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Fast Start Pricing - Impact Analysis

This study analyzes the impact of fast start pricing on price formation and performance incentives for resources during tight system conditions. It addresses shortcomings in the current pricing methodology and provides recommendations for improvement.

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Fast Start Pricing - Impact Analysis

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  1. April 16, 2015 | NEPOOL markets committee Ben Ewing & Jon Lowell Market development Price Formation When Fast Start Resources Are Committed and Dispatched Fast Start Pricing – Impact Analysis

  2. Goals of the Fast Start Pricing Design • Improve price formation by reflecting the cost of fast-start deployments through transparent market price signals. • Improve performance incentives for all resources during tight system conditions when reliability risk is heightened. • Address External Market Monitor’s recommendations • Address shortcomings of the current Fast Start Pricing methodology • Shortcoming #1 - Fast Start assets are generally unable to set price after the first dispatch interval, even though committed and dispatched economically • Shortcoming #2 - Relaxing EcoMin values in the dispatch solution distorts the system energy balance

  3. Additional Information Available • These documents have been re-posted for the April MC meeting: • Memo: “Fast-Start Pricing Improvements – Revised Edition” • Detailed explanation of Fast Start Pricing examples • Powerpoint: “Fast Start Pricing” presentation at the March MC meeting • Includes examples from the memo and discussion of Fast Start Pricing design principles

  4. Impact analysis overview

  5. Study methodology - Summary • 11 month study period (Jan 1, 2014 – Dec 2, 2014) • Re-run dispatch and pricing software using FS pricing logic • Simulate intervals when one or more eligible FS units were committed. • ~15,000 RT dispatch cases meet this criteria, of ~58,000 total cases in the study period (25% of all cases). • 5-min. simulated prices aggregated into hourly LMPs and RMCPs • Use simulated prices to compare actual market outcomes with simulated market outcomes under proposed FS pricing logic • RT energy and reserves, Lost Opportunity Cost, NCPC.

  6. Study methodology – Context and Caveats • This is a retrospective simulation study methodology. • It estimates what would have happened in the 2014 study period with the proposed new rules. • Analysis employs the actual load, energy offers, unit commitment, and other system conditions that occurred during the study period. • These are assumed unaffected by the new FS pricing logic. • Future years’ system conditions may differ from the observed conditions during 2014.

  7. Real-time Market Impact Summary • Notes: • Annualized values • Includes adjustment for Forward Reserve Obligation Charge, eliminating real-time • payment to resources already compensated in the Forward Reserve Market. • 3. Excludes approximately 17% of cases for which LOC could not be estimated, • and therefore may underestimate LOC (intervals where Fast Start EcoMins are relaxed under the current methodology)

  8. Fast start pricing example – August 19, 2014

  9. Hourly LMP is unchanged in 70% of hours No change in 70% of hours Impact ranges from 1 cent / MWh to $5 / MWh in 20% of hours

  10. FS pricing lowers RT NCPC payments, on net NCPC impacts are estimated by applying rules in effect as of Hourly Offers implementation to the historical study period. • Notes: • Annualized values • Excludes approximately 17% of cases for which LOC could not be estimated, • and therefore may underestimate LOC. • 3. Includes $3.6M of LOC payments as revenue offsetting a portion of total NCPC.

  11. Longer term impacts on DAM and FCM • Over time, an increase in RT LMPs will affect DAM and FCM prices. • DAM. An increase in average annual RT LMPs should be expected to increase average annual DA LMPs by a similar amount. • 4.8% of the 2014 annual DA market value is approximately $400M. • FCM. An increase in suppliers’ DA market energy revenue should reduce FCM prices, by increasing suppliers’ infra-marginal energy revenue • This lowers FCA net going-forward costs and net CONE • This effect holds, to different magnitudes, whether new or existing sets FCA price • We cannot say with certainty how much one effect will offset the other, as different resources tend to set price in the FCM and DAM. • FS pricing will move money from the FCM into the energy markets, where it strengthens the RT performance incentives for all suppliers (when FS units operate)

  12. Impact analysis – additional detail

  13. Real-Time Energy Market Impact • Averages are across all hours in the study period

  14. RT energy market Impact – monthly breakdown Largest price impacts seen in Jan – Mar due to tight operating conditions. For further info on these conditions see the May 2014 PC materials, beginning on slide 128. *Note: December data includes only two days (12/1/2014 – 12/2/2014)

  15. RT energy market Impact – monthly breakdown Largest price impacts seen in Jan – Mar due to tight operating conditions *Note: December data includes only two days (12/1/2014 – 12/2/2014)

  16. Average zonal LMP increases from FS Pricing Minimal price separation across zones, except during tight operating conditions in Jan 2014. *Note: December data includes only two days (12/1/2014 – 12/2/2014)

  17. 63% of hours affected by FS pricing are on-peak Notes: *December data includes only two days (12/1/2014 – 12/2/2014) On-peak hours defined as non-holiday weekdays, hours ending 08-23

  18. Real-Time Reserve Market Impacts • Averages are across all hours in the study period, including those when RMCP = $0. • RMCPs shown are for Rest-of-System.

  19. How much more frequently would Hub LMP exceed PER Strike Price? With RCPFs which were in effect during simulation period: (TMOR = $500, TMNSR = $850) With higher RCPFs which are currently in effect (TMOR = $1000, TMNSR = $1500): • FS pricing increases the estimated number of hours in which Hub LMP > PER Strike Price by 3-4 hours over the study period. *Notes: Averages are across only those hours in which Hub LMP > PER Strike Price Slide modified on 4/14/2015 from original posting

  20. Next steps

  21. Anticipated Schedule • February MC meeting – conceptual overview • March MC meeting • Lost Opportunity Cost discussion • Detailed Examples • April MC meeting • Historical simulation of fast start pricing design impacts • Tariff language review • May MC meeting – request MC vote • June PC meeting – request PC vote • FERC filing – summer 2015 • Implementation - sometime in 2016

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