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3 rd Stakeholder Update: Locational Capacity Demand Curves in ISO-NE

3 rd Stakeholder Update: Locational Capacity Demand Curves in ISO-NE. Samuel A. Newell Kathleen Spees Ben Housman. August 6, 2014. ISO New England Markets Committee. Contents. Introduction Import-Constrained Zones Export-Constrained Zone Next Steps Appendix.

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3 rd Stakeholder Update: Locational Capacity Demand Curves in ISO-NE

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  1. 3rd Stakeholder Update: Locational Capacity Demand Curves in ISO-NE Samuel A. Newell Kathleen Spees Ben Housman August 6, 2014 ISO New England Markets Committee

  2. Contents • Introduction • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  3. IntroductionObjectives for Today • Respond to stakeholder questions and comments on importing and exporting zones • Propose an initial candidate curve for the exporting zone (no change to the candidate curve for the importing zone) • Gather additional input on both importing and exporting zone candidate curves

  4. IntroductionIndex to Stakeholder Questions

  5. Contents • Introduction • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  6. Import-Constrained ZonesRecap of Candidate Curve: 1.5x System Width • Cap: • Quantity at “minimum acceptable” reliability, defined as MAX[1-in-5 LOLE, TSA] • Price at 1.6x Net CONE • Foot: • Quantity is 1.5x the ratio above “minimum acceptable” compared to the system curve, mathematically the quantities are: • Local Net CONE: • Assumed greater than or equal to system Net CONE • Estimate local Net CONE as a separate value only if likely to be 15% higher than system • Currently estimating <5% higher for CT, NEMA/Boston, and SEMA/RI NEMA Candidate Curve Notes: Footsystem = 35,605 MW Capsystem= 32,053 MW CapNEMA = 8,059 MW CapCT= 10,089 MW

  7. Import-Constrained ZonesHow Does Performance Change with Net CONE? • As a base assumption, we evaluate curve performance with true local Net CONE 10% above system Net CONE to illustrate results with a moderate cost differential • We test here the performance of the curve under a range of true local Net CONE values (keeping administrative Net CONE fixed at the system level) • If true local Net CONE is only 1-5% above the system Net CONE, import constrained zones attract greater excess, resulting in good reliability and infrequent price separation • Therefore if local Net CONE is ≥ 15% above system, we recommend estimating a separate administrative Net CONE for importing zones above this threshold (same conclusion as from prior tests on other curves)

  8. Import-Constrained ZonesHow Sensitive are Results to Supply Lumpiness? Example Local Supply Curves • Our results incorporate the impact of lumpy investment decisions (with offer curves in each zone reflecting the block sizes of historical FCA offers) • This sensitivity tests our results with smoothed supply curves at the local level (keeping “shock” sizes the same) • As expected, a smoother supply curve would improve performance in both price volatility and reliability

  9. Import-Constrained ZonesHow Sensitive are Results to Shock Sizes? • We tested the performance sensitivity under base case with +/ 30% shock size sensitivities • Standard deviation in prices would increase by $0.5/kW-m with 30% larger shocks (decrease by $0.7-0.8/kW-m with smaller shocks) • Reliability performance also improves with smaller shocks (degrades with larger shocks) Standard Deviation of Net Supply minus Demand Shocks

  10. Import-Constrained ZonesWhat Costs are Associated with Price Separation above LSR? • Some were concerned that a sloped demand curve would lead to the zones having to buy a larger than necessary fraction of its capacity locally at a price premium, focusing on a subset of draws in which: (a)quantity exceeds LSR,and (b) price separates above system • 20% and 25% of draws fall into this subset in NEMA and CT respectively • This subset of draws may seem counter-intuitive when taken individually (i.e. why pay a price premium in the zones during years when the zone is long on supply?) • However, these results are consistent with the overall objectives of the demand curve and FCM when considering the need to meet reliability objectives and mitigate price volatility, because the price premium paid in this subset of draws helps to support sufficient local supply to prevent larger price separation or lower-reliability events from occurring in other years • However, if reducing the frequency of such events, or reducing the average size of the excess procured local quantity across all zones were to be prioritized, this would suggest implementing a steeper curve (next 2 slides) • Notes: See additional detailed histograms summarizing price, quantity, and cost results in this subset of draws in Appendix. Reported metrics reflect results from the 1.5x width Candidate Curve presented in the July MC meeting which used a vertical curve in Maine.

