Market Evolution Program

Market Evolution Program Steve Mullins/Jason Chee-Aloy/Leonard Kula Document ID #:MAC-04-07 Market Advisory Council of the IMO

Locational Marginal Pricing • Preliminary analysis indicates that underlying pricing issues need to be dealt with before any recommendation can be made Environmental Information Tracking • Comment period on draft regulation closed May 5 • RFP for system issued and closed June 5 Market Advisory Council of the IMO

Wholesale/Retail Integration • Discussion paper issued May 15 • Seeking input by June 23 • Provides a list of activities under consideration e.g. pilot projects on load aggregation • As part of its investigation into market integration: • What other activities should the IMO support? • What other marketplace/technological developments should the IMO monitor? • Does your organization have any proposals that relate to the identified activities? Market Advisory Council of the IMO

Multi-Interval Optimization • Dispatch solution for the next 5 minute interval that optimizes based on a defined set of criteria over a given period of time • Multi-Interval Optimization Working Group (MIOWG) • 11 members • Have met a number of times to determine: • Objectives • Design Requirements Market Advisory Council of the IMO

Multi-Interval Optimization • March IMO Board recommendation to proceed with IMO proposed solution: • Primarily as a result of concerns with estimates for the calculation time with the ABB solution • MIO Working Group has determined design requirements which ABB are assessing • ABB now have a MIO engine that can be used to baseline calculation times for the ABB proposed solution Market Advisory Council of the IMO

Multi-Interval Optimization Next Steps • Assess ABB calculation time results • Assess impact on schedule and budget to implement ABB solution • Make recommendation to continue with IMO solution or adopt ABB proposed solution Market Advisory Council of the IMO

access input/dialog notify post Email IMO.consultation@theimo.com Phone 905-403-6931 Consultation/Information http://www.theimo.com/imoweb/consult/marketDev.asp Working Groups IMO Stakeholders Market Advisory Council of the IMO

Long Term Resource Adequacy Jason Chee-Aloy Market Advisory Council of the IMO

Overview • Stakeholder process • Objectives • Evaluation Criteria • Paths and Options • Feasibility Assessment Conclusions • Feasibility Assessment Recommendations Market Advisory Council of the IMO

Stakeholder Process • Long Term Resource Adequacy Working Group (LTRAWG) was formed: • Over 20 members • 8 meetings have been held since March 7 • LTRAWG has agreed on objectives, evaluation criteria, options/paths, conclusions and recommendations contained in feasibility assessment • LECG (consulting firm) has provided expert advice • Other stakeholdering efforts have included the MOSC, RASC, MEP webcasts and workshops Market Advisory Council of the IMO

Objectives • Review and recommend appropriate mechanisms to define requirements, allocate obligations and implement market-based allocation of demand and supply resources to address Ontario's long-term resource adequacy needs • Recognize that appropriate mechanisms may extend beyond the IMO’s wholesale market jurisdiction and require policy or regulatory support from others • Utilize existing demand, supply and transmission resources efficiently Market Advisory Council of the IMO

Objectives • Through market-based signals, facilitate efficient development of new generation sources, demand-response mechanisms and the mitigation of transmission limitations • Seamlessly integrate with other IMO-administered markets • Mitigate seams conflicts with neighbouring jurisdictions while recognizing FERC and other US initiatives Market Advisory Council of the IMO

Main Evaluation Criteria • Assure Physical Adequacy of the Power System • Efficient Allocation of Obligations and Costs • Accommodate Market Entry • Address Gaming and Market Power • Supports Development and Refinement of Competitive Electricity Markets • Implementation that is Sustainable and Flexible Market Advisory Council of the IMO

Paths and Options • Path A: Complete the initial design and structures without an explicit Resource Adequacy Requirement (RAR) • Option 1 - Do not introduce any RAR and rely on results of improved energy and ancillary service markets alone • Path B: Create Load Serving Entities (LSE) and assign a RAR to these entities • Option 2 - LSEs required to contract forward capacity requirements • Option 4 - LSEs required to secure forward capacity requirements and IMO administers a resource adequacy auction market Market Advisory Council of the IMO

