?
A: The fundamental reason for the asymmetry in the risks of over and underestimating
Net CONE is, as noted above, that reliability is a highly nonlinear function of capacity,
while costs rise linearly with the quantity of capacity. The non-linear nature of
reliability can be seen by looking at the impact of capacity deficits or surpluses on
reliability: being 500 MW short may increase the frequency of load shedding events by
46%, while being 500 MW long may only decrease the probability by 29%.
However, as noted above, costs for a market in equilibrium rise (or fall) at a constant
rate: true Net CONE x the quantity of additional (or reduced) capacity. Because of this,
reducing the amount purchased may have a large reliability effect (e.g. a doubling of
load shedding events) but decrease costs by less than three percent (900 MW out of
34,000 MW).
System-wide Demand Curve
• It is important to evaluate how often the system will go below
NICR
– To date, that information is lacking
• If ISO-NE sets Net CONE at NICR, than logically they will be
below NICR 50% of the time
• Query whether that is the right level
Import Constrained Zones
• ISO's MRI curves are designed to allow procurement inside import
constrained zones far below minimum procurement levels that the ISO
has been willing to enforce in each of the past 10 FCAs, particularly in
situations where the LSR is governed by the TSA and not the LRA.
• If ISO is willing to procure on this basis, it is critical for proper
functioning of the markets that resulting deficits not be satisfied
through out of market mechanisms. This would include:
– GAP RFPs not be used to procure additional capacity when the zone clears on
the Demand Curve (that is, no "Inadequate Supply.")
– RAs be structured using the same Demand Curves as the associated FCA
(adjusted only for updates to load forecasts).
– Bilateral capacity transactions be approved or rejected on a similar reliability
basis to the main FCA.
– Delists and Retirements be assessed on a comparable or same reliability basis
to the main FCA.
Export Constrained Zones
• FCM on average needs to clear near Net CONE in order to
provide sufficient incentives
• Demand curve must take into account any impacts from zeropriced MWs as a result of the renewable exemption of 200
MWs
• If you presume that a significant fraction of that 200 MWs will
end up in an export-constrained zone, the impact will likely
force early retirement of existing capacity in that zone
Export Constrained Zones
• When proposing the linear demand curve to the FERC, ISO-NE
testified that since there would be load growth, the
exemption would be just and reasonable since its impact
would be minimal to the capacity clearing price and the FCM
could still clear near Net CONE
• Impact of 200MW clearing in various parts of the system
– To the system-wide capacity (35,000MW) impact is only 0.6%
– To Northern New England capacity zone (8,500MW) impact is 2.3%
– To Maine capacity zone (4,000MW) impact is 5%
• Added concerns include a lack of expected load growth in the
region and the fact that unused MW from the exemption can
be carried forward for 3 years
Export Constrained Zones
• The MRI concept introduced by ISO-NE merges economic and
reliability theory to calculate marginal benefit to the system
• The intent is to have a precise calculation on marginal benefit,
but the presence of up to 200 MWs of zero-priced entry
distorts the true MRI calculation
• The MRI is intended to send the correct price signals. If there
is surplus of capacity, this will show up as negative congestion
and prices in a export constrained zone would be lower than
the system-wide price
• This presence of potential 200 MWs of zero-priced renewable
exemption eligible entry distorts the true MRI calculation and
intended price signals
Negative impact to clearing price in Maine
Capacity Zone
•
•
Current qualified capacity in Maine + import capability using FCA 9 published
information is 3,553MW + 208MW = 3,761MW
Adding 200MW of renewable exemption resources = 3,961 would yield
approximately -$1 congestion. Adding another 400MW would yield -$4 congestion
-$1
-$4