INCREMENTAL CAPACITY AUCTION (ICA)

Transcription

1 INCREMENTAL CAPACITY AUCTION (ICA) Participation Model Preliminary Decisions October 18 & 19, 2018

2 Disclaimer This presentation and the information contained herein is provided for information and discussion purposes only. This presentation does not constitute, nor should it be construed to constitute, legal advice or a guarantee, representation or warranty on behalf of the IESO. In the event of any conflict or inconsistency between the information contained in this presentation and the Market Rules, the Market Manuals, any IESO contract or any applicable legislation or regulation, the provisions of the Market Rules, Market Manuals, contract, legislation or regulation, as applicable, govern. 2

3 Agenda Day 1 Welcome and Overview 9:00 9:15 Recap of Sept 12 Themes and Responses 9:15 10:30 Break 10:30 10:45 ICA Foundational Decisions 10:45 11:00 Preliminary Decisions Auction Activities 11:00 12:00 Lunch 12:00-12:45 Preliminary Decisions Auction Activities 12:45 2:00 Break 2:00 2:15 Preliminary Decisions Auction Activities 2:15 4:00 Day 2 Preliminary Decisions Auction Activities 9:00 10:30 Break 10:30 10:45 Preliminary Decisions Auction Activities 10:45 12:00 Lunch 12:00 12:45 Brattle Demand Curve Analysis 12:45 2:00 Next Steps & Adjourn 2:00 2:15 3

4 Purpose & Overview The purpose of this two-day session is to present preliminary decisions that have been made to date Throughout the presentation, preliminary decisions are highlighted in blue; text that appears in black font provides background information, context, rationale and next steps This session will also: Provide an overview of feedback heard during the September 12 stakeholder session (grouped into eight key themes) Review ICA fundamental decisions Present preliminary findings regarding the demand curve (Brattle) 4

5 September 12 Session - Recap Approximately 75 stakeholders participated in the September 12 session with wide representation across sectors and industries The breakout sessions generated good discussions and several topics were identified as areas that needed more clarification The eight themes are summarized in the following slides Green boxes include a summary of the feedback identified by stakeholders Grey boxes summarize the IESO s response to the feedback 5

6 Themes from Sept 12 SE Breakouts 1. Desire for more detail 2. Transparency of system needs 3. Understand opportunities for running auction earlier (i.e., understand two year delay in 1 st auction) 4. Clarity on 2023 needs and IESO view on need for new build capacity 5. Further information on Multi-Year Commitment availability 6. Details related to governance - decision making/dispute resolution 7. Risk mitigation force majeure/permitting/government alignment 8. Locational details zones/zonal price/deliverability/targets, etc. 6

7 Theme 1: Desire For More Detail Stakeholders identified that more details would be helpful to better understand the ICA design and inform expectations of what will be included in the High Level Design (HLD). IESO Response: The IESO will provide as much detail as possible regarding available preliminary decisions and the associated rationale throughout this presentation 7

8 Theme 1: Desire For More Detail (cont d) Stakeholders feel that they are now in a position to discuss the details regarding ICA design decisions Originally, this session was only intended to present Participation Model decisions, but, where available, decisions related to Auction and Delivery categories will also be shared IESO plans to hold an additional stakeholder meeting in early 2019 to provide more information on remaining HLD decisions Some stakeholders asked for added clarity on which technical considerations will be reflected in the HLD and which will be addressed in detailed design The focus of HLD decisions will remain on the What and Why, while the detailed design will focus on the How 8

