October 16, 2019| Markets committee

1. October 16, 2019| Markets committee Chris Geissler 413.535.4367 cgeissler@iso-ne.com Anticipated Model Enhancements Energy Security Improvements: Impact Analysis

2. Winter Energy Security Improvements WMPP ID: 125 Proposed Effective Date: Mid 2024 Impact analysis seeks to inform stakeholders of ESI’s expected effect on market and reliability outcomes across various scenarios While scope of this analysis was original limited by the October filing deadline, the extension will allow the ISO and its consultant to provide additional analysis and undertake various enhancements to the production cost model used in the impact analysis Today: Discuss proposed model enhancements, solicit stakeholder feedback, and provide preliminary schedule of upcoming impact analysis work

3. ISO retained Analysis Group to assess the potential market and reliability impacts of ESI under a range of system conditions To estimate these impacts, Analysis Group developed a production model with the expectation of an October 15, 2019 filing deadline This deadline required various simplifications and a limited assessment of model outputs The extension will allow the ISO, Analysis Group, and stakeholders time to further assess the model’s inputs and assumptions, and make a number of model enhancements Background: Original deadline limited scope of analysis

4. Consistent with its comments submitted to FERC regarding the request for an extension, the ISO and its consultant plan to conduct further analysis with the additional time afforded, including: Additional scenarios Continued assessment and discussion of the model’s input assumptions and outputs ISO welcomes stakeholder feedback on what analysis would provide greatest value Additional time will allow for more analysis and discussion of model results

5. The ISO and its consultant also plan to make model enhancements to the model’s assumptions and clearing logic These enhancements will allow the model’s outputs to more accurately reflect expected market and reliability outcomes Based on earlier stakeholder feedback and ISO review, we have identified three model enhancements that will better reflect expected outcomes and therefore provide more meaningful information about ESI’s expected impact (next) Additional time will also allow for model enhancements

6. Enhancement 1: Extend the model to non-winter months Enhancement 2: Further assess model’s fuel input assumptions Enhancement 3: Improve the model’s calculation of the EIR Next: Discuss each enhancement in more detail Three model enhancements ISO plans to pursue

7. Enhancement 1: Extend the model to non-winter months

8. To provide quantitative analysis in advance of committee votes and October FERC filing, the model’s scope was limited in several ways Notably, the analysis was limited to a 90-day winter period, when ESI’s impact on the region’s energy security is expected to be most significant Analysis of non-winter months will allow the ISO and stakeholders to better assess the expected market and reliability impacts associated with ESI With the extension, the ISO anticipates that it will be able to provide stakeholders with such analysis Model has only been run for winter months to date

9. Analysis for the non-winter months will utilize the same production cost model that has been used for the winter months (plus the proposed enhancements) Model’s input assumptions will need to be modified to reflect key differences between winter and non-winter months E.g., system load, natural gas available for electric generation, assumptions regarding renewable generation Welcome feedback on how this analysis can use the additional time to provide maximum value to stakeholders Non-winter analysis summary

10. Will allow the ISO and stakeholders to better understand ESI’s expected impacts on market and reliability outcomes, including changes in: Total consumer costs Incremental revenue associated with new ancillary service products, and change in DA LMPs Production costs Reflects more complete of ISO’s ESI proposal, which introduces these new ancillary services across all months Benefits to assessing ESI in non-winter months

11. Enhancement 2: Further assess model’s fuel input assumptions

12. The analysis currently makes assumptions about the initial oil inventory levels under both current market rules (CMR) and ESI based on historic fuel survey data As discussed at the September Markets Committee, these input assumptions appear to be broadly consistent with profit maximizing behavior for the central cases However, as stakeholders noted, there may be some instances where the model assumes that resources will procure more or less incremental oil than would be expected Current fuel input assumptions

13. Extension will allow for further assessment of model’s initial oil inventory and refueling assumptions to quantitatively assess if they are consistent with profit-maximizing behavior Assessment will consider whether it is appropriate to consider more granular input assumptions that are more specific to resource characteristics including tank size, efficiency, etc. Will also evaluate whether these assumptions should be modified in certain scenarios to more fully reflect their expected impact on incremental incentives, fuel inventory, and reliability Further exploration of these fuel assumptions is merited

14. Will help to validate key model assumptions that are key in assessing ESI’s impact on: System reliability across a range of scenarios Consumer costs Total production costs May also allow ISO and stakeholders to explore the extent to which changes to ESI design parameters (e.g. strike price) influence ESI’s impact on market and reliability outcomes For example, if a higher strike price would reduce total market revenues relative to the ISO’s proposal, it may also incent lower fuel procurements and therefore reduce ESI’s reliability impacts Benefits to further assessment of fuel input assumptions

15. Enhancement 3: Improve the model’s calculation of the EIR

16. In the current model, EIR is set at a fixed value for each hour - the greater of 0 MWh and the ‘gap’ between forecast load and cleared DA generation This methodology captures the historical gap between the forecast load and cleared DA generation, but it does not account for how ESI design’s proposed rule changes would impact the size of the gap Calculation of EIR under current model

17. The ESI design’s proposed optimization treats DA generation and EIR awards as substitutes (up to forecast load), where the sale of more DA generation will reduce the quantity of EIR procured The ESI design’s DA optimization may therefore award more DA generation than occurs under current rules This additional DA generation will reduce the amount of EIR that must be procured, and may therefore increase social surplus Properly accounting for this substitution requires making demand bids price-sensitive May expect this gap to decrease under ESI

18. Enhancement would modify the model’s assumptions about DA load to include price responsive demand bids, as occurs in the DA market in practice For runs that assume ESI is in place, this will allow the model to endogenously solve for the cleared EIR quantity as part of the DA optimization, consistent with the ISO’s design Still assessing the precise methodology to develop DA demand Proposed approach to modeling DA demand

19. More accurately reflects observed supply and demand conditions in the DA market Allows model to determine DA awards in a manner that is more consistent with the proposed ESI design, which may lead to the following effects: Produces market and reliability outcomes that better reflect those expected under the ESI proposal Increases DA energy awards and reduce EIR awards, relative to results presented to date Impacts energy and ancillary service clearing prices, and ESI’s impact on consumer costs Benefits to including price-responsive demand

20. Next steps

21. In the coming months, the ISO and its consultant plan to discuss: Model assumptions, mechanics, and outputs More details on these proposed model enhancements Updated model results reflecting these enhancements Any additional scenarios or analysis conducted in response to stakeholder feedback Will try to be as responsive to stakeholder requests as possible, but schedule to complete this work remains tight (next) Upcoming discussion with stakeholders

22. Expected Impact Analysis Stakeholder Schedule