  11. Import-Constrained ZonesGDF SUEZ Modeling Curve for Consideration • We test here a steeper curve with a higher price cap • Curve shows improved performance on all reliability metrics, but the tradeoff is a substantial increase in price volatility, and increases susceptibility to exercise of local market power • Curve also shows greater local excess on average (due to higher cap and greater price spikes), suggesting that if the objective of this curve is to reduce the size of the local excess then this could be achieved by lowering the cap Connecticut GDF SUEZ Modeling Curve *Same quantity as 1x System curve when price equals Net CONE

  12. Import-Constrained ZonesNESCOE Modeling Curve for Consideration • We test a left-shifted curve that increases vertically at LSR • Curve shows a much higher frequency of events below TSA, and average LOLE worse than the target in CT (still meeting LOLE target in NEMA) • Price volatility and susceptibly to exercise of local market power also increase somewhat with the steeper curve Connecticut NESCOE Modeling Curve 1.2x Net CONE *Same quantity as previous NESCOE modeling curve, defined such that the slope of the curve passes through LSR at 1.2x Net CONE NESCOE Disclaimer: The request does not reflect a NESCOE position on the zonal demand curves or parameters or any individual state view. The request is intended to facilitate NESCOE's consideration of possible zonal demand curve parameters and proposals under consideration. 

  13. Import-Constrained ZonesSummary Comparison of Curves (Connecticut)

  14. Import-Constrained ZonesSummary Comparison of Curves Notes: Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system. Zonal load costs reflect capacity procurement costs paid by customers in each zone, assuming all zonal CTRs are awarded to local customers. *Curves modeled with vertical curve in Maine from prior MC meeting (slightly lowers average LOLE stats)

  15. Contents • Introduction • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  16. Export-Constrained ZoneMaine Candidate Curve: Sloped through MCL Maine Candidate Curve • Definition: Cap and foot quantities defined as the same % of MCL as system curve is of NICR • How the curve meets objectives: • Mitigates price volatility in Maine, dropping standard deviation from $4.4 to $4.1/kW-m compared to vertical • Small degradation in reliability at system level, increasing LOLE by 0.003 events/yr • Concept is simpler than other possible clearing mechanisms explored in July MC meeting Curve Parameters Slope: $4.4/kW-m per 100 MW

  17. Export-Constrained ZoneNESCOE: Linearized Reliability Value Curve • We developed a linearized curve running through the “reliability value” function (cap moves left, foot in almost the same spot), reducing the expected quantity that can be procured from Maine • Does not reflect the full “reliability value” clearing mechanics because Maine MW still count 1-to-1 toward system need • Curve shows improvements in price volatility and reliability, tradeoff is increased complexity (unless a fixed curve shape is adopted rather than updating the reliability function) Slope: $3.2/kW-m per 100 MW Curve Parameters

  18. Export-Constrained ZonesSummary Comparison of Curves

  19. Export-Constrained ZoneMaine Simulation Results Notes: Base case assumes true Net CONE in NEMA/Boston and Connecticut is 10% higher than system, Maine Net CONE is 10% lower than system . Zonal load costs reflect capacity procurement costs paid by customers in each zone, accounting for CTRs that are awarded to local customers.

