Transcript Monthly Reconfiguration Auctions

OCTOBER 7-8, 2014 | NEPOOL MARKETS COMMITTEE
FCM Sloped Demand Curve:
Reconfiguration Auctions,
CSO Bilaterals, and backstop
Design changes to accompany system and
capacity zone sloped demand curves
Matt Brewster
MARKET DEVELOPMENT
413.540.4547 | [email protected]
Design changes to accompany system and
capacity zone sloped demand curves
• Reconfiguration Auctions
– Annual auctions
– Monthly auctions
Slide 3
Slide 9
• CSO Bilateral Transactions
Slide 11
• Capacity Backstop
Slide 18
• Overview of tariff redlines
Slide 21
This presentation is an update of the ISO’s July and September MC materials
on this topic with additional figures and examples, and the tariff overview.
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ANNUAL RECONFIGURATION AUCTIONS
Changes to incorporate sloped demand curves
Proposed annual reconfiguration auction (ARA)
changes to accompany sloped demand curves
• Beginning with Capacity Commitment Period 9 (CCP9) (2018/19),
system-wide demand curve included in each annual reconfiguration
auction (ARA)
• Beginning with CCP10 (2019/20), system-wide and capacity zone
demand curves included in each ARA
• Demand curve quantity parameters will be updated consistent with
restudied ICR values (same as current)
• Demand curve price parameters from FCA will be held constant for
each ARA (same as current)
• Sloped demand curves replace ISO submitted bids and offers to
true-up supply to 100% of capacity requirements (ICR, LSR)
– For CCP9, current rules for ISO demand bids remain for import zones
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ARA proposed rules will not significantly alter
the existing auction structure
• Applying sloped demand curves in each ARA is consistent with
current practice of applying updated ICR, LSR, MCL requirements
• Maintains objective to define demand in the reconfiguration
auctions consistent with the FCA
– With multiple forward auctions, a consistent definition of demand
prevents expectations of predictable changes in market prices
• ARA continues to allow suppliers opportunity to adjust their
capacity obligations prior to commitment period
– Suppliers submit supply offers (to acquire CSO) and demand bids (to shed)
– Supply offers and demand bids will not require an offsetting resource
offer/bid in order to be cleared in the ARA
• CSO exchanged in the ARA are credited/debited at the ARA clearing
price and included in Net Regional Clearing Price
5
Updating demand curves for each ARA is analogous
to “ISO participation” with fixed demand
Demand definition
ARA demand increase
ARA demand decrease
Fixed demand
“ISO demand bid” entered at the
FCA Starting Price for quantity
short (cap price for every MW)
In ARA 3, “ISO supply offer”
entered at 25-75% of FCA
clearing price for quantity long
(release CSO at low prices)
Sloped demand
Updated demand curve quantity
parameters applied (pricequantity curve shifts right)
Updated demand curve quantity
parameters applied (pricequantity curve shifts left)
•
Under fixed demand design, ISO would not release extra CSO until ARA3 to avoid case
where CSO released in ARA1/2 (at low price) must be re-purchased (at cap price)
•
With sloped demand, left- or right-shifting the price-quantity curve has significantly less
effect on the incremental costs of potentially fluctuating demand
•
Asymmetry in the ARA demand is not necessary. Upward and downward demand
adjustments allow re-clearing market based on current supply/demand conditions
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ARA Sloped Demand Example 1:
Supply offers in ARA (offers to acquire CSO)
•
Sloped demand
•
No change in demand
•
ARA supply offers (green) from
resources with qualified capacity
but not assigned a CSO
•
To acquire, resource offers have to
be lower than the FCA price (PFCA)
– And holding all else constant
– Demand price associated with higher
supply quantities is lower
•
Lower price supply offers have
clearing priority (min cost to load)
•
Cleared supply offers are credited at
ARA clearing price (PARA)
– In Net Regional Clearing Price
Note: other supplier demand bids and/or supply offers may also be in the auction, but are excluded from example for simplicity.