9 Theme 1: Desire For More Detail (cont d) Participation Model Auction Stakeholder Consultation Dispute Resolution Resource Eligibility Target Capacity- Auction Inputs Slope of Demand Curve Locational Considerations - Clearing Commitment Period Length of Forward Period Locational Considerations - Deliverability Resource Obligations in the Forward Period Multi-year Commitments Qualified Capacity Rebalancing Auctions Min/Max Capacity Limits Auction Mechanics Net CONE (Mechanics) Max Auction Clearing Price Delivery Locational Considerations - Zones Market Power Mitigation - Physical and Economic Withholding Market Power Mitigation Inefficient Suppression of Auction Prices Non- Performance Implications in the Forward Period Target Capacity - Transparency and Certainty Performance Assessment Resource Performance Obligations Cost Recovery 9

10 Theme 2:Transparency of System Needs Stakeholders stressed the importance of having access to sufficient information to allow for informed longterm investment and project development decisions. IESO Response: The IESO agrees that the availability of accurate and timely information to help inform investment decisions is important to the success of the ICA The IESO will continue to work, with stakeholders input, towards providing increased transparency in the IESO s bulk system planning process 10

11 Theme 3: Opportunities to Run ICA Earlier Stakeholder interest in understanding whether opportunities exist to implement and administer the first ICA earlier than 2023 and in time to address the first potential capacity gap. If not, would the IESO have the ability to develop a simplified auction design to meet this need. IESO Response: The IESO is open to answering questions and discussing timelines with stakeholders Administering an auction prior to 2023 given current processes and resource limitations would be very challenging. Parallel implementation of other MRP work streams, continuing engagement efforts with stakeholders, and the development and execution of pre-auction activities are some of the key factors affecting the timeline A simplified auction would still require many of the processes and components of the fully implemented ICA (i.e., HLD, DD, Market Rules and IT implementation), and potentially delay implementation of the full ICA 11

12 Theme 3: Opportunities to Run ICA Earlier (cont d) During the April stakeholder engagement session, the IESO highlighted that a review of the project development timelines would continue and stakeholders would be updated in the fall on how these timelines may impact when the first ICA would occur In September, after a review of the timelines and processes required to implement the auction, it was determined that the earliest the first ICA could be held in 2023 (for a 2024 Commitment Period) Committing to an auction in 2021 or 2022 was identified as infeasible after further review of the project development timelines 12

13 Theme 3: Opportunities to Run ICA Earlier (cont d) The first auction requires completion of the design phase, implementation of processes, rules, and IT requirements, and must allow lead time for completing auction processes that occur during the pre-auction phase, with many of the activities overlapping throughout design and implementation ICA Design and Implementation* 18 mo. in line with DD timelines in other jurisdictions * Subject to change 13

14 Theme 3: Opportunities to Run ICA Earlier (cont d) Additional considerations that impact timing include: internal and external training and market trials timing, process and duration of the Net CONE study that will need to be completed ahead of the first auction is yet to be determined implementing the auction for 2023 already required the overlapping of a number of project steps; increasing overlap further would present significant challenges and increase risk of being able to achieve the project schedule After completion of the HLD, development timelines will continue to be assessed to determine whether opportunities to streamline the process exist 14

15 Theme 3: Opportunities to Run ICA Earlier (cont d) Some stakeholders suggested that a simplified auction may be an option to expedite the auction mechanism (e.g., by leveraging the current DR auction): The current DR auction provides a transparent and cost-effective way to select the most competitive providers of DR, but was not designed to facilitate generation resources, fully account for transmission limitations, or ensure total system resource adequacy is maintained An adjusted scope of design would require most of the same steps to be completed as designing the full ICA (e.g., design, process implementation, Market Rules & Manuals, IT changes, etc.) Implementing the ICA as quickly as possible remains a top priority for the IESO If necessary, the IESO will consider running a targeted and short term procurement in advance of the first auction being implemented 15

16 Theme 4: Clarity on 2023 Needs & IESO View on the Need for New Build Capacity Stakeholders requested additional clarity on the magnitude of the anticipated capacity gap and insight into how the IESO intends to satisfy a capacity need that may emerge ahead of the auction. IESO Response: The current resource adequacy outlook includes a number of assumptions and uncertainties identified during the recent Technical Planning Conference. Over the next year, the potential magnitude of the supply gap will be further refined as greater clarity is achieved on key planning uncertainties. (cont d on next slide) 16