  20. Contents • Introduction • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  21. Next Steps • Please submit questions, comments, or alternative proposed curves to ISO-NEby August 8 for Brattle response in the September MC meeting

  22. Contents • Introduction • Import-Constrained Zones • Export-Constrained Zone • Next Steps • Appendix

  23. AppendixImport-Constrained Candidates: Parameter Values by Zone Connecticut NEMA Notes: MWquantities based on FCA7; prices based on a Net CONE of $11.1/kW-m. Foot quantity based on the system demand curve foot-to-cap ratio of 1.1. TTC values were 2,600 MW CT, 4,850 MW NEMA in FCA& from http://iso-ne.com/markets/othrmkts_data/fcm/doc/summary_of_icr_values%20expanded.xls

  24. AppendixNEMA Detailed Results Vertical Curve for Zones (System Sloped) Candidate Curve

  25. AppendixConnecticut Detailed Results Vertical Curve for Zones (System Sloped) Candidate Curve

  26. AppendixMaine Detailed Results Vertical Curve for Zones (System Sloped) Local Curve Same Shape as System Curve Note: Assumes import-constrained curves have same sloped shape as system.

  27. AppendixPrice Separation When Zones Clear above LSR Stakeholders requested to see distribution statistics for only those draws where the following two conditions are both met in importing zones: • Cleared quantity exceeds LSR • 904 and 901 draws for NEMA and CT, respectively • Local zone price separates from system • 199 and 247 draws for NEMA and CT, respectively (of the 904 and 901 draws where cleared quantity exceeds LSR) • For this subset of 199 and 247 draws, stakeholders requested the following three statistics for each capacity zone, shown on the following three slides: • Price Distribution (slide29): The distribution of values equal to the amount by which the local price exceeds the system-wide price (based on a single pull).  • Surplus MW Distribution (slide 30): The distribution of values equal to the amount by which the quantity of capacity procured under the local curve exceeds the LSR. • Distribution of Cost of Local Surplus (slide 31): The distribution of values equal to the product of (i) amount by which the local price exceeds the system-wide price (for only pulls in which the LSR is met), and (ii) the amount by which the quantity of capacity procured under the local curve  exceeds the LSR. Note: All distributions depicted in these slides are for the 1.5x Width (Candidate Curve) curve presented in the July 9th, 2014 MC Meeting. Results would be slightly different if updated to reflect a sloped curve in Maine.

  28. Appendix(1) Distribution of Local Prices Minus System NEMA CT Stats on 199 draws Stats on 247 draws Notes: All distributions depicted in these slides are for the 1.5x System Shape (Starting Point Curve) curve presented in the July 9th, 2014 MC Meeting. Results depict a subset of 20% and 25% of draws where both: (a) local cleared MW exceed LSR, and (b) local prices exceed system prices.

  29. Appendix(2) Distribution of Cleared Quantity Minus LSR NEMA CT Stats on 247 draws Stats on 199 draws Notes: All distributions depicted in these slides are for the 1.5x System Shape (Starting Point Curve) curve presented in the July 9th, 2014 MC Meeting. Results depict a subset of 20% and 25% of draws where both: (a) local cleared MW exceed LSR, and (b) local prices exceed system prices.

  30. Appendix(3) Distribution of Costs of Local Surplus NEMA CT Stats on 199 draws Stats on 247 draws • These 199/247 draws represent events where the zones pay a premium on surplus capacity. • The expected annual cost of such events is the sum, over all 199/247 identified draws, of: • 0.001 probability * Price Delta above System * Surplus observed in each draw. • The result is $2.5 mil and $3.5 mil for NEMA and CT, respectively • Note that this subset of local customer costs during price separation events above LSR reflect a portion of the costs needed to maintain sufficient local excess in most years (thereby preventing more frequent and larger shortages in other years) Notes: All distributions depicted in these slides are for the 1.5x System Shape (Starting Point Curve) curve presented in the July 9th, 2014 MC Meeting. Results depict a subset of 20% and 25% of draws where both: (a) local cleared MW exceed LSR, and (b) local prices exceed system prices. 0.001 probability applied to each draw because out of the 1,000 draws tested, the probability of any single draw occurring equals 1/1000th

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