Market System Evaluation. June 2017

Transcription

1 Market System Evaluation June 2017

2 How do we extend and protect MISO s value proposition? Execution of MISO s strategy is predicated on secure systems with the tools and information required to ensure reliable performance Evaluations confirm limited capability of legacy system to meet future business and security needs: Increasing security threats and NERC CIP requirements Strong business case tied to potential deferred or canceled market roadmap End of life 2023 for legacy platform (negotiable) Other ISOs face similar limitations with current vendor s legacy platform Our 2-stage decision process for platform upgrade over the next 5+ years: Decision 1 (now) Protect, Extend + Upgrade Options: Start path with current vendor to support full platform upgrade Add extensions to protect & enhance legacy platform Run concurrent development & test alternate vendor upgrade options Decision 2 (2019) Upgrade Finalization Confirm continued work with current vendor or select best alternate option for remaining technology upgrades 1 Market System Evaluation

3 MISO has a history of investments to protect the value proposition over the last 12+ years Market Implementation Energy & Ancillary Services Markets Value Expansion Now Future Portfolio Evolution Market System Enhancement Energy Markets Implemented Ancillary Services Implemented 2009 South Region Integration Decision Decision 2 Upgrade Finalization 2005 (In millions) Energy Market Implementation Ancillary Services Implemented South Region Integration Market System Enhancement Technology Investment $245 $75 $30 $130 (plus 25% contingency that includes vendor alternatives) Note: numbers are not adjusted for inflation 2 Market System Evaluation

4 Market System program will yield significant benefits & mitigate risks Investment Category (in millions) Cost Realized Benefits Cost Avoidance* Risk Mitigation Total** (Realized Benefits+Cost Avoidance+Risk Mitigation) Protect, Extend & Upgrade $11 $66 $0 $30 $96 Foundational Advances $43 $34 $117 $24 $175 Evaluation of Alternatives $11 $2 $1 $26 $29 Decision 1 Sub-Total $65 $102 $118 $80 $300 Future Market System (Decision 2) $65 $99 $136 $31 $266 Total $130*** $201 $254 $111 $566 Example investment benefits Strong business case tied to potential deferred or canceled market roadmap items such as Multi-Day Financial Commitments and Behind-the-Meter Storage Aggregation Market performance enhancements also benefit security (examples in Appendix) Network / Commercial model process improvement (including data management and validation) *Cost avoided defined as current and future costs incurred that can be eliminated **Includes MISO-realized and Customer benefits and risk mitigation ***25% contingency not included Note: All figures are present values utilizing 4.0% discount rate, with the exception of Cost figures 3 Market System Evaluation

5 Less Likely More Likely Resource Portfolio Market System Evaluation tested a variety of future business scenarios & impacts on the current systems Future Business Scenarios Self- Contained Distributed Generation 1- Base Existing Conditions 2- Enhanced Markets in a Changing World 3 - FERC NOPR Key Market Enhancements + Portfolio Evolution Distributed Energy Resources (DER) + Energy Storage (ES) in Market Expanding in a Changing World Footprint Expansion + Portfolio Evolution 2 Kitchen Sink : Market Enhancements, Portfolio Central 5 - Everything Evolution, Footprint Station 1 Expansion, DER, ES 4 Market System Evaluation Utility Customer Contact Point End-Use Customer

6 Testing showed Day Ahead Market performance is the most impacted business outcome Market Performance Day Ahead Market Solution Time Works today Need Extension Investments (2018) 1- Base (53min) +0% Performance Threshold 4- Expanding in a Changing World +21% 5 Everything +81% 0min 60 min 100min Need new foundation and long term upgrade 3 - FERC NOPR +15% 2- Enhanced Markets in a Changing World +49% 5 Market System Evaluation *60min Performance Threshold provides sufficient case solution time to address market clearing requirements on all but the most extreme days

7 Decision 1 Upgrade path delivers value and mitigates risk Protect, Extend & Upgrade: Program start in 2017 Begins long-term upgrade path with current vendor Market performance enhancements also benefit security Data management & security (improved monitoring capability) Foundational Advances: Building blocks of a flexible, modular system Network / Commercial model process improvement (including data management and validation) Dedicated future system test environment(s) Energy Management System upgrade Determine capability requirements and form program team Detailed Evaluation & Testing of Alternatives: Upgrade Optionality for Decision 2 Current vendor upgrade; ongoing evaluation Across multiple industries Alternate vendor(s) New Platform Milestones: 6 Market System Evaluation Start Staffing begins Vendor Engagements Build Protect & Enhance Testing Environments Develop/test Alternatives Finalize Data Management Advanced Modeling EMS Upgrade Alternative Option (Decision 2) Operate Modular Adaptable Extensible

