Thoughts on ISO-NE Energy Security Proposal

1. Thoughts on ISO-NE Energy Security Proposal Markets Committee Meeting July 10, 2019 Brian Forshaw Energy Market Advisors LLC

2. Overview • Gap in Current Energy Market Design • Energy Security Problems Identified by ISO • Actionable Energy Security Decision • Elements of the ISO Proposal • Challenges Associated with ISO Proposal • Decoupling Design Element Implementation • Rationale • Conclusions and Next Steps

3. Gap in Energy Market Design • Market assumes that energy will be available in RT if DA resources are not sufficient to meet RT requirements. • May result from forecast errors, low DA Cleared Demand, or unavailability of DA resources • Current construct does not provide adequate incentives for resources to procure and maintain sufficient energy supply to address these contingencies.

4. Identified Energy Security Problems • Misaligned Incentives - Resources do not have sufficient incentives to procure and maintain sufficient energy supplies which may be more valuable to the system in the future. • Operational Uncertainty - There may be insufficient energy available to the system to withstand unexpected and extended supply loss during the winter months. • Inefficient Schedules - Premature depletion of energy inventories even when such stored energy may be more valuable in the future.

5. Actionable Decision Associated with Energy Security Problems • Do we use (or procure) stored energy today, or save it for later when it may be more valuable? • How we answer this question has significant (and differing) impacts for resource owners, system operators, and electric consumers.

6. Elements of Current ISO Proposal • Multi-Day Ahead Market (MDAM) • Day Ahead Market Enhancements - Pricing New Ancillary Service Products • Replacement Energy Reserves (RER) • Generation Contingency Reserves (GCR) - TMSR, TMNSR, and TMOR • Energy Imbalance Reserves (EIR) • Seasonal Forward Procurement

7. Challenges Associated with ISO Proposal • Scope of the Proposal. • Timing for development and implementation. • Up-front and ongoing cost impacts. • Impact on risk and uncertainty. (See excerpt from December 11-12, 2018 Markets Committee presentation attached as Appendix 1.)

8. Decouple Implementation of the 3 Design Elements • Initially focus on development and implementation of DA Market Enhancements under the current Single DA Market and Opportunity Cost constructs. • Evaluate need for an incremental Seasonal Forward Procurement once DA Enhancements are complete. • Consider MDAM in the context of broader consideration of additional reforms to improve effectiveness and efficiency of the markets.

9. Rationale for Sequential Development • Incorporating and pricing RER, GCR, and EIR in the current SDAM goes a long way towards addressing the “Misaligned Incentives” and “Operational Uncertainty” problems. • Resources are compensated for preserving energy inventories when it makes sense for the system. • 95+% of the RT load already clears in the current SDAM construct.

10. Rationale for Sequential Development (cont.) • The existing OC mechanism, in conjunction with RER, GCR, and EIR compensation, reduces “Scheduling Inefficiency” concerns. • Implementing these major design elements in a sequential fashion allows greater focus and more effective use of scarce ISO and stakeholder resources. • As a region, we have shown that we can develop and implement a Seasonal Forward Procurement fairly quickly if it becomes necessary

11. Rationale for Sequential Development (cont.) • Stakeholders and ISO have already largely acknowledged the need to incorporate and price TMSR, TMNSR, and TMOR in the DA Market. • ISO has made a good case for also including RER and EIR as part of this process • Implementing this element on a stand-alone basis may streamline the process and substantially reduce litigation risk and delays associated with the Seasonal Forward Procurement and MDAM elements

12. Rationale for Sequential Development (cont.) • Many stakeholders view the MDAM as a major change in the overall design of the wholesale markets. • Changes risk profile of participating in DA & RT energy markets. • Up-front hardware and software changes. • Revising risk and business processes. • Exposes market to the impact of ISO load forecast errors (through the EIR). • Many question effectiveness in resolving Scheduling Inefficiency problem.

13. Conclusions and Next Steps • In terms of energy security and reliability concerns, Misaligned Incentives and Operational Uncertainty are most significant • The primary and initial focus should be on addressing these problems as quickly and efficiently as possible. • Implementing MDAM and Seasonal Forward Procurement at the same time as DA Enhancements significantly complicates the development, evaluation, filing and approval of such significant changes for stakeholders, ISO, and FERC.

14. Conclusions and Next Steps • Incorporating RER, GCR, and EIR into the SDAM, in conjunction with OC adders, will significantly reduce the implication of identified problems. • Development of the Seasonal Forward Procurement can (and should) be considered after implementation of the DA Market Enhancements. • Request that ISO and the stakeholders consider focusing primarily on DA Market Enhancements between now and the October 15, 2019 compliance filing deadline.

15. Questions?

16. Appendix 1 Excerpt from December 11-12, 2018 Markets Committee Presentation on Chapter 3 Energy Security Proposals

17. Issues/Concerns with MDAM Proposal • Many stakeholders view implementation of the MDAM as a major change in the New England markets that will have broad reaching impacts for for both sides of the market. • MDAM introduces significant up-front and ongoing impacts on front office, back office, business process, and risk management requirements. • Data processing, management, and storage requirements will increase by at least a factor of 6.

18. Issues/Concerns with MDAM Proposal (cont.) • By extending the timeline of the DA Market, MDAM significantly changes the risk profile of participation in the Energy market. • Each day you go out into the future increases exposure to uncontrollable and “difficult to predict” factors including weather, load uncertainty and unplanned outage contingencies. • This added uncertainty will translate into added risk premiums that will ultimately be reflected in RT, DA, and bilateral energy prices.

19. What Does This Added Uncertainty Look Like? • Chart taken from ISO memo “Natural Gas Price Forecast Method for Energy Market Opportunity Costs” dated October 9, 2018 presented to Markets Committee.

20. The MDAM May Not Reflect the Future Value of Energy Inventory • Because of the added uncertainty, it is likely that the “cleared demand” on days 2-6 will not match the ISO's load forecast. • Loads will not submit fixed demand bids or will submit very low-priced demand bids. • Resource owners will need to include added risk premiums to cover exposure to load variability and unplanned outage exposure. • If this happens, resources with stored energy will be dispatched today, even if they might be needed later in the week.