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ARA Sloped Demand Example 2:
Demand bids in ARA (offers to shed CSO)
•
Sloped demand
•
No change in demand
•
ARA demand bids (orange) from
resources with CSO (offer the shed)
– And holding all else constant
– Bid to “buy back” CSO, that if cleared
reduces CSO
•
To shed, demand bids must be higher
than the FCA price (PFCA)
– Demand price associated with lower supply
quantities is higher
•
Highest price demand bids have clearing
priority (max refund to load)
•
Cleared demand bids are debited at ARA
clearing price (PARA)
– In Net Regional Clearing Price
– Applies also for demand bids submitted by ISO for significant decrease
Note: other supplier demand bids and/or supply offers may also be in the auction, but are excluded from example for simplicity.
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MONTHLY RECONFIGURATION AUCTIONS
No design changes
No change proposed for monthly reconfiguration
auction (MRA) to accompany sloped demand curves
• No change to monthly reconfiguration auction (MRA)
• MRA allows suppliers opportunity to adjust their capacity
obligations on a monthly basis
– Submit supply offers (to acquire CSO) and demand bids (to shed)
• Total system capacity does not change in MRA (cleared supply
offers equals cleared demand bids)
– Clearing requires an offsetting resource bid/offer in the auction
– CSO can be traded across capacity zones respecting zonal resource
requirements (LSR, MCL)
• Sloped demand curves reflect annual capacity values that could
inhibit efficient trades if applied in MRA (examples in Appendix)
• CSO exchanged in MRA are credited/debited at the MRA clearing
price and included in Net Regional Clearing Price
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CSO BILATERALS
Conforming change for capacity zone sloped demand curves
Proposed changes to CSO bilateral rules for
capacity zone sloped demand curves
• Beginning with Capacity Commitment Period 2019/20 (CCP10)
– Trades between resources in separate capacity zones only allowed to
transfer CSO in direction of modeled interface constraint
• e.g., resource in rest-of-pool can transfer CSO to NEMA resource,
but not the other way around
– Same as presently effective rules for trades between zones
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Proposed rules require that acquiring resource
provide capacity of equal or greater value
•
CSO Bilaterals allow suppliers opportunity to adjust resource obligations
outside ISO auctions
– Private contracts to transfer CSO between resources
– Administered by ISO on first come, first served basis (not based on price)
– Do not affect Net Regional Clearing Price
•
CSO Bilaterals are beneficial (more trading opportunities) provided that the
capacity exchanged is of equal or greater value
– If this condition does not hold, consumers may be negatively impacted
•
Capacity is not perfect substitute across zones, as implied by zonal demand
requirements/curves
– Capacity located in import-constrained areas meets local and system requirements, but
resources outside import zone can’t satisfy LSR
– Capacity value can differ across zones based on supply/demand conditions
•
Examples of beneficial and inefficient bilaterals on next slides
•
Reconfiguration auctions allow suppliers to acquire or shed (without
identifying a counterparty) and ensure efficient allocation of CSO based on
price and respecting value of capacity among zones
– Proposed rules allow the beneficial trades, but not the inefficient ones
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CSO Bilateral Example 1:
Bilateral within same capacity zone
• Single capacity zone
Auction Outcome
• Resource A (green) clears in auction (offered
below demand price)
• Resource C (orange) does not clear in auction
(offered above demand price)
• After auction Resource A and Resource C
experience a change in valuation for CSO
– Enter into a CSO Bilateral
• The result of this bilateral is equivalent to reordering the auction supply stack
After CSO Bilateral
– Efficient to assign CSO to Resource C (least cost)
• Consumers unaffected: continue to receive
same amount of capacity purchased in
auction with no change in cost or reliability
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CSO Bilateral Example 2:
Bilateral across separate capacity zones
•
Two capacity zones (Import Zone A and ROP Zone B)
•
Zone A supply (orange) meets Zone A and system demand, ROP supply (turquoise)
meets system demand (not Zone A demand)
•
CSO Bilateral from ROP to Zone A (red) moves additional capacity into constrained zone
•
Consumers better off: more Zone A capacity at no additional cost
–
Improves Zone A reliability without changing capacity quantity meeting system demand
Auction Outcome
After CSO Bilateral
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CSO Bilateral Example 3:
Bilateral across separate capacity zones
•
Two capacity zones (Import Zone A and ROP Zone B)
•
Zone A supply (orange) meets zone and system demand, ROP supply (turquoise) meets
system demand (not Zone A demand)
•
CSO Bilateral from Zone A to ROP (red) moves capacity out of constrained Zone A
•
Consumers worse off: less Zone A capacity (less reliable), no refund for auction purchase
–
–
Zone A supply/demand after CSO Bilateral indicates supplier in Zone A should have paid cap to shed
Zone B supply/demand after CSO Bilateral indicates capacity exceeds amount of demand
Auction Outcome
After CSO Bilateral
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CSO Bilateral Example 4:
Bilateral across separate capacity zones
•
Do the “inefficient” outcomes occur only if there was price separation?
