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Capacity Demand Curve in ISO-NE. CRA Presentation #2: Comments on the March 12 ISO proposal and related topics. Prepared for NextEra Energy March 12, 2014. David Hunger Jeff Plewes. Introduction.
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Capacity Demand Curve in ISO-NE CRA Presentation #2: Comments on the March 12 ISO proposal and related topics Prepared for NextEra Energy March 12, 2014 David Hunger Jeff Plewes
Introduction We have reviewed ISO-NE’s recommended curve and have developed comments on the following topics: • The danger of setting the price cap too low • How to account for uncertainty in E&AS offsets • Why rules about exemptions matter • How a seven year lock-in impacts the capacity market
Price Cap The lower price cap increases the frequency of prices at the cap and will increase risk from getting Net CONE wrong • The difference in moving from 2x to 1.65x Net CONE is not highly visible when assuming a similar supply curve and no error in administrative Net CONE Initial Candidate $/kW-mo From ISO presentation ISO Recommended FCA7 Representative Supply Curve MW
Price Cap Comparison to the NYISO cap should not be made without understanding the rest of the demand curve parameters • While the ISO-NE price cap may be slightly higher than the NYISO cap (assuming the ISO-NE reference technology for both curves), the other ISO-NE parameters lead to lower average prices and less resiliency to E&AS uncertainty, with the exception of the cap floor in high E&AS times $/kW-mo ISO Recommended NYISO (adjusted to ISO-NE) FCA7 Representative Supply Curve MW
E&AS uncertainty The recommended curve appears vulnerable to error in setting the administrative Net CONE value From ISO/Brattle March 12 presentation Once in every 3.5 years on average the reserve margin would be below 10.6%
Price Cap - minimum Simply increasing the “minimum price cap” can make a curve fairly resilient to E&AS offset uncertainty or forecasting error • We recommend 1.25x Gross CONE as the minimum, which is nearly equal to the current 1.65x Net CONE price cap $/kW-mo ISO Recommended Recommended cap minimum FCA7 Representative Supply Curve MW
Impact of Exemptions Price suppression from exemptions is a greater concern when the reserve margin is below NICR, exactly when higher prices are needed (and the slope of the curve is greater by design) Demand & Supply Curves – w/ and w/out exemptions (initial curve) Slope* = $0.93/kw-mo per 100MW Demand FCA(x) Supply FCA(x)+exemptions Slope* = $0.38/kw-mo per 100MW Net CONE Supply FCA(x) Demand FCA(x+1) * Slopes based on recommended curve, chart of previous curve 3
Impact of Exemptions Brattle/ISO-NE showed the impact of an exemption on capacity price using the recommended demand curve Demand Curve Slope (from ISO) Interactions with the supply curve temper the price suppression effect, but not by much – the elasticity of the supply curve is approximately 0.17 in the relevant region Note: MWquantities based on FCA7; due to supply elasticity, price impacts from a 100 MW shift in supply-demand would be less than the slope suggests. Price drop is nearly one-for-one with slope of the demand curve due to inelasticity of supply
Impact of Exemptions We question the claim that exemptions are not impactful because they are expected to be less than combined load growth and replacements for retirements every year • NESCOE proposed an exemption of 225 MW year, with allowance for annual rollovers – this could accumulate to large numbers • The latest ISO-NE forecast assumes load growth tapering before the FCA9 capacity commitment period • While retirements were high for FCA8, this is not a guaranteed trend • Ironically, additional retirements would be motivated by price suppression from additional exemptions – we assume resource substitution is not a goal of the capacity market design • Retirements alone cause lumpiness (volatility in prices), which is amplified with an additional supply uncertainty of exemptions that could easily be mis-timed with large retirements ISO-NE expected load growth (from 2013 CELT) – summer peak, not net of passive DR
Impact of Exemptions Historical renewable capacity additions did not outpace the discussed exemption levels, but additional PV, offshore wind and a renewed PTC could lead to increased new renewables entry Historical and planned capacity additions Announced projects (likely to underestimate new entry) MW Gas CC Wind PV Gas CT Source: Energy Velocity
Impact of Exemptions Potential solutions related to exemptions • Ideally, all of the additional proposals/features (exemptions, lock-ins, self-supply, etc.) would be evaluated for individual and cumulative impacts • Do not include exemptions – the price suppression and market distorting effects may be too much of a concern given the small market size • Allow price formation without the exemptions – “shifting the curve”
Impact of Lock-ins Longer lock-ins can potentially lead to additional price-suppression and are not the key driver impacting bankability of new builds From ISO presentation • The impact is dependent on rules about how locked-in capacity can/must bid into the capacity market • The change from 5 to 7 years is presented as compensation for dropping the price cap • Setting parameters that lead to investors expecting Net CONE would mean less need for the longer lock-in – “aim for a shorter haircut”