Market Pricing Integrated Proposal: Consequences, Trade-Offs & Implementation

1. Market Pricing Integrated Proposal: Consequences, Trade-Offs & Implementation Market Operations Standing Committee of the IMO

2. Background • Three pricing issues • pre-dispatch vs. real-time prices • counter-intuitive prices in times of shortage • size, content and variability of uplift • Contributing factors not only give rise to pricing issues, but also: • reduce market efficiency • jeopardize reliability of IMO-controlled grid Market Operations Standing Committee of the IMO

3. Given That... • Maintaining status quo is not acceptable: • pricing signals and outcomes (incl scarcity pricing) • reduced market efficiency; reliability at risk • Supply is tight in Ontario for foreseeable future • Market structure schedules “just enough” resources to meet market demands • Significant increase in average HOEP would cause hardship to load customers then………. Market Operations Standing Committee of the IMO

4. Proposed Integrated Approach • Objective: • Provide rational and understandable market prices, improve efficient operation of IMO-administered Markets and improve reliable operation of IMO-controlled Grid • Strategy: • Reduce frequency of need for control actions, then change manner in which control actions are utilized i.e. put control action sources of Operating Reserve “in the market” • Staging of initiatives Market Operations Standing Committee of the IMO

5. Summary of Stages • Stage 1 (already underway): • 4-2 window; HADL; additional market information • Stage 2 (under development): • reduce failed transactions • spare generation on-line • Stage 3: • additional supply (R/S of domestic generation units) • Stage 4: • put control action OR into the market (price & qty) Market Operations Standing Committee of the IMO

6. Consequences and Trade-Offs Initiative and Approach Address Pricing, Efficiency & Reliability Issues but….. Initiatives, singly and together, have consequences that would mean trade-offs to achieve the stated objective Question: To what extent are these consequences and trade-offs acceptable in order to move the market forward from the status quo? Market Operations Standing Committee of the IMO

7. Spare Generation On-Line Issues/Consequences/Trade-offs - Market Pricing • Potential for reduced price volatility; scarcity pricing • Downward pressure on market prices (impact of 12x ramp rate in market schedule) Issues/Consequences/Trade-offs - Suppliers • Level playing field with neighbouring suppliers • Potential for reduced market value of flexible generation • Potential for reduced generator revenues through reduced prices • What costs are guaranteed? Is auditing necessary? Market Operations Standing Committee of the IMO

8. Control Action OR Issues/Consequences/Trade-offs - Suppliers • Potential for not scheduling market sources of Operating Reserve • Cap on Operating Reserve prices; scarcity pricing • Activation vs Scheduling Issues/Consequences/Trade-offs - Loads • Potential for reduced reliability and quality of service i.e. potential for increased utilization of voltage reductions • Upward pressure on market prices; rational price signals and outcomes Market Operations Standing Committee of the IMO

9. Control Action OR • Objective is to reduce pricing issues • Proposal - to offer Control Action Resources into the market based on their value • Value difficult to determine directly - use participant issues to arrive at approximate value Market Operations Standing Committee of the IMO

10. Control Action OR • Value of Control Action Resources - participant issues • Maintain reliability and quality - limit exposure • Minimize competition for OR selection with dispatchable resources [Lower Bound on resource price] • Impact on average HOEP should be consistent with the benefit of use of Control Action OR [Upper Bound on resource price] Market Operations Standing Committee of the IMO

11. Control Action OR • Uncertainty in implementation • Control Action Resources are included in pre-dispatch and real-time • Impact of initiatives going forward is difficult to quantify • Balance of benefits is difficult to establish • Uncertainties are driving conservative impact assumptions - balance of benefits skewed depending on assumptions Market Operations Standing Committee of the IMO

12. Control Action OR • Implement Stage 4 in steps • Prudent approach recognizing uncertainty • Allow assumptions to be benchmarked • Allow participants to react to market changes Market Operations Standing Committee of the IMO

13. Control Action OR • Proposal • Implement 200 MW of 3 % V/R as soon as possible (covers 15 % of historical incidents), followed monthly by; • additional 200 MW of 3 % V/R (total 3 % covers 60 % of historical incidents) • 280 MW of 5 % V/R • Removal of 200 MW supplemental OR requirement • Allow pricing of 30 minute OR shortfall Market Operations Standing Committee of the IMO

14. Control Action OR • Trade-off’s are required - Minimize competition for OR selection with dispatchable resources - choose conservative prices to meet objectives - choose prices which meet 95 % criteria in pre-dispatch ie. 95 % of historical pre-dispatch OR MCP’s < OR price chosen - Results in OR price of; 30 $ for 3 % Voltage Reduction resource Market Operations Standing Committee of the IMO

15. Control Action OR • Choosing price based on 95 % pre-dispatch criteria results in outcomes for objectives 1 and 3 • - Maintain reliability and quality - limit exposure - Load exposure expected to be less than that experienced in 2002 • - Impact on average HOEP consistent with benefit of use - Upper bound impact on average HOEP is expected to be approximately neutral Market Operations Standing Committee of the IMO