– No, example 4 is the same as 3 (prior slide) except auction prices are now the same in Zone A
and Zone B. Consumers are worse off for reasons explain in example 3.
•
What if there would not be price separation after the bilateral?
– Bilaterals allocate CSO on first come, first served basis (not based on price)
– Other suppliers may be willing to pay higher price to shed Zone A CSO, or accept lower price
to provide capacity in Zone B
– Reconfiguration auctions prioritize transactions based on price and are the most efficient
mechanism to solve the CSO allocation problem
Auction Outcome
After CSO Bilateral
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CAPACITY BACKSTOP
Process for responding to market outcomes where supply is
below capacity requirements
Backstop involves evaluating FCA short of
requirements, and possible RFP after ARA
• If system-wide capacity in FCA is below Net ICR, or import capacity
is below LSR, ISO will evaluate cause of the shortage and
recommend adjustments, as appropriate
• If supply conditions persist through ARA, ISO will investigate need
to pursue RFP to address the capacity shortage
• Recommendations for market adjustments occur through
stakeholder process
• RFPs conducted under §III.11 require review with Reliability
Committee and FERC approval
• Existing tariff provisions allow for backstop if necessary
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Two-tiered process is intended to provide
measured, transparent response
• Prospective, market-based adjustments when FCM is not able
to secure required capacity supply (market objective)
• Gap RFPs when there is a near-term threat to system
reliability that cannot be resolved by other means
• Impossible to establish a threshold that will be acceptable in
all potential situations
– Case-by-case analysis will be necessary
• ISO is aware that drastic market changes between auctions
and out-of-market purchases are not healthy for FCM
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TARIFF REDLINES
Overview of tariff revisions for reconfiguration auctions and
CSO Bilaterals
Overview of tariff revisions for reconfiguration
auctions and CSO Bilaterals
The posted tariff revisions include all necessary redlines to implement the
ISO’s proposed design changes to accompany sloped demand curves.
Note: the tariff document also includes the revisions for capacity zone
demand curve related changes (WMPP #63)
Topic
Slide
Reconfiguration auctions
#23
CSO Bilaterals
#24
Related cleanup items
#25
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Reconfiguration auctions
Tariff Section(s) Description of Revisions
III.13.4
Modeled constraints for annual and monthly auctions are
differentiated in Sections III.13.4.5 and III.13.4.7, respectively
III.13.4.2.1.5,
III.13.4.2.2
Reconfiguration auction supply offers and demand bids are not
rejected solely on basis of Net ICR or Local Sourcing Requirements
III.13.4.3
Differentiate applicability of ISO participation in reconfiguration
auctions depending upon commitment period
III.13.4.5
i) Capacity requirements modeled in annual reconfiguration
auctions are the same as modeled for the FCA (e.g., for CCP8 Net
ICR is applied; for CCP9 the system demand curve is applied)
ii) FCA starting price value applied in annual reconfiguration
auctions is the same as applied in the FCA
III.13.4.7
Capacity requirements modeled in monthly reconfiguration auction
are the Local Sourcing Requirement and Maximum Capacity Limit
for capacity zones
23
CSO Bilaterals
Tariff Section(s) Description of Revisions
III.13.5.1
Bilaterals between resources in separate capacity zones must
transfer CSO in the direction of capacity zone interface constraints
24
Related cleanup items
Tariff Section(s) Description of Revisions
III.13.1.4.6.2.1,
III.13.1.4.6.2.2,
III.13.1.9.2.1,
III.13.1.9.2.2,
III.13.2.5.2.5
III.13.2.8.1.1
Remove redundant explanations that ISO incorporates CSO changes
when determining whether ISO supply offers or demands are
necessary for reconfiguration auctions
III.13.4.4
Correct typo in tariff cross reference
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SUMMARY AND SCHEDULE