17 Theme 4: Clarity on 2023 Needs & IESO View on the Need for New Build Capacity (cont d) IESO Response (cont d): IESO will be making a decision about when it may need to take action and what mechanism would be used to acquire any necessary resources for 2023 Any capacity secured for 2023 will be aligned with MRP principles There is sufficient time to secure and bring on resources for 2023 given the size and nature of the need Sufficient resources that can meet an anticipated 2023 need with a three year or less lead time, and without the need for long term commitments, are expected to be available 17

18 Theme 5: Further Information on Multi-Year Commitments Many stakeholders felt that Multi-Year Commitments (MYCs) should be included in the ICA design and that MYCs will be important for certain resource types to participate in the auction. Stakeholders requested more details on how, to whom, and under what conditions MYCs will be available. IESO Response: The IESO has considered MYC benefits and trade-offs, as well as stakeholders' feedback, and has determined that MYCs will be included as part of the ICA implementation 18

19 Theme 5: Further Information on Multi-Year Commitments (cont d) A Multi-Year Commitment could provide an opportunity for eligible projects to have certainty that they will receive capacity revenues for more than a single Commitment Period Four design features related to MYCs have been identified in the ICA: Availability: The specific circumstances under which MYC will be available Term: The maximum number of years resources can lock in a commitment through a MYC Eligibility: The types of resources that will be eligible to compete for a MYC Price Formation: Pricing rules that apply beyond the first year in which the resource clears (will be reviewed as part of auction mechanics) 19

20 Theme 5: Further Information on Multi-Year Commitments (cont d) The MYC mechanism has close links to other features being developed for the ICA, including eligibility criteria, cost recovery, auction mechanics, and market power mitigation, among others While capacity auctions can function without a MYC mechanism, it has have been included in some jurisdictions Anticipated benefits include: Encouraging participation and increasing competition Allowing more competitive offers by reducing investment risk Increased likelihood of meeting resource adequacy needs Building participants /investor confidence in the auction mechanism Reduced price volatility as single year commitments may require a very high price cap to attract new build resources 20

21 Theme 5: Further Information on Multi-Year Commitments (cont d) A drawback of MYCs is that they reduce the auction s flexibility by locking in resources beyond a single Commitment Period i.e., Risks locking in more resources than needed, resources that are not aligned with system needs, and/or resources at higher prices It is possible that Ontario will require new capacity prior to the auction establishing a track record that developers can reference for projections of future potential revenue ICA is forecast to launch during a unique situation where capacity needs peak in early years and are then reduced as refurbished nuclear units return to service 21

22 Theme 5: Further Information on Multi-Year Commitments (cont d) Overview of methodology used to analyze financial outcomes under varying scenarios related to the inclusion of MYCs Locked-in Revenues + Expected Market Revenues Capacity Costs Present value of lockedin revenues Present value of capacity market revenues in years with no lock-in Assume participants forecast future clearing prices and form expectations of future revenues Account for investor discounting of future revenues Present value of revenues a new entrant must expect to earn before entering Evaluated as a multiple of Net CONE Function of supplier cost and risk tolerance, which are uncertain If TRUE, auction will sustainably support new entry. Customer costs calculated as a function of market clearing prices and lock-in costs If FALSE, auction will not support new entry without additional payments 22

23 Theme 5: Further Information on Multi-Year Commitments (cont d) A MYC mechanism may result in higher costs as it reduces an auction s flexibility While there is potential for total customer costs to be higher with a MYC mechanism in certain scenarios, it can help mitigate price volatility in years when new capacity is added and improves the likelihood that resource adequacy needs will be met Below is an illustrative example showing the tradeoffs between having and not having a MYC mechanism in the auction Note that a discount rate has not been applied. Therefore, higher future annual costs associated with having an MYC could result in a lower total present value cost depending on assumptions around discount rates Total Customer Costs Option 1. No MYC; Out of Market Actions Required No MYC MYC for New Resources Option Year Lock-in for New Resources 23

