4 th Stakeholder Update: Locational Capacity Demand Curves in ISO-NE

1. 4th Stakeholder Update: Locational Capacity Demand Curves in ISO-NE Samuel A. Newell Kathleen Spees Ben Housman October 7, 2014 ISO New England Markets Committee

2. Contents • Introduction • Impact of Model Updates • Stakeholder Questions • Import-Constrained Zonal Demand Curves • Export-Constrained Zonal Demand Curves • Summary Comparison of Zonal Demand Curves • Appendix

3. IntroductionObjectives for Today • Benchmark the impact of model updates (described in ISO-NE’s prior presentation) • Provide analytical results illustrating performance of ISO-NE’s proposed locational demand curve and market clearing rules • Summarize analysis of stakeholder proposed curves and respond to stakeholder questions

4. IntroductionIndex to Stakeholder Questions

5. Contents • Introduction • Impact of Model Updates • Stakeholder Questions • Import-Constrained Zonal Demand Curves • Export-Constrained Zonal Demand Curves • Summary Comparison of Zonal Demand Curves • Appendix

6. Model UpdatesDescription of Model Updates • We describe and show the impacts of two simulation model changes that we have implemented to reflect ISO-NE’s requested updates (see Appendix and written stakeholder responses for more detail): • Updated LOLE Calculation and Reporting • FCM Auction Clearing Rules • The updated LOLE calculation results in minor changes • Adjustment to the auction clearing has more impact on results • Differences occur in approximately 1/3 of draws, when one or both import zones price separate • Results are the same as the prior clearing model if there is no price separation (if assuming the same supply and demand in a particular draw, i.e. with no “smart block” adjustment) • Comparison of results for a range of zonal curves is included in appendix

7. Model UpdatesImpact on System Results • Updated LOLE calculation shows minimal impact (but new reported metric provides additional information) • Revised clearing algorithm slightly increases price volatility and reduces reliability system-wide • Effect becomes larger with increasing width of local curves and number of importing zones System Performance Impacts of Model Updates ISO-NE Proposed System and Local Curves (1x No TTC)

8. Model UpdatesImpact on Importing Zone Results • Revised clearing algorithm shows slightly lower price volatility in zones • Reliability below target in zones, associated primarily with lower reliability on a system basis (see prior slide) • But more supply is locally-sourced (reducing the contribution of LOLE from locally-driven events) Importing Zone Impacts of Model Updates ISO-NE Proposed System and Local Curves (1x No TTC)

9. ISO-NE ProposalImpact on Exporting Zone Results • Minimal changes to realized performance in Maine • Primary performance change is associated with impact of revised clearing mechanics on system price and reliability results Exporting Zone Impacts of Model Updates ISO-NE Proposed System and Local Curves (1x Curve in Exporting Zone)

10. Contents • Introduction • Impact of Model Updates • Stakeholder Questions • Import-Constrained Zonal Demand Curves • Export-Constrained Zonal Demand Curves • Summary Comparison of Zonal Demand Curves • Appendix

11. Import-Constrained ZonesNU & UI: FCA 8 Back-Cast with Proposed Curves • Request to re-run FCA 8 auction results with system and local demand curves treating cleared supply as price takers • No price separation occurs across zones • Back-cast prices would have dropped from $15.0 to $13.9/kW-m in the presence of the system demand curve • Adding a 600 MW plant would have reduced the prices to $11.9/kW-m Back-Cast of FCA 8 Results Note: Cleared quantity excludes TTC.

12. Import-Constrained ZonesNU Curve: Cap at 1-in-5, Foot at 1-in-87 Connecticut • Concept is to define local demand curves according to the same LOLE-based definition as in system • Results in flatter local curves and lower price volatility • However, reliability is degraded in both zones: • Result may appear counter-intuitive, but is a consequence of implementing a wide curve in combination with updated clearing rules • Wide local curves result in less rest-of-system procurement during price separation, therefore reduced rest-of-system reliability and increased rest-of-system price volatility • ISO-NE clearing rules will prohibit use of a zonal curve this wide with three importing zones (demand quantity in zones could exceed system curve width) Performance Note: Curve names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases.