Recap and next steps
Summary and schedule
• Summary
–
–
–
–
–
Demand curves applied in annual reconfiguration auctions
No change to monthly reconfiguration auctions
CSO bilateral across zones allowed in direction of interface constraints
Backstop involves evaluating when short ICR/LSR, and possible RFP
Proposed tariff revisions have been posted with October MC materials
• Schedule
– November – additional discussion (design and tariff)
– December – MC vote
– January 2015 – filing with FERC
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APPENDIX
CSO Bilateral:
Numerical example of inefficient bilateral
• Assume
– Bilateral trades were allowed from import-constrained zone to rest-of-pool
– FCA clearing prices:
• Import-constrained zone = $12/kW-month
• Rest-of-pool = $8/kW-month
• Suppliers agree to transfer 10 MW of FCA CSO from Resource A in importconstrained zone to Resource B in rest-of-pool for $10/kW-month
• Consumers no longer receive the Zone A capacity (less reliability) but will
nevertheless pay Resource A for its capacity purchased in auction
– Consumers charged $120k (= $12/kW-mo x 1000 x 10MW) for Resource A FCA CSO
– Resource A is debited $100k (= $10/kW-mo x 1000 x 10MW) to credit Resource B
– Consumers receive no refund for capacity shed by Resource A
• Supplier with Resource A profits by $20k ($120k - $100k) and no longer
has a CSO obligation to provide capacity
• Supplier with Resource B acquires a CSO at above the price consumers
were willing to pay for its capacity (assuming Resource B did not receive a
CSO in the FCA because its offer was above the clearing price)
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Monthly Reconfiguration Auctions:
Applying FCA demand curves in the MRA would be
inconsistent with monthly value of capacity
• FCA price of $5/kW-month implies capacity is valued at $5 on
average but not each month
– For all 12 months capacity is valued at $60/kW-year ($5 x 12)
• Consumers would likely pay a higher price in peak months and
a lower price in shoulder months
• An offer of $5/kW-month in the FCA, does not mean supplier
would accept a CSO at this price in individual months
– Would likely offer a higher price in peak months (when more scarcity
hours are expected to occur) and a lower price in shoulder months
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Monthly Reconfiguration Auctions:
FCA demand curves in MRA without fixing total
system capacity leads to inefficient procurement
• Assume we apply FCA demand curves for each MRA and allow total
system capacity amount to increase or decrease (not ‘fixed’)
• Simple clearing rules
– Demand bids must be above price set by FCA demand curves
– Supply bids must be below price set by FCA demand curves
• In peak months with high scarcity events, suppliers with CSO will
submit high price demand bids (to shed)
– Require high price to keep CSO with high probability of scarcity events
– Total capacity decreases when it is most important to system reliability
• In shoulder months with low scarcity events, suppliers without CSO
will submit low price supply offers (to acquire)
– Require low price to take on CSO with low probability of scarcity events
– Total capacity increases when it is least important to system reliability
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Monthly Reconfiguration Auctions:
FCA demand curves when requiring total system
capacity remain fixed would inefficiently limit trades
• Assume we apply FCA demand curves for each MRA but do not
allow total system capacity amount to increase or decrease (‘fixed’)
• Simple clearing rules
– Demand bids must be above price set by FCA demand curves
– Supply bids must be below price set by FCA demand curves
• In peak months with high scarcity events, supply offers and demand
bids will likely both be above price set by FCA demand curves
• In shoulder months low scarcity events, supply offers and demand
bids will likely both be below price set by FCA demand curves
• In both peak and shoulder months, no trades occur even when
allowing them would be efficient and not harm reliability
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