24 Theme 5: Further Information on Multi-Year Commitments (cont d) The IESO is proposing to include an MYC mechanism, as follows: Mechanism will be available in the auction from the start Only new resources will be eligible Maximum length of MYC term will be determined during detailed design, but the IESO is currently contemplating 5+ years Final duration to be informed by Maximum Auction Clearing Price and overall risk allocation During detailed design, the IESO will explore options to reflect a preference for shorter duration commitments in the auction clearing mechanism HLD will also present further decisions on: additional eligibility requirements, price formation and other design considerations MYC mechanism may be phased out over the longer-term 24

25 Theme 6: Governance Overview Stakeholders stressed that governance is critical to the success of the ICA and are interested in understanding the governance and dispute resolution process as part of, or prior to, the HLD. Stakeholders also expressed the desire to be involved in the review of current processes in the Market Rules and indicated that the IESO should consider making modifications or adding new mechanisms (if necessary). IESO Response: The IESO acknowledges the importance of governance and the dispute resolution process These matters are being reviewed by the ICA design team as well as the Governance and Decision Making Advisory Group ( Advisory Group ) and the outcome of this review will inform future ICA design decisions, as applicable In addition, the IESO will seek to identify opportunities for additional review or recourse mechanisms as part of the HLD 25

26 Theme 6: Governance Summary of Stakeholder Feedback Stakeholders expressed an interest in having a greater understanding with respect to governance and dispute resolution as part of, or prior to, the HLD Stakeholders indicated that the current dispute resolution and appeals processes may not be sufficient for dealing with issues that may arise under the ICA (e.g., related to eligibility, QC, or being required to participate in a Rebalancing Auction, etc.) Suggested that the existing mechanisms may not be sufficient to address issues that may arise under the ICA Suggested additional/new mechanisms may avoid the need for dispute resolution Expressed the desire for greater transparency and inclusiveness in the decision making processes There were also questions around how stakeholders will be involved in various ICA elements, such as Net CONE and target capacity determinations 26

27 Theme 6: Governance (cont d) IESO Response The IESO agrees with stakeholders that a well-functioning governance, rule making and dispute resolution framework will be key to the success of the ICA; recognizing that this topic extends beyond the scope of the ICA, a broader sector wide engagement has been initiated The Advisory Group is considering the current Market Rule dispute resolution process as well as other matters that have been raised by stakeholders, including stakeholder involvement in the Market Rule and Market Manual creation and amendment processes The IESO will submit a recommendations report to the Board in December 2018, which will be informed by the Advisory Group consultations 27

28 Theme 6: Governance (cont d) IESO Response As certain of the governance and dispute resolution matters raised by stakeholders are related to the topics under consideration by the Advisory Group, an update on these will follow after the work of the Advisory Group is complete General governance and decision-making framework Existing Market Rule dispute resolution process Potential enhancements to stakeholder engagement, in terms of the inclusiveness and transparency of IESO decision-making related to market rule processes ICA design features that relate more broadly to stakeholder involvement in IESO decision-making, such as the processes for determining Net CONE and target capacity, will be considered in light of Advisory Group report The IESO will endeavour to provide an update on these matters as part of, or prior to, the HLD 28

29 Theme 6: Governance (cont d) IESO Response In addition, the IESO has identified an opportunity in the ICA to incorporate other mechanisms designed to provide participants with opportunities to provide additional information to the IESO and/or seek reconsideration of certain IESO determinations relating to individual participants in the administration of the ICA Other mechanisms may be utilized in lieu of or prior to the formal dispute resolution process, and may be useful where matters require expedited handling or relate to highly technical subject matter IESO will identify, within certain design elements in the HLD, potential IESO determinations to which such other mechanisms may apply, with the details of any such mechanisms to be determined in detailed design IESO welcomes feedback from stakeholders with respect to the participant-specific determinations in the ICA that stakeholders think would benefit from opportunities for a participant to provide additional information or seek reconsideration by the IESO 29