16. Control Action OR • Benefits of the stepped approach • Starts to address pricing signal concerns immediately (first 200 MW addresses ~ 15 % of historical incidents, second 200 MW ~ 60 %) • Starts to improve reliability based on better price signals • Allows the marketplace to gain experience with control action resources in the market • Allows for benefit of other initiatives to be observed and factored into future steps Market Operations Standing Committee of the IMO

17. Failed Intertie Transactions - Update • Ongoing compliance measures • clarifying MISO “safe harbours” • minor adjustments to existing “safe harbours” • Ongoing MISO discussions • release of transmission capacity • Ongoing NYISO discussions • protocol enhancements Market Operations Standing Committee of the IMO

18. Implementation of SGOL and Control Action Operating Reserve Market Operations Standing Committee of the IMO

19. Market Rules Implementation Timeline Reduce Failed Transactions New Supply Concepts Developed SGOL & ORIM Implementation Dates Milestone June 4 MOSC June 10 TP June 11 MAC June 16 TP June 18 MOSC June 24 TP July 3 IMO Board Procedures, Quick Takes issued Mid-July Notification of intent to go live End July Go live Market Operations Standing Committee of the IMO

20. SGOL - Market Rules (MR-00235) • Generation facility eligibility criteria • dispatchable, not quick start, domestic • MP Obligations if they wish facility to be eligible • provide minimum loading point, minimum run time • provide costs on per start basis • Other eligibility criteria • scheduled for hour “h” in “h-3” P-D schedule; notify IMO of intent to synchronize; synchronize before end of hour “h” • Combined Guaranteed Costs: fuel only; auditing Market Operations Standing Committee of the IMO

21. SGOL Implementation - Overview Market Operations Standing Committee of the IMO

22. Affected Market Manuals • MM 1.2: Facility Registration, Maintenance and De-Registration (MDP_PRO_0016); • MM 4.2: Submission of Dispatch Data in the Real-Time Energy and Operating Reserve Markets (MDP_PRO_0027); • MM 5.5: Physical Markets Settlement Statements (MDP_PRO_0033); • IMO Charge Types and Equations (IMP_LST_0001); • Format Specifications for Settlement Statement Files and Data Files (IMP_SPEC_0005) Market Operations Standing Committee of the IMO

23. MM 1.2 Facility Registration, Maintenance and De-Registration • Market participants are required to complete a registration form. Information to be provided: • Market Participant Name and ID; • Resource Name and ID; • Minimum Loading Point [MW]; • Minimum Run-Time [hrs]. • This information should be fairly static. Any modifications will be processed via the facility registration change-management process. Market Operations Standing Committee of the IMO

24. MM 4.2: Submission of Dispatch Data in the Real-Time Markets • The sequence of events is: • Market participant decides to start up its unit and run in hour H; • Market participant ensures that a valid offer for the unit is submitted at least 3 hours before the dispatch hour H; • Market participant is allowed to revise its offer without restriction until the start of H-3; Market Operations Standing Committee of the IMO

25. MM 4.2: continued The sequence of events is (cont’d): • After the publication of the H-3 pre-dispatch results and until the start of H-2, the market participant is not allowed to revise the portion of dispatch data reflective of the unit’s Minimum Loading Point; • Market participant may synchronize its unit anytime after the H-3 pre-dispatch run, but no later than the end of hour H; Market Operations Standing Committee of the IMO

26. MM 4.2: continued The sequence of events is (cont’d): • Once the unit has reached its Minimum Loading Point, the IMO will constrain the unit to at least this minimum for the duration of its Minimum Run-Time; Market Operations Standing Committee of the IMO

27. Settlement Principles • Guarantee recovery of start-up, minimum load ramping and minimum generation cost - Combined Guaranteed Costs. • The MP will be compensated if market revenues from Energy, Operating Reserve and CMSC payments, earned by the facility over the period between synchronization and the end of the MP specified MinimumRuntime is less than the Combined Guaranteed Costs submitted by the MP. • Guarantee payments will be paid out to eligible Market Participants monthly, and will be calculated on a “per start” resolution. • Costs for guarantee payments will be recovered from other Market Participants as a monthly uplift charge on basis of AQEW. Market Operations Standing Committee of the IMO

28. MM 5.5Physical Markets Settlement Statements • Eligible Market participants must notify the IMO of an eligible facility’s Combined Guaranteed Costs by completing a cost notification form by the close of the second business day following the day of the synchronization Market Operations Standing Committee of the IMO

29. Format Specifications for Settlement Statement Files and Data Files • Append New Charge Types • Generation Cost Guarantee Payment • Will appear in “Manual Line Item” and include Date and hour the facility synchronized • Generation Cost Guarantee Recovery Debit • Will appear in “Manual Per Unit Allocation” Market Operations Standing Committee of the IMO

30. IMO Charge Types and Equations • Append new variables • Combined Guaranteed Cost (CGC): start-up cost + minimum load ramping cost + minimum generation cost • Generation Cost Guarantee Payment • Generation Cost Guarantee Recover Debit • Append New Equations • Generation Cost Guarantee Payment • Generation Cost Guarantee Recover Debit Market Operations Standing Committee of the IMO

31. Control Action OR - Implementation • IMO will publish: • offer prices and quantities (to be approved by IMO Board in July) • scheduled quantities • Settlements • settle and collect only for market sources of operating reserve Market Operations Standing Committee of the IMO