8 Decision 1 Protect, Extend & Upgrade Begin upgrade path with current vendor with specific benefits: Day ahead market solve time performance improvement Centralized data and advances in analytic capabilities improve performance, as well as security, market efficiency, and reliability ISO / RTO group reduces cost for MISO CURRENT STATE Direct connections: adds complexity as an organization scales Data Integration Layer establishes manageable, scalable, and reusable integrations. App App D A T A App App 7 Market System Evaluation

9 Decision 1 Foundational Advances Upgrades to the commitment / dispatch engine and model platform will enable scalable and automated processes to handle substantially more resource points and updates Consolidate planning, network, and market models and improve validation of data provided by members Shorten timeline for model changes Separate input paths Simplified & Validated Legacy New Model Platform 8 Market System Evaluation

10 Industry Dynamics Business Strategy Enterprise Architecture Value creation Decision 1 New Architecture and Detailed Evaluation of Alternatives Adopt a modular, secure, and scalable architecture Anticipate and address changing business scenarios, models, and conditions Upgrade optionality for Decision 2 limits vendor and technology constraints and risk Requires: Performance Quality Security Availability Maintainability Usability Modifiability Business Architecture Data Architecture Application Architecture Technology Architecture 9 Market System Evaluation

11 2017: Program Start (gross forecast) 2017 Spend ($ m)* Investment Category Investment Themes CapEx OpEx Total Protect, Extend & Upgrade Foundational Advances Evaluation & Testing of Alternatives Upgrade begins with current vendor Cyber-security Performance improvements Form program team and recruit Data management Specification of requirements Design Algorithm/math engine optimization Platform investigation $0.6 $0.1 $0.7 $0.3 $0.9 $1.2 $0.2 $0.9 $1.1 Total $1.1 $1.9 $3.0 Includes OpEx from seven (7) additional MISO positions including solution architects, security architects, market engineers and program managers for initial staffing 10 Market System Evaluation

12 Next Steps Decision 1 (June 2017) Upgrade Options + Protect & Extend Start path with current vendor to support full platform upgrade Add extensions to protect & enhance legacy platform Initiate foundational advances Run concurrent development & test alternate vendor upgrade options Align overall MISO budget and resource planning (July August 2017) Complete organization capability/resource assessment relative to business and technology requirements for MSE project and other company priorities MISO Budget approval (Oct 2017) Decision 2 (2019) Upgrade Path Finalization Confirm current vendor upgrade path or move to alternative option Adopt modular architecture Limit vendor and technology constraints and risk 11 Market System Evaluation

13 Appendix

14 Performance Impact Decision 1 Protect and Enhance: Market performance enhancements also benefit security High A B C E D A B C D Near-Term Computational Enhancement Data Transfer Enhancement Modular Architecture Data Integration Layer Low Low Security Impact High E Memory-based data transfer Security Performance Confirmed our hypothesis that cyber investments can extend the legacy system Vendor support for the legacy system scheduled to end in 2023 (negotiable) NERC CIP v5 regulations significantly increased in Market System Evaluation

