Locational ICAP Draft Market Design

1. Locational ICAPDraft Market Design Power System Resource Adequacy Working Group  The Sheraton Springfield Hotel, MAAugust 27, 2003M. KarlMarket Development

2. Locational ICAP Background • FERC Compliance Order requires filing by March 2004 and Implementation by June 2004 • Order was in response to Devon cost-of-service request • RMR Contracts not acceptable to FERC and a market solution is required • Order requires Locational ICAP or a Deliverability mechanism • While PJM deliverability tests are mentioned, implementation of such a process will require years and will not deal with issues addressed by FERC (revenue adequacy in load pockets) • Imposition of “full deliverability” is one response to a locational ICAP market and is not in conflict with this market

3. Locational ICAP Background (Cont) • Additional FERC Compliance Order Issues • “PUSH” bids eliminated when Locational ICAP is implemented • Order directs NEPOOL/ ISO-NE to address issues in export constrained regions as well as in load pockets • Order essentially requires assignment of ICAP obligations on a regional basis • Based on ISO-NE planning studies, import regions with local sourcing requirements are Greater Southwest Connecticut, Connecticut, and NEMA/Boston while Maine is the export constrained region

4. Locational ICAP Market Design Options

5. Locational ICAP Market Goals • Recognize differences in locational value of capacity • Provide sufficient revenue to load pocket resources to ensure reliability is maintained • Address the binary pricing problem • Address export constraints as well as import constraints • To the extent possible maximize market liquidity in the ICAP product • Readily accommodate bilateral contracts • Manage Market Power in load pockets

6. LICAP Market Design Choices • As currently defined the LICAP market contemplates three import constrained zones, an export constrained zone, and “rest of pool” • A number of market design choices were considered by ISO-NE. Common features were: • Assignment of zonal obligation to load and mapping of generation to zones • Different sourcing percentages based on transfer capabilities • Need to allow generation to meet requirements in other zones based on transfer capability

7. LICAP Market Design Choices (Cont) • Decision came down to a choice between two market approaches • These approaches deliver similar results but approach the problem differently • Key Difference between the two is the approach to bilateral contacting • Choices are: • Zonal ICAP LMP Model • Zonal Cascaded Market Model

8. Zonal ICAP LMP ModelDesign Summary

9. Zonal ICAP LMP Model Summary • As suggested by the title this approach uses an LMP calculator to optimize selection of ICAP resources • ICAP Obligations assigned by zone • Generators mapped to zones • Each Participant has a net “Zonal Position” • In auctions Participants offer resources and bid for resources as needed by zone. • LMP Objective Function minimizes total pool cost of ICAP while respecting zone to zone transfer limits • Prices separate by zone when transfer capability is exhausted and local resources are required to meet local demand

10. Gen: 250 mw Load: 400 mw Gen: 550 mw Load: 400 mw Gen: 1000 mw Load: 500 mw Gen: 200 mw Load: 400 mw Gen: 800 mw Load: 200 mw Zonal ICAP LMP Example System Maine Greater CT Rest of Pool 200 mw 150 mw 300 mw 160 mw (Arrow is in direction of binding constraint – counter flow assumed unrestricted) NEMA/ Boston Greater SWCT

11. Zonal ICAP LMP Model Issues • Advantages • Flexible Solution which is easily adapted to changes in topology • Determinate solution even with a networked zonal topology • Completes the auction in a single pass • Implicitly allocates transfer capability prorata to load in import constrained zones and to generators in export constrained zones. • Disadvantages • Participants responsible to manage out of zone requirements to ensure that they are met. • LMP has not been applied elsewhere (no model to follow, but share some similarity with NYISO). • At this point, it is not clear how to incorporate the demand curve.