13. Import-Constrained ZonesNESCOE Curve w/ 70% Shocks, Supply Elasticity Supply Curves with More Elasticity • Requested analysis of NESCOE proposed curve (1x system ratio, above and below LSR; see figure on slide 23) • With three changes to modeling assumptions that each reduce price volatility and improve reliability: (1) reduce shock sizes to 70% of base; (2) increase supply elasticity (see right); (3) remove supply lumpiness • Combined effect under sensitivity assumptions is a substantial improvement in all price volatility and reliability metrics Performance

14. Import-Constrained Zones CT PURA & DEEP: Simulation Requests • CT PURA & DEEP requested simulation results under different combinations of sensitivity assumptions, and using two different LOLE tuning approaches • Sensitivity assumptions would reduce price volatility and increase reliability, including: • 70% shock sizes • No demand shocks • LOLE capped at the value when local MW are at TSA (i.e. consistent with an assumption of ISO-NE intervention to restore local MW to TSA) • Tuning approaches are conceptually similar to approaches we used system-wide, with local LOLE tuned to 0.105 LRA target (note: this request contemplates allowing for the violation of the “minimum acceptable” at TSA) • However, because system LOLE is above 0.105 under the revised clearing mechanics, no amount of tuning can restore the zones to this level. We therefore re-interpret this question as tuning the local curves to reach a local adder of 0.005 LOLE (consistent with the LRA delta above NICR) • Re-interpreted tuned curves reflect: • ISO-NE proposed curve, shifted to a local LOLE adder of 0.005 events/year • Cap at 1-in-5 LOLE, adjust foot to meet a local LOLE adder of 0.005 events/year

15. Import-Constrained Zones CT PURA & DEEP: Tuned Curves Candidate Curve, Left/Right Shifted to Tune LOLE* Cap at 1-in-5, Foot Adjusted to Tune LOLE* NEMA NEMA Connecticut Connecticut Notes: The “truncated LOLE” curves were not possible to develop in NEMA because the LOLE adder at TSA was too low (i.e. the LOLE adder cannot be increased to 0.005 because the LOLE adder at TSA is close to zero). See appendix slide 34 for system simulation results under the same curves.

16. Import-Constrained Zones CT PURA & DEEP: Simulation Results Note: Tuned curves could not be drawn in NEMA in the cases where local LOLE was capped at TSA. Because the local LOLE “adder” becomes close to zero at TSA, the local curve could never be 0.005 events/year above Unconstrained System LOLE. See appendix slide 34 for system simulation results.

17. Import-Constrained ZonesUI: What Are Local Prices When LOLE is Similar to System? Question: “How often would we expect customers in import constrained zones to pay higher capacity prices than customers in the rest of pool for the same level of reliability (as measured by the LOLE metric)?” • We focus on the subset of draws in which: (a) local price separates above system (b) local LOLE is within 0.005 events/year above unconstrained system LOLE • 16% and 2% of draws fall into this subset in NEMA and CT respectively (greater in NEMA because TSA & LSR are right-shifted compared to LRA, and so local LOLE adder is usually very small) • The results in this subset of draws may seem counter-intuitive when taken individually (i.e. why pay a price premium in the zones when local reliability is no worse than rest of pool?) • However, these results are consistent with the overall reliability and price volatility objectives of the demand curve and FCM, because the price premium paid in this subset of draws helps to support sufficient local supply to prevent larger price separation or lower-reliability events from occurring in other years • Further, focusing only on LOLE does not account for the transmission security objective TSA

18. Import-Constrained ZonesUI: Comparison of Statistics Across All Curves • Comparing all candidate curves in instances where: • The zone price-separates, and • LOLE adder in zone is < 0.005 • Anywhere from 0-22% of draws depending on the curve • NEMA always shows greater frequency from these draws for any curve drawn to the right of TSA • Average price differential above system is the same across all curves (even though the price differential associated with this subset of draws varies substantially)

19. Contents • Introduction • Impact of Model Updates • Stakeholder Questions • Import-Constrained Zonal Demand Curves • Export-Constrained Zonal Demand Curves • Summary Comparison of Zonal Demand Curves • Appendix

20. Export-Constrained ZoneEmeraEnergy: 1.5x Width Curve • Emera Energy proposed a curve with width 1.5x of system ratio (flatter than proposed) • Results in modest improvement in price volatility in Maine (modest degradation in System LOLE) compared to ISO-NE proposal Performance Note: Curve names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases.