30 Theme 7: Risk mitigation Stakeholders stressed the importance of alignment between the various Ministries (e.g., Energy, Environment, Natural Resources, etc.) to mitigate project development risks and to ensure that project timelines can be achieved. Stakeholders requested further details around force majeure and its applicability to the development of new resources under the ICA (e.g., connection and permitting risks); indicated that this will be required to manage regulatory risk. IESO Response: The IESO acknowledges the importance of coordinating with the various Ministries to ensure that timelines of the ICA are well understood Intent is to discuss alignment of processes administered by various Ministries which are related to aspects that may affect development timelines for projects participating in the ICA The ICA will not contain force majeure provisions in respect of project development delays ICA design decisions and process alignment discussions with Ministries are intended to help participants mitigate project development risk 30

31 Theme 8: More information on Locational Considerations Some stakeholders identified that more information is required concerning how the IESO intends to set capacity zones, clear capacity zones, and how deliverability may impact auction clearing and outcomes. IESO Response: The HLD preliminary decisions and supporting rationale covered in today s session will provide additional details on locational related elements. The following slides describe how the ICA design will reflect transmission limitations 31

32 Theme 8: More information on Locational Considerations (cont d) What are Locational Considerations? ICA design aspects that aim to reflect the impact existing transmission limitations can have on a capacity resource s ability to meet system adequacy needs What Locational Considerations are considered in the Participation Model? Pre-Auction: Capacity Zones with Zonal Maximum/Minimum Capacity Qualification: Deliverability Run Auction: Auction Optimization 32

33 Theme 8: More information on Locational Considerations (cont d) Preliminary decisions are included in this presentation for each relevant auction stage (i.e., 12-step auction process outlined in the September session) 2. Determine Auction Parameters and Publish Pre-Auction Report Pre-Auction Deliverability Indication (PADI) Capacity zone formation Zonal Maximum/Minimum Capacity 4. Confirm Eligibility, Determine Qualified Capacity Deliverability Assessment 6. Run Auction, Convey Obligations, Post-Auction Results Auction Optimization How locational constraints will be included in Auction Engine How zonal price differentiation will occur when zonal constraints are binding 33

34 Theme 8: More information on Locational Considerations (cont d) Capacity Zones and Deliverability are two important Locational Considerations Concept Timing Focus Outputs Capacity zones Zonal boundaries are defined based on major transmission constraints which will be identified in advance of the auction, in order to give participants an indication of the deliverability through the zonal boundaries Prior to auction Major transmission interfaces Capacity zones (e.g., a map) and zonal maximum /minimum capacity Deliverability Deliverability assessment will identify inter- and intra-zonal transmission constraints between the individual resources and where capacity is needed, based on the proposed connection point Part of the capacity qualification process Individual resources based on proposed connection point Qualification results and information about competition constraints 34

35 Theme 8: More information on Locational Considerations (cont d) Illustration: Zone A Zonal Maximum Capacity Zonal transmission constraints In the PADI, Zonal Maximum Capacity will be identified for an export-constrained zone based on inter-zonal transmission constraints G1 ~ Zone A Intra-zonal transmission constraints Zonal transmission constraints* In Qualification process, Deliverability will assess individual resources (e.g., G1) and identify any inter- /intra-zonal deliverability constraints based on the proposed connection point * Deliverability will identify all transmission constraints between the resource connection point and where capacity is needed, which may extend across multiple zones 35

36 ICA Foundational Decisions 36

37 ICA Foundational Decisions This section outlines some foundational principles that help form the overall structure of the Incremental Capacity Auction The foundational decisions presented will also be referenced throughout the content covered in the 12-step auction process 37