12. Zonal LMP Allocation of Congestion • All load in import constrained region required to purchase fixed percentage of all obligation at local LMP. • All generators in export constrained are effectively allowed to sell limited portion outside the zone. • Bilateral transactions full supported – stipulated as change of position in any zone. • Constraints are enforced in the auction in the LMP optimization. • Any Ability to Import/Export Not Used in Bilateral Market is Settled at Supply or Deficiency Auction Price • Participant has option of whether to purchase/sell in Supply Auction • Any remaining imports/exports settled in Deficiency Auction

13. Zonal ICAP LMP Model – Business Process • Obligations are assigned to load based on peak contributions (same as now) except the obligations are assigned by zone • Locational sourcing requirement is communicated to Participants but not enforced in the bilateral process • Trades exchange capacity entitlement without changing zone • A bilateral between Maine and Boston must be specified as in Maine Zone or in Boston Zone. • Participants required to track positions by zone and account for the amount of credit expected from capacity purchased in other zones • When purchasing from an export constrained zone the purchaser must account for the constraint and adjust the deal accordingly.

14. Zonal ICAP LMP Model – Business Process • Supply auction clears zonal supply and demand without transfer constraints • Supply auctions function same as current market • Allows for virtual trades • LMP process is applied to the deficiency auction • Capacity in one zone not netted against obligations in another zone • Capacity chosen in the auction is the most economic set of resources based on offers • The Boston load Participant with Maine capacity is treated as deficient load in Boston and as a supplier in Maine • Separate zonal prices calculated based on loads, offers, and constraints

15. Zonal Cascaded Market ModelDesign Summary

16. Cascaded Market Model Summary • Assigns obligations and maps generation on a zonal basis • Enforces transfer constraints directly in the mapping process rather than through an LMP • Applies to both Load and Generation. For example. • Assume 50% of Maine generation is “locked in” • The owner of a 100 MW Maine generator would get 50 Maine zone MW and 50 “rest of pool” MW • A Maine load obligation can be met with MW from either zone • Assume 60% SWCT sourcing requirement • A 100 MW SWCT load would get 60 MW of SWCT obligation and 40 MW of Connecticut obligation

17. Cascaded Market Model Summary (Cont) • Participants track position by zone, and Participants may have obligations in multiple zones • Multiple obligations arise out of less than 100% local sourcing requirement • Total obligation is assigned, then broken into the piece that must be acquired locally and the piece(s) that may be imported • Participants buy and sell to meet obligations in zones where they have obligations • Different zonal prices reflect supply and demand conditions in each zone

18. Cascaded Market Model Issues • Advantages • Increased contracting certainty because export and import constraints are dealt with prior to the contracting period • Mapping process is capable of accommodating asset-specific deliverability if required • Fits well with existing market and software design • Disadvantages • Somewhat less adaptable to changes in system topology (May be dealt with in software design) • Could pose problems if a networked zonal configuration is required (Works well in the current daisy chain structure)

19. Cascaded ICAP Model – Business Process • Total obligations assigned zonally based on peak contributions • Local sourcing requirement enforced by distributing obligations across zones. For example: • Assume a SWCT Participant has a 100 MW obligation with sourcing requirements of 60% SWCT, 30% CT, 10% ROP • 100 MW obligation distributed across these zones • SWCT Participant can meet obligation 100% with SWCT resources if desired but may also meet 30% and 10% with less expensive resources • Generators in export constrained areas also distributed

20. Cascaded ICAP Model – Business Process • Bilateral contracts identify the zone involved in the trade • Capacity credited to a zone does not move when sold • Participants know with certainty that purchased capacity will count toward zonal obligation • Boston Load Participant can buy “rest of pool” capacity from a Maine resource and apply it to the “rest of pool” portion of the Boston obligation. • Supply auctions conducted in each zone using same process as current market (virtual trades allowed) • Deficiency auction conducted in each zone to meet zonal deficiencies • Auctions and offers cascaded from import constrained to export constrained zone

21. LICAP Market Model Choice • Choice between the Zonal LMP and Cascaded Market approaches is required • The LMP approach has perceived advantages: • Flexibility, Adaptability to changes, and Ability to resolve networked zones is desirable • Significant Issues must be resolved to make ICAP LMP viable • Issues with integrating an LMP calculator in settlement software • Uncertain on hot to integrate the demand curve.