Paths and Options • Path C: Allow a central agency to procure adequate resources and allocate the resource acquisition costs to loads • Option 3 - Government agency required to contract forward capacity • Option 5 - IMO required to secure forward capacity on behalf of LSEs and IMO administers a resource adequacy auction market • Option 6 - IMO Required to secure forward capacity on behalf of LSEs and IMO administers a resource adequacy call-option auction market Market Advisory Council of the IMO

Issues • All paths have various sub-options as potential solutions • Although no mechanism is widely accepted as effectively addressing long term resource adequacy, most jurisdictions have implemented or are developing an explicit Resource Adequacy Requirement (RAR) • Where the IMO does not have sole jurisdiction, significant constraints and barriers exist to implementing some of the identified options: • Compared to suppliers, most buyers do not have the ability to participate in wholesale spot markets and enter into bilateral contracts Market Advisory Council of the IMO

Issues • FERC has modified their position (White Paper, April 2003) from their Standard Market Design SMD NOPR (July 2002): • No longer impose an explicit Resource Adequacy Requirement (RAR) • Final rule will not change state authority over RARs and regional transmission planning or include a minimum level of resource adequacy Market Advisory Council of the IMO

Conclusions • Unclear whether any Path or Option can overcome existing barriers to investment or be effective: • Barriers to investment • Lack of consistent electricity policies • Independence of regulatory entities • Market power on behalf of a dominant supplier • Lack of liquid contracting market • Lack of appropriate investment incentives resulting from inefficient market signals • Effectiveness cannot be assured as several essential market design elements of the intended market framework are missing or have been compromised (e.g. inability or disincentives of buyers to enter into bilateral contracts) • Policy issues need to be resolved, which require decisions that impact the market design framework Market Advisory Council of the IMO

Feasibility Assessment • Seven recommendations result from the feasibility assessment • The first five recommendations relate to policy issues: • Some of which cannot be made solely by the IMO and its stakeholders • The process for making these policy decisions is a strategic point to be resolved outside of the LTRAWG • The last two recommendations address the timing of the development and implementation of an option to address long-term resource adequacy Market Advisory Council of the IMO

Feasibility Assessment Policy-related recommendations: • Barriers to investment must be addressed to better ensure market entry to address long-term resource adequacy • The market ‘buyer’ must be defined (in particular, for small default electricity consumers) • Improvements to the current IMO-administered market design should be implemented, irrespective of the option to address long-term resource adequacy • Given the decision of who the market ‘buyer’ is, the ability and magnitude of spot prices to clear under shortage or near-shortage conditions must be addressed • The appropriate level of reliability must be decided Market Advisory Council of the IMO

Feasibility Assessment Decision Timeframe Recommendations: • Policy issues should be addressed and an option recommended by the end of the year in order to: • Address potential inadequate future supply • Allow sufficient lead-time required to develop new resources • Provide potential investors with required signals • If policy issues are not addressed, a recommended option is required sooner • i.e. if the barriers to investment, market ‘buyer’ definition and the magnitude of spot prices under shortage conditions are not addressed Market Advisory Council of the IMO

Day Ahead Market Leonard Kula Market Advisory Council of the IMO

Day Ahead Market • Recap - activities since Feb 18 MAC • Day Ahead Market high level design • Proposed features • Benefits • Development process Market Advisory Council of the IMO

Activities Since Feb 18 MAC DAM material: • Objectives and key principles (Mar 6) • updated to reflect comments (June 9) • Feasibility Study (Mar 31) • recommended to IMO Board (Mar 28) that the IMO proceed with stakeholdering and high-level design for a FERC standard market design-style DAM • High-level DAM design (May 30) Market Advisory Council of the IMO

Activities Since Feb 18 MAC • Day Ahead Market Working Group (DAM WG) • open to all stakeholders • formed after Feb 18 MAC • 28 members representing loads, generators, distributors, marketers and other stakeholders • have met 13 times to discuss DAM: • objectives • feasibility study and DAM alternatives • features and impact upon participant classes • design strawman and issues Market Advisory Council of the IMO

Activities Since Feb 18 MAC Broader participant stakeholder activities: • DAM material posted to IMO web enabling comments and discussion from all market participants • DAM WG acts as a sounding board • DAM high-level design workshops • 4 sessions - May 30 and June 3 • 2 sessions - supplier perspective • 2 sessions - consumer perspective • helped stakeholders understand Day Ahead Market initiative • additional opportunity for stakeholders to provide comments Market Advisory Council of the IMO

