Possible FTR Developments

1. Possible FTR Developments Grant Read and Roger Miller Presented to EPOC 2011 by Grant ReadUniversity of Canterbury and EGR Consulting ltd This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time The conclusions suggested here should be regarded as tentativeand have not been peer reviewed

2. Possible FTR Developments • Firming the rental pool • Multi-hub rental partitioning • Multi-hub interface generalisation • Secondary Trading • Product differentiation This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

3. Firming the rental pool Loss and reserve pricing effects threaten revenue inadequacy, because: • loss costs have to be paid for from market settlement surplus, and • arguably reserve support costs should be too There are two issues here: • Covering the cost of loss “support” (and reserve support too, if charged to FTR account) • Covering the shortfall that will occur when flows are: • High enough to create a differential (always the case for losses) • But lower than the FTR quantity This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

4. Low flows: No loss contract quadratic loss => linear marginal loss Loss Rents(Collected and paid out to FTR holders) Marginal loss X price flow FTR Loss Costs FTR payout at risk not covered by market rents Additional FTR payout at risknot covered by market rents This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

5. Loss contracting Obligation-inclusive FTRs may be analysed in terms of “unbalanced FTRs”, but balance can be restored by: • Pre-purchasing losses calculated for net FTR balance • Losses are just energy, so no special contracts required Could integrate loss purchase into FTR auction to guarantee no FTR is issued for less than the cost of loss support • But unnecessary given liquid energy hedge market at hubs Simple energy hedges give revenue adequacy for obligation-inclusive FTRs • Assuming network (loss factors) as in FTR auction This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

6. Example: Low flows, loss contract (See Appendix for more examples) Loss Rents(Collected and paid out to FTR holders) Surplus Loss Contract payments Marginal loss flow FTR Loss Costs Hedged by contracts paid for from extra auction revenue And paid out to FTR holders This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

7. Conclusion? Initially EA suggests accounting for losses by • Restricting FTR capacity and • Ex post scaling where necessary Loss contracting could enhance revenue adequacy • Simulation shows more FTRs can be issued at same risk More complex (contingent) contract forms would be required to cover options exactly (Since each exercise pattern implies different losses) • But judgement should produce a reasonable outcome This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

8. Funding HVDC reserve support One may debate whether HVDC reserve support • Should be considered a transmission system overhead (and perhaps recovered like HVDC fixed costs) .... OR • Should be paid out of the HVDC FTR support account In case (2), the HVDC settlement surplus can only support hedging up to Hcrit • Beyond that reserve providers collect rent, and would be the one able to provide hedging • Just as for incremental commercial link capacity This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

9. Reserve and revenue adequacy The situation wrt reserve differs slightly • If HVDC paid all costs of incremental reserve required only to support inter-island flow, we would have: Reserve Rents paid out to reserve providers Inter-island differential Equals reserve price if Flow >Hcrit HVDC imposes no extra reserve requirements and collects rent Reserve Costs paid out to reserve providers HVDC covers own reserve requirements and collects rent HVDCself support Largest unit HVDC flow Hcrit This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

10. Revenue adequacy with reserve contracts An Appendix considers Case (2) for obligation inclusive FTRs and concludes that, if we contract reserve providers to cover FTRs issued above Hcrit: • We make no money on sale of those FTRs, • But then break even, except: • We make a surplus if “forward” flows are below Hcrit • And even more if “reverse” flows exceed Hcrit In particular it covers the critical case where flows are high enough to create a differential, but below FTR • As in loss contracting example above This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

11. In reality.. Reserve support costs are not recovered as in (2) • Gazetted Code does not charge FTR support account at all So FTR support account is boosted • But risk still remains when flow lies between Hcrit and FTR EA initially suggests caution with respect to FTR quantities, with ex post scaling as required • But contracting as above could still assist • Covering the gap between FTR and actual flow level But precise “revenue adequacy” seems unlikely: • We do not know the level of actual flow in advance • And nor do we know what options will be exercised This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

12. Multi-hub rental partitioning The Code (Schedule 14.6) has been written so as to generalise to a modest number of trading hubs • Hence it talks about “extreme FTR injection patterns” rather than simply “maximum inter-hub flow” Generalising from BEN-OTA to BEN-HAY-OTA seems trivial • The calculation is done in HVDC and AC parts anyway Adding another South Island node is really no harder But what if we had three nodes in the same North Island AC system? (note: the following figures really should be 3-D, but...) This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

13. “Rectangular” approximations? Simplistic approximations based on maximum flows between hub pairs may not work very well NS flow Complete Feasible Region Possible conservative approximation EW flow Approximation assuming maximum flow in each direction with no flow in the other Feasible region assuming maximum flow in each direction with optimised supporting flow in the other This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

14. Convex hull approximation NS flow An injection pattern that can not be expressed in this fashion lies outside the “convex hull” of these solutions, but may still be feasible Given all extreme points of the SPD feasible region, this “gap” would be eliminated Choosing FTR injection patterns close to the true extreme points will increase the feasible region and collect more rent FTR pattern expressed as weighted sum of “extreme” patterns EW flow Feasible Region defined by convex combinations This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

15. Rental decomposition Schedule 14.6 partitions the actual market settlement surplus, ex post, into FTR and non-FTR pools • decomposing rents in terms of the critical constraints, or “Flowgates” , on which they are generated (not the lines on which rent is collected) There are issues with the feasibility of “lossy” vs “lossless flows” • and hence support of “unbalanced” vs “balanced” FTRs But it should be possible to determine set of extreme patterns to give a reasonable approximation for a modest number of hubs This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

16. Multi-hub interface generalisation Schedule 14.6 only relates to ex post partitioning of the market settlement surplus • But, if we can define a set of feasible extreme FTR injection patterns we could also use them to define the limits of the FTR feasible region, and clear the market using a “convex combination” formulation An Appendix discusses a simplified market clearing formulation which would require no direct transmission system knowledge • But there may be little point to that, if the FTR manager needs to run a similar model to determine extreme points In schedule 14.6 This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

17. Secondary trading Most FTR markets involve FTRs defined between many node pairs • But the underlying rent/flow components of, say BPE-OTA FTR would overlap significantly, with say a HAY-SFD FTR • So a bundle of new and old FTRs may be re-arranged produce a different (more valuable) FTR combination • But only through a “re-configuration” auction in which the simultaneous feasibility test is applied But, trading could occur within the pool of issued FTRs of a particular type, without re-configuration • And with only two hubs the only “re-configuration” that can occur is between option and obligation-inclusive FTRs This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

18. Product differentiation Finally, it may be desirable to trade both more and less firm versions of FTR products, e.g.: • A 100% firm swap-like FTR • Plus a (target) 80% firm option FTR But the simultaneous feasibility test only distinguishes • Feasible FTRs (which it thinks are 100% firm although they are not • Infeasible FTRs (which it thinks are 0% firm although they are not) So, it can not allow any participants to trade-off risk premium against firmness This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

19. Simultaneous firm/non-firm clearing Firm products do not necessarily trump non-firm products • A non-firm BENOTA FTR may be worth more than a firm HAYOTA FTR , but both may be constrained by the same bottleneck • So simultaneous, rather than sequential market clearing is desirable It seems this can be done by defining nested FTR grids • E.g. A smaller 100% firm grid within a larger 80% grid In the limit, we can always clear 100% firm swaps even if the 100% firm grid has no capacity at all • But in that case the North-South swaps must be perfectly matched by South-North swaps This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury

20. THE END This presentation describes possible extensions discussed by LPRTG, but not approved by the EA for implementation at this time Presented by E Grant Read EGR Consulting /University of Canterbury