21. Export-Constrained ZoneNESCOE: Curves at or Above MCL • NESCOE proposed looking at two curves that would be right-shifted compared to MCL • Both curves perform similarly to the ISO-NE proposal (very small increase in price volatility in both cases; and degradation in system reliability in one case) • Both options would prevent procuring less than MCL supply in Maine in the event of system-wide shortage Performance Notes: Runs modeled with ISO-NE Proposed curve in NEMA/Boston and Connecticut. Curves names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases

22. Contents • Introduction • Impact of Model Updates • Stakeholder Questions • Import-Constrained Zonal Demand Curves • Export-Constrained Zonal Demand Curves • Summary Comparison of Zonal Demand Curves • Appendix

23. Curve ComparisonAlternative Importing Zone Curves (Connecticut) Note: Curves names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases.

24. Curve ComparisonPerformance in Import-Constrained Zones Notes: Curve names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases. Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers.

25. Curve ComparisonSystem-Wide Performance Impacts Notes: Curve names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases. All curves were run with the ISO-NE Proposed 1.0x System Ratio (No TTC) curves for NEMA/Boston and Connecticut and the ISO-NE Proposed 1.0x System Ratio curve in Maine.

26. Curve ComparisonAlternative Exporting Zone Curves Note: Curve names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases

27. Curve ComparisonPerformance in Export-Constrained Zones Notes: Curve names are labeled based on the stakeholder suggesting those curves for analysis, but do not necessarily reflect that stakeholder’s recommended approach in all cases. All curves were run with the ISO-NE Proposed 1.0x System Ratio (No TTC) curves for NEMA/Boston and Connecticut. Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system, Maine Net CONE is 10% lower than system . Zonal load costs reflect capacity procurement costs paid by customers in each zone, accounting for CTRs that are awarded to local customers.

28. Contents • Introduction • Impact of Model Updates • Stakeholder Questions • Import-Constrained Zonal Demand Curves • Export-Constrained Zonal Demand Curves • Summary Comparison of Zonal Demand Curves • Appendix

29. AppendixUpdated LOLE Calculation and Reporting • System: • Previously reported only “System LOLE,” which reflected the LOLE that ISO-NE would calculate if there were no internal constraints (i.e. “copper sheet” assumption used when estimating NICR) • That metric will now be labeled as “Unconstrained System LOLE” and used as a primary metric for evaluating the system demand curve • Also reporting a new metric “Constrained System LOLE,” which reflects the max of the LOLE of any zone in any one draw (consistent with NPCC definition of system LOLE in the presence of zonal constraints) • Import Zones: • Zonal LOLE is affected by MW of supply both within the zone (determines local events) and outside the zone (determines system events) • Previously calculated zonal LOLE as the maximum of local and system LOLE • Updated approach calculating local LOLE “adder” on top of system events (results very similar to prior approach) Revised Local LOLE Approach Local LOLE Unconstrained System LOLE “Local LOLE Adder”

30. AppendixUpdated Local Clearing Approach System-Wide Clearing Price and Quantity • Updated clearing mechanics will produce the same prices as the prior model if there is no price separation (clear on system demand curve) • If importing zones do price-separate, then system-wide prices and quantities will clear below and to the left compared to prior modeled clearing mechanics (which assumed system + all zones supply would clear on the aggregate system demand curve) • Affects approximately 1/3 of draws (any time one or both import zones price separate) Individual Draws (Each w/ unique “Residual” System Demand Curve) Example Draw (See Below) Clearing in Example Draw Example Draw

31. Appendix Range of Import Zone Curves Compared • We tested a range of import zone demand curves under the updated simulation model • Updated LOLE Calculation • FCM Auction Clearing Rules • Intended to provide stakeholders more information about results that can be expected with varying widths of local curves • General observations: • System reliability and price volatility worsen with wider zonal curves • Zonal metrics move in the opposite directions (i.e. local reliability and price volatility improve with wider curves) Connecticut Curves Tested Under Updated Model Note: “1x System (No TTC)” curve applies the system ratio multiplier to NEMA and CT local curves without including the TTC MW in the calculation.

32. AppendixSystem Simulation Results Note: All runs modeled with a 1x system ratio curve in Maine.

33. AppendixImporting Zones Simulation Results Note: All runs modeled with ISO-NE Proposed 1x system ratio curve in Maine.

34. AppendixCT PURA & DEEP System Simulation Results Note: All runs modeled with a 1x system ratio curve in Maine.