38 Incremental Auction Design Regions with centralized capacity markets generally require all resources to participate In Ontario, however, the majority of existing capacity is contracted/rate regulated (i.e., suppliers receive payments through contract settlement or true-ups to regulated rates) The contracted capacity from these resources is already relied upon to ensure system adequacy, and, as such, the contracted capacity from these resources will not be eligible to participate The auction will, therefore, seek to procure capacity that is incremental to what is already under contract/rate regulation Avoids administrative complexity that would be required to ensure that contracted/rate regulated resources are not being compensated more than once for the same MW of capacity 38

39 Length of Forward Period The Incremental Capacity Auction will be a forward, rather than a spot, auction The Length of Forward Period is the time between the Base Auction and the beginning of the of the Commitment Period The Length of the Forward Period will be three and a half years The base auction will take place in the winter, between November and January Note that for the initial few transitionary auctions the Forward Period will range from 1 to 2.5 years, and the month of the base auction date has not yet been determined 39

40 Anticipated Auction Schedule* Pre-Auction Activities B1 (Base 1) (CP1) (Commitment Period 1) Initial Auction Pre-Auction Activities B2,B3,B4, Rebalancing Auctions B2,B3,B4 CP2 CP3 CP4 Transitional Auctions Pre-Auction Activities B5 B5 Rebalancing Auctions Steady-State Auction CP5 ~3.5 years * Assuming first Commitment Period begins in Subject to change. 40

41 Commitment Period Commitment Period is the length of time over which each auction will secure capacity resources. The Commitment Period will be comprised of two Obligation Periods Obligation Period is the time period that cleared capacity is required to meet its performance obligations and when cleared capacity will be compensated The ICA design needs to determine the start and end months of the Commitment Period and each Obligation Period The decision to go with a two season design (i.e., to have two Obligation Periods) has been discussed in previous sessions 41

42 Commitment Period When determining the start date of the Commitment Period (which generally aligns with the start of the summer Obligation Period in most jurisdictions), three main factors were considered: Meeting system needs, facilitating trade, and aligning with existing processes May System Seasonal Characteristics Start of Summer Driven Peak Demand Start Capacity Auction Commitment Periods, other Jurisdictions NYISO Start PJM MISO Existing Ontario Electricity Considerations IESO DR Auction Commitment Period Start ICI Settlement Period Start Jun Start Start 42

43 Commitment Period: Seasonal/System Need Start of Summer Driven Peaks Start of Winter Driven Peaks Average Temperature During Peak Demand Hour ( o C) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The y-axis is the average temperature recorded in Toronto during that month s system peak demand hour, between 1995 to 2017 (22 years) 43

44 Commitment Period Commitment Period: Annual May 1 April 31 Obligation Periods: Summer May 1 October 31 Winter November 1 April 31 44

45 Commitment Period Facilitating Trade Jurisdictions that are aligned with the proposed Commitment Period, or that do not have a fixed commitment period: NYISO Strip auctions are aligned with proposed Commitment and Obligation periods Hydro Quebec and Manitoba Hydro Both HQ and MH typically secure capacity through RFPs Jurisdictions that are not aligned: NE-ISO; no interconnection with IESO PJM; currently no interconnection with IESO MISO; directly connected to IESO The IESO will explore opportunities to address any issues associated with Commitment Period misalignment during detailed design 45

46 Preliminary Decisions Auction Activities 46

47 Overview of Auction Activities Pre-Auction Period Participant 1. Review Participation Requirements 3. Submit Info for Eligibility and Qualifying Capacity IESO 2. Determine Auction Parameters and Publish Pre-Auction Report 4. Confirm Eligibility, Determine Qualified Capacity Auction 5. Submit Auction Offer 6. Run Auction, Convey Obligations, Post-Auction Results Forward Period 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Activities 1-8 repeated for each Rebalancing Auction Base/Rebalancing auction outcomes flow into Commitment Period activities Commitment Period 9. Deliver Capacity Obligation 10. Assess Performance 11. Receive Capacity Payments 12. Recover Costs 47