DAM High Level Design DAM performs two functions: 1) Market - allows participants to buy and sell energy and sell operating reserve; lock-in prices day ahead • bid/offer based auction with clearing price • optimization function ‘maximizes gain from trade’ • outcome: • quantity of energy sold equals quantity bought - ‘satisfy bid load’ • financial commitment • drives real-time market toward becoming a balancing market 2) Process - commits additional resources to meet forecast load Market Advisory Council of the IMO

Proposed Features Participation • participants with physical resources • price and quantity locked-in day ahead - drives operational certainty in real-time • importers and exporters • facilitate inter-regional trading with Ontario neighbours • virtual buyers and sellers • open to all DAM participants • buy/sell in DAM - quantities automatically sold/bought in real-time (through the settlement process) • consistent with neighbouring markets Market Advisory Council of the IMO

Proposed Features Three-part offers/bids • allows participants to separate fixed and variable components of energy offer/bid • energy offer/bid can more closely represent incremental cost of supply/benefit of consumption • does not apply to virtual offers/bids • submit physical characteristics of resources (start time, minimum run times, etc.) • resources will be ‘scheduled’ in a more realistic fashion that respects their capabilities Market Advisory Council of the IMO

Proposed Features Multi-pass calculation engine • outcomes • financially binding quantities of energy bought/sold • uniform energy price and uniform reserve prices • schedule of committed resources • advisory schedules • optimized solution... • over 24-hour period of the day ahead • amongst three-part bid components • simultaneously optimize energy and operating reserve markets Market Advisory Council of the IMO

Proposed Features Unit Commitment • process that commits resources day ahead for reliability purposes to meet forecast demand • no prices are set • output is a set of committed resources • virtual bids/offers not used • bid production cost guarantee • keeps resources whole to their commitment costs - drives resources to show-up in real-time Market Advisory Council of the IMO

Benefits • Enhances trading opportunities for market participants and forward price certainty for market participants • participants can buy/sell energy and sell operating reserve and lock-in prices day-ahead • transparent day-ahead price should foster other forward market products that could be indexed to the IMO DAM prices • virtual buyers and sellers increase liquidity, mitigate market power and facilitate arbitrage between DAM and RTM prices • Improves overall efficiency of the Ontario electricity market • allows for direct participation of loads in IMO-administered markets; additional opportunity for demand side responses • optimized ‘schedule’ that takes advantage of day-ahead time-frame Market Advisory Council of the IMO

Benefits • Provides relief to some of the problems evident in current market design and operation • Intertie transactions implemented and priced day-ahead: • moves transactions from RTM to DAM • reduces uncertainty associated with intertie trading • should reduce IOG in RTM • Improved commitment process for all resources (generators and loads) • allows the IMO to commit additional resources to meet forecast demand • uses three-part bids and optimized approach  increases efficiency • reduces bidding and commitment risk • helps the IMO assure reliable operations in real-time Market Advisory Council of the IMO

Benefits • Provides relief to some of the problems evident in current market design and operation • Lock-in price and quantity day-ahead  drives operational certainty for loads and generators • dispatchable facilities - participants can offer/bid into RTM to be dispatched to DAM quantities (can also choose to be price sensitive) • non-dispatchable facilities - day-ahead price certainty can drive RTM supply/consumption activities • DAM volatility should be less than RTM volatility • participants can hedge against real-time volatility Market Advisory Council of the IMO

Development Process • Cost to develop and implement • $30 M, -10% / +30% • Implementation date • late ‘04 / early ‘05 • By next MAC (Oct 8): • DAM design strawman - develop increasingly greater levels of detail • DAM system requirements - start of development • Market Rules - begin to draft and stakeholder rules Market Advisory Council of the IMO

Development Process • Continued commitment to extensively involve stakeholders in the development process • DAM WG actively involved to identify issues and discuss options to address them • Top 4 issues: • demand-side participation • supply-side participation (MPMA) • consistency of DAM and RTM pricing methodology • interchange scheduling • all DAM WG material posted to Consultation page on IMO web-site; all stakeholders invited to comment Market Advisory Council of the IMO

Market Evolution Program