15 Investment Process Timeline 14 Market System Evaluation

16 Market System Evaluation: Final Report 1. Executive Summary Over the last 12 years MISO s efficient and effective operation of the energy markets has established our reputation as the most reliable, value-creating RTO. Strategic investments in the market system are necessary to ensure that MISO continues leading the way in the future. MISO has identified a prudent investment strategy that ensures our customers continue to receive value while mitigating risks inherent in development of a highly complex IT business solution. MISO s ability to successfully execute its strategy is predicated on having secure systems providing the tools and information required. MISO s current market system which was introduced to the industry in 1997 and put in production at MISO with the introduction of the Energy Markets in 2005 is the most prevalent within the ISO/RTO community in North America. MISO s investments over the years have extended the life, expanded the capabilities, and minimized the costs of this existing legacy system. However, over the last 12 years the demands and requirements on the system have increased significantly. These demands including ever evolving security requirements and needs for new market products and services have and will continue to grow ever faster in the years to come. Additionally, obsolescence is becoming a key concern as the current system limits MISO s ability to implement needed security and performance enhancements. Lastly, MISO s primary system vendor has indicated it will stop supporting the legacy system and software as early as Each of these factors will erode and potentially threaten MISO s ability to maintain or create value for its stakeholders going forward. Given the present situation and outlook, MISO conducted a Market System Evaluation (MSE) to assess and fully understand the legacy system s remaining life and to answer questions around what performance and security capabilities are required to meet MISO s long term needs. Findings and conclusions drawn from the evaluation resulted in a clear call to immediately initiate a system upgrade. The financial analysis shows the clear value from upgrade with a greater than 4-to-1 return on the recommended investment. The business case for the upgrade rests on four cornerstones: 1) strengthen the long term security posture of MISO s platform; 2) mitigate several known and critical business services risks; 3) minimize threats to avoid a diminished value proposition; and 4) preserve the opportunity to create value from product and service enhancements identified in the MISO Market Roadmap. As such, MISO recommends a two-stage approach with an estimated incremental cost of $130 million, plus a 25 percent contingency for risk mitigation, including development of vendor alternatives. This includes the concurrent initiation of work on the long-term solution and development of solution alternatives to assure that a viable upgrade path is available. This approach will address critical needs in security and performance to ensure that MISO is prepared to protect business operations and will continue to be the most reliable, value creating RTO. 1

17 Market System Evaluation: Final Report First-stage investments will start in 2017: Initiate work with MISO s preferred long-term solution provider Extend the useful life of the current system by five to seven years through improved security and increased performance Build a new foundational base for a new system Assess alternative options to inform second stage investment decisions Second-stage investments will start no later than 2020: Confirm the preferred path initiated in 2017 Or, finalize an alternate path for core software and hardware architecture requirements to meet the longterm needs of MISO s stakeholders and the energy markets 1.1 Market System Evaluation: Legacy System Limitations and Impediments MISO initiated a Market System Evaluation in 2016 to study the security and capabilities of its current system and to recommend a path forward to address any concerns identified in the evaluation. The evaluation focused on three criteria: Performance, assurance and resiliency the ability to maintain security and reliability Business enablement the ability to maintain and grow the value MISO customers expect Optionality the flexibility to react to the uncertain times ahead The evaluation also considered staging for the upgrade, including assessing the viability of current vendor solution options and the timing of decisions about various upgrade elements and options. To fully assess the need for the upgrade, several potential business scenarios were tested, including key market enhancements, portfolio evolution, footprint expansion and growing FERC requirements. Numerous deficiencies in the existing market system were also identified and factored into the staging approach: Inability to Support Growing Requirements the current system cannot meet the anticipated long-term security and market enhancement requirements, though strategic short-term investments can support a five- to seven-year transition to a new platform Security Risks the system has inherent architectural issues that present security challenges; modern software and system architecture would address these challenges and improve recovery times if a successful cyber-security incident were to occur Performance and Technical Limitations the system does not currently meet industry standards for availability and resiliency; it suffers from inadequate performance and slow solve times, and is incompatible with modern internet browsers and other MISO applications Vendor Support the market system vendor intends to shift development and support resources away from the current platform in the coming years, increasing the costs and challenges of remaining on the existing platform 2

18 Market System Evaluation: Final Report MISO s market system is quickly approaching its end-of-life and the system also has material vendor, business and security risks. While strategic investments can extend its useful life another five to seven years the current system cannot support long-term future market needs. As a result, MISO has concluded that it must immediately begin the upgrade process. This includes the definition of detailed requirements and the design and build of a new market system architecture that meets the guidelines for security, availability, business continuity, performance, user experience, and other important operating principles. 1.2 Market System for the Future: Requirements and Recommendations The current energy market platform is one of the primary means MISO uses to create and deliver value to its stakeholders; estimated at $280-$315 million annually 1. As the current market system approaches its end-of-life and as the business strategy clarifies new capabilities required for long-term success, MISO can chart a path for a next generation market platform that will sustain and further increase its value proposition. MISO s market systems must provide sufficient flexibility and performance to implement complex formulations to optimize the commitment, clearing, dispatch and deployment of energy and ancillary services in both the dayahead and real-time markets over an expansive geographic footprint and diverse transmission topology. In looking ahead to future needs, MISO conducted system performance tests for several potential future business scenarios, including: Base scenario, existing conditions Key market enhancements and portfolio evolution, consistent with MISO s current market roadmap Increasing FERC requirements, particularly around the incorporation of new Distributed Energy Resources and Energy Storage in the market and Critical Infrastructure Protection enhancements Footprint expansion and portfolio evolution A combination of all of the above MISO evaluated all components of the current market systems, including those used for real time market operations, day-ahead market operations and state estimation. Testing showed that the day-ahead market performance threshold requirements are the key limiting factor. The actual testing showed that without any upgrades the current market system can only meet existing conditions and a very limited number of additional market roadmap enhancements that do not exert additional strain on the system. The table below shows that likely future business scenarios such as ongoing market roadmap enhancements, portfolio evolution, increasing FERC and NERC requirements, and potential footprint expansion will require market system upgrades. 1 MISO, 2016 Value Proposition: Stakeholder Review Meeting, February,

