Transcript IMM Conduct Review

FEBRUARY 11, 2015 | MARKETS COMMITTEE
Proposal to Address
Uneconomic Retirement of
Capacity Resources
Hemant Patil
SENIOR ANALYST, INTERNAL MARKET MONITOR
Introduction
• In the November 5, 2014 memo the Internal Market Monitor
(IMM) and ISO Management identified uneconomic
retirement of capacity resources as a key issue
• At the January 15, 2015 Markets Committee meeting the IMM
provided details of the market power concern with
uneconomic retirements
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Current Non-Price Retirement Process
• A supplier may submit a binding Non-Price Retirement
Request (NPRR) to retire all or part of a Capacity Resource
• NPRR is subject to a reliability review by the ISO
• If reliability review rejects a NPRR, a resource may
– retire even if the resource is needed for reliability
– elect to remain in operation until it is not needed for reliability
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Background
• NPRRs have the ability to significantly distort market
outcomes
• Uneconomic NPRRs can benefit suppliers to the detriment of
load
• The IMM proposes a retirement process that deters the
exercise of market power with uneconomic NPRRs
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IMM Proposal
• A supplier attempting to exercise market power through an
uneconomic NPRR will not benefit from the retirement.
– The IMM’s proposal will remove the incentive for a supplier to attempt
an uneconomic NPRR
• Load will be better off under the IMM’s proposal than under
the current market rule because the incentive for uneconomic
NPRRs will be removed
• Other suppliers are not affected.
– The proposed rule only impacts suppliers attempting to exercise
market power.
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Proposed Non-Price Retirement Process
• A supplier may submit a binding NPRR to retire all or part of a
Capacity Resource
• The IMM will evaluate NPRRs greater than 5 MW to ensure
sufficient economic justification exists for the retirement
– Why 5 MW? Small capacity supply changes are unlikely to have a
significant impact on market outcomes, while reviewing small NPRRs
may be an administrative burden for the supplier and the IMM
– An NPRR will be evaluated only if the supplier’s total NPRRs in a
capacity zone meet a threshold MW quantity
• The current Reliability Review process, which determines
whether a resource is needed for reliability, remains
unchanged.
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Proposal Summary
• IMM Conduct Review
– The IMM will evaluate supplier’s NPRRs in a capacity zone if they are
greater than 5 MW to ensure sufficient economic justification exists
for the retirement
• IMM Impact Review
– The IMM will determine the impact of the NPRR on the market
outcomes based on the capacity requirement
• Charge Determination
– The IMM will calculate a charge based on the size of supplier’s
uneconomic NPRR, the size of supplier’s portfolio and the slope of the
zonal demand curve
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Proposal Details: IMM Conduct Review
• Threshold for the IMM Review:
– The combined quantity of a supplier’s NPRRs in a capacity zone is
greater than 5 MW
• The IMM will consider a supplier’s conduct uneconomic if
both of the following conditions are met
1.
2.
The decision to retire a resource is NOT beyond the control of the
supplier (e.g. new environmental regulation making it illegal to
continue operating)
The individual resource is profitable at or below the FCM Starting
Price for the remainder of its economic life
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Proposal Details: IMM Impact Review
• If the cleared quantity in the auction is less than the
requirement in a capacity zone then an uneconomic NPRR in
that zone is deemed to have had a market impact
• Impact will be assessed in each FCA until the remainder of
resource’s economic life
– For instance, if IMM determines a resource has 2 years of economic
life left then the impact assessment will be done twice: once before
the FCA in which NPRR is submitted and then before the next FCA
– Capacity zone for a resource location may not remain same in each
auction (e.g. Resource location could be in an import-constrained zone
in one FCA and then Rest-of-System in the next)
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Proposal Detail: Charge Determination
• The charge will more than offset the total portfolio gain the
supplier would have otherwise earned with the uneconomic
retirement – discouraging uneconomic NPRRs in the first place.
• Determine Uneconomic Charge Amount
– Slope of the demand curve times
– Min {total uneconomic NPRR quantity of the supplier, (LSR/NICR – cleared
quantity in the auction)}
– If the cleared quantity in the auction is greater than the requirement
(LSR/NICR) then the price impact for that auction is assumed to be zero
• Total Portfolio charge Amount
– 1.5 times
– the price impact times
– the supplier’s cleared CSO in the capacity zone for the relevant auction
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Examples
1. Capacity requirement not met, even with the inclusion of the
uneconomic NPRR
2. Capacity requirement is met with the inclusion of the
uneconomic NPRR
3. Auction clears above the capacity requirement. The
uneconomic NPRR is not needed to meet the requirement
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Example 1: Capacity requirement not met, even with the
inclusion of the uneconomic NPRR
Requirement (MW)
4,000
Cleared Quantity in the
FCA
3,845
FCA Clearing Price
($/kw-month)
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Uneconomic Retirement
(MW)
109.39
Supplier's Cleared
Portfolio (MW)
1,000
Price Impact ($/kwmonth)
2.00
Charge Amount
($/month)
3,000,000
Charge Amount ($/mw-month):
(1.5)*(Price Impact)*(Supplier’s Cleared Portfolio) = (1.5)*(2)*(1,000)= 3,000
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Example 2: Capacity requirement is met with the inclusion of
the uneconomic NPRR
Requirement (MW)
Cleared Quantity in the FCA
(MW)
FCA Clearing Price ($/kwmonth)
4,000
3,954
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Uneconomic Retirement
(MW)
109.39
Supplier's Cleared Portfolio
(MW)
1,000
Price Impact ($/kw-month)
0.84
Charge Amount ($/month)
1,258,135
Charge Amount ($/mw-month):
(1.5)*(Price Impact)*(Supplier’s Cleared Portfolio) = (1.5)*(0.84)*(1,000)= 1,258
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Example 3: Auction clears above the capacity requirement
Requirement (MW)
Cleared Quantity in the FCA
(MW)
FCA Clearing Price ($/kwmonth)
4,000
4,064
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Uneconomic Retirement
(MW)
109.39
Supplier's Cleared Portfolio
(MW)
1,000
Price Impact ($/kw-month)
0
Charge Amount ($/month)
0
Charge Amount ($/mw-month):
(1.5)*(Price Impact)*(Supplier’s Cleared Portfolio) = (1.5)*(0)*(1,000)= 0
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Proposal Detail: Properties of the charge
Structure
• Simple and Proactive
– The charge will proactively discourage uneconomic NPRRs, is relatively simple to
implement and not require changes to the ISO’s qualification processes or auction
software.
• Transparency
– Supplier can easily estimate the maximum amount of charge
• Price impact varies with relative capacity scarcity
– If the auction clears an about an amount greater than the requirement the charge
is zero
• Deterrent and not a market impact recovery mechanism
– Only suppliers who engages in uneconomic retirement incur a charge.
• Uniform charge Rate across suppliers within a capacity zone
– The charge rate is a function of the demand curve
• Responsive to New Entry
– Higher cleared quantity in the subsequent auction lowers the charge
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