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Zonal Modeling and Price-setting in FCM

Zonal Modeling and Price-setting in FCM. Peter D. Fuller NEPOOL Markets Committee January 13, 2010. Summary. Mitigated cost-based delist bids should be eligible to set zonal prices in FCM

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Zonal Modeling and Price-setting in FCM

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  1. Zonal Modeling and Price-setting in FCM Peter D. Fuller NEPOOL Markets Committee January 13, 2010

  2. Summary • Mitigated cost-based delist bids should be eligible to set zonal prices in FCM • In addition to the contestability of the market introduced by virtue of the 3-year forward auctions, market power mitigation in FCM is accomplished through two important restrictions: • Static delist bids above 0.8 CONE must be approved by MMU and FERC as being consistent with net risk-adjusted going-forward costs (“nragfc”) • Permanent delist bids above 1.2 CONE must be approved by MMU and FERC as being consistent with nragfc

  3. Summary (2) • ISO MMU acknowledges its proposal is inefficient* • MMU and FERC review of cost-based delist bids provide a full measure of protection against locational market power abuse • Mitigation of delist bids to nragfc is analogous to energy market reference prices, ie, short-run marginal costs, and therefore mitigates market power • FCM was implemented specifically to create a locational market • Current proposed rules confound the objective of revealing locational price differences, cause prices not to separate, and impose substantial inefficiencies and ‘uplift’ paid to resources retained to meet locational purchase requirements * ISO MMU Review of the Forward Capacity Market Auction Results and Design Elements, June 5, 2009

  4. System NICR = 1,000MW West Zone LSR = 100MW West Zone Resources = 120MW Rest of Pool Resources = 920MW System Resources = 1,040MW Example • System NICR = 1,000MW • Total resources in system = 1,040MW • ‘West’ Zone LSR = 100MW • Total resources in zone = 120MW: 12 Resources, each 10MW • This example ignores Permanent Delists, Non-Price Retirement Requests, Exports and Administrative Exports

  5. NICR/LSR

  6. Scenario 1: Twelve Different Suppliers • 12 Suppliers in West Zone, each with 10MW • No pivotal supplier (no matter how measured) • Under ISO’s proposal: • West Zone would be modeled (Existing - Static from non-pivotal < LSR) (120MW – 70MW < 100MW)

  7. Scenario 1 Clearing (West Zone) Clearing West Zone – 2 Static delist bids clear, at 1.5 x CONE and 1.4 x CONE Price = 1.3 x CONE, when Supply = LSR West Zone Price = 1.3 x CONE

  8. Scenario 1 Clearing (Rest of Pool) Clearing Rest of Pool – With West Zone cleared at 1.3 x CONE and 100MW, Rest of Pool continues until Total System Capacity = NICR = 1,000MW 1 Static delist bid clears, at 0.8 x CONE Price = 0.7 x CONE, when TSC = NICR (100MW West + 900MW ROP) ROP Price = 0.7 x CONE

  9. Scenario 1 Summary • Static delist bids in West Zone and ROP made at nragfc ‘reference price’, reviewed and approved • West Zone clearing price of 1.3 x CONE reflects an actual higher marginal cost in zone than in ROP • Transparent price separation; no ‘RMR’ resources.

  10. Scenario 2 – One Supplier in West Zone • 1 Supplier in West Zone, owns twelve resources of 10MW each, total 120MW • Supplier is pivotal (barring at least 100MW of New Resources qualified in West Zone) • Supplier submits cost-based static delists, just as in Scenario 1 • Under ISO’s proposal: • West Zone would not be modeled (Existing - Static from non-pivotal > LSR) (120MW – 0MW > 100MW) • Delist bids from pivotal suppliers ignored in setting price

  11. Scenario 2 Clearing Clearing total system – 2 Static delist bids in West Zone clear, at 1.5 x CONE and 1.4 x CONE, 1 ROP delist bid clears, at 0.8 x CONE All other delist bids in West Zone rejected to meet LSR Price = 0.7 x CONE, when Supply = NICR, including static delist MW from pivotal supplier 2 West Zone delist bids clear 5 delist bids (50MW) rejected in West Zone System-wide Price = 0.7 x CONE 1 ROP delist bid clears 950MW – ‘in merit’ supply 50MW – ‘out of merit’ supply

  12. Scenario 2 Summary • Delist bids in West Zone and ROP made at nragfc ‘reference price’, reviewed and approved • System-wide clearing price of 0.7 x CONE masks higher marginal cost in zone than in ROP • No locational price separation • Market purchase requirements met through out-of-market actions rather than through auction clearing • 50MW ‘RMR’ resources will be paid their bid prices as ‘uplift’

  13. Conclusion • The only difference between Scenarios 1 & 2 is ownership of resources, yet the market prices and resulting signals are dramatically different. Is this an appropriate outcome? • Market power in FCM is fully mitigated by cost-based bidding, so ‘pivotal’ test proposed by ISO is overly restrictive and will impose inefficiencies

  14. Recommended Changes to Tariff • Capacity Zones should be modeled at all times • There is no reliability basis for not doing so • Market power is fully mitigated by the cost-based delist bid process • Reviewed and approved cost-based static delist bids should be reflected in clearing and setting prices for Capacity Zones in FCM

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