19 Market System Evaluation: Final Report Figure 1: Future Business Scenarios Further, to determine specific requirements for a future market system that will continue to drive value and growth, MISO conducted five optionality studies: 1) Market System Needs; 2) Business Requirements; 3) Technical Requirements; 4); Business Processes; and 5) Architecture. These studies clarified the requirements for people, processes, and technology needed to sustain MISO s current market services and to create a system that will serve MISO well into the future. These requirements were then used to fully scope the recommendations for investments. 1.3 First Stage Investments (Decision 1) The upgrade path ahead to address the limits and requirements described above includes two overarching stages. The total estimated incremental costs are $130 million, plus a 25 percent contingency for risk mitigation, including vendor alternatives, over six years. For comparison, the implementation cost of MISO s Energy Markets in 2005 was $245 million and the Ancillary Services market cost $75 million to implement in Starting in 2017 MISO proposes to make several first stage no-regret investments. Some of these investments are already underway, focused on addressing immediate requirements while also laying the groundwork for the path ahead. These initial investments also will provide a number of near-term benefits including improved security and performance and data management capabilities of the current systems. The investments can be largely repurposed and will underpin the creation of a technical base upon which MISO will build its future platform. Plans are in place to repurpose and leverage 70% of these first stage investments to develop, operate and maintain the new platform. However, the repurpose percentage could be as low as 60% if MISO needs to exercise a contingency path with an alternative vendor, as described below. Through the evaluation process, MISO has grown more confident in the upgrade path of the current vendor. Corporate ownership and structural changes, combined with their refocused attention and investment in key security and software architectural needs, have substantially bolstered our outlook for the success of this path. However, given the need to ensure that MISO will be able to move forward with a viable upgrade solution in a timely manner, the First Stage Investments also include limited investments in the development of two alternate upgrade paths, separate from the preferred long term solution vendor. These options will provide a contingency 4

20 Market System Evaluation: Final Report path to a viable upgrade should the preferred long term solution prove to be infeasible. In sum, these near-term investments will: Protect and enhance the current system gaining an additional five to seven years of useful life through improved data management, cyber security and market performance Lay the foundation for a new system creating the building blocks of a flexible, modular system that supports sustainable value creation Evaluate alternative vendor solutions making an informed decision about the next generation system 1.4 Second Stage Investments (Decision 2) In 24 to 36 months, MISO will confirm or adjust its path for remaining technical upgrades in a second-stage decision point. Not later than 2020, MISO will either: finalize the remaining path with the preferred vendor; or, if vendor performance and business conditions warrant a reconsideration MISO will select and pursue one of the vetted alternatives. Either path will result in fully upgraded core software and a hardware platform and infrastructure to meet the long-term needs of MISO stakeholders and the energy markets. Based on the MSE work to date, MISO recommends pursuing a long term upgrade path that will implement a modular platform (sometimes referred to as micro-services ). This approach utilizes platform-neutral software applications from multiple vendors improving the speed and frequency of deploying new services and updates. This approach also improves scalability and technological diversity, and it creates independence in case of failure. The flexibility afforded by a modular approach will meet evolving business needs well into the future. While a modular approach can potentially create more operational complexity than a monolithic system, the advantages far outweigh the disadvantages. Figure 2: Start, Build, Finalize and Operate 5

21 Market System Evaluation: Final Report 1.5 Conclusion Over the last 12 years, MISO s efficient and effective operation of the energy markets has established a reputation for MISO as the most reliable, value-creating RTO. Strategic investments in the market system are necessary to ensure that MISO continues leading the way in the future. Protecting and extending MISO s value proposition requires continued investment in MISO market systems. These investments will address vital security and performance needs enabling MISO to continue meeting requirements of a quickly evolving industry. MISO has identified a prudent investment strategy that ensures our customers continue to receive value while mitigating risks inherent in development of a highly complex IT business solution. 6