48 1. Review Participation Requirements 48

49 Review Participation Requirements 1. Review Participation Requirements In advance of the auction, interested parties will have access to information (e.g., historical auction outcomes, market rules/manuals, etc.) to help inform decisions with respect to participation in the ICA Some of the information that will be available includes: Organization and resource registration requirements Ineligible resource types Minimum project size & resource aggregation Requirements for new vs. existing resources Project awareness requirements Participation of Regulated Entities Requirements related to participation of contracted resources Requirements related to participation of imports Connection Assessment timelines Site access requirements 49

50 Organization & Resource Registration 1. Review Participation Requirements Organization Resource A Resource B Resource C Step #1: Prior to participating in the capacity auction, organizations will be required to register as a Capacity Auction Participant This is a one time process that organizations will need to complete Step #2: Resources that a participant wishes to offer into the auction will need to be registered as Capacity Auction Resources Allows participants to submit information required to evaluate eligibility, determine qualified capacity for each Capacity Auction Resource and submit offers into the auction AUCTION Step #3: After clearing the auction, and prior to the Commitment Period (CP), Capacity Auction Participants will need to register as a Capacity Market Participant This is a one time process *that will be required of all participants that have an obligation during the Commitment Period Step #4: Resources that clear the auction will need to register as Capacity Market Resources Enables the IESO to pay resources or apply non performance charges based on resource performance during the Commitment Period Note: Participants will still need to following existing IESO processes to become a market participant and register resources COMMITMENT PERIOD * Participants that change their registration status with the IESO may be required to reregister in future years 50

51 Ineligible Resource Types 1. Review Participation Requirements The ICA will encourage broad participation from a range of resources in order to maximize competition. However, for reasons discussed throughout the options phase of the ICA design, many of which are specific to Ontario s unique context, certain resources will not be eligible The following resources will not be eligible to participate in the ICA: Coal fired generation is not permitted in Ontario due to restrictions outlined in s.59 of the Environmental Protection Act (EPA) Contracted capacity is already being compensated for making capacity available in Ontario through contract payments Rate-regulated facilities are compensated for energy produced at a facility based on the available capacity (changes to the facility are handled through the regulation) Energy Efficiency* is currently being compensated through other initiatives There will also be limitations on imports, to be discussed later in this presentation * May be re-evaluated at a later date as the auction approaches 51

52 Minimum Project Size 1. Review Participation Requirements The Minimum Project Size is the minimum capacity that a project is required to be in order to participate in the auction In other jurisdictions this ranges from 100 kw to 1 MW In order to participate in the auction, projects must have a minimum installed capacity (ICAP) of 1 MW* This is aligned with current Market Rules requiring that a facility must have a minimum rated generation capacity or a minimum dispatchable load capacity of 1 MW * Reducing the current threshold to below 1 MW is an initiative under consideration by the IESO, but is out-of-scope for MRP 52

53 Aggregation 1. Review Participation Requirements In other jurisdictions, resources can be aggregated for the purpose of meeting the minimum project size requirements Enables participation of smaller resources (i.e., those < 1MW) Normally limited to a specific geographic or distribution area In Ontario, the Market Rules currently allow a market participant to apply to the IESO to aggregate several resources for the purposes of withdrawing or injecting one or more physical services in the IESO-Administered Markets 53

54 Aggregation (cont d) 1. Review Participation Requirements Aggregated resources will be eligible to participate in the auction, subject to current aggregation rules and technical limitations For DR resources, contributors must be located within a single electrical zone (i.e., one of the existing 10 electrical zones), consistent with requirements under the current DR auction Generation resources must meet requirements outlined in the Market Rules (i.e., be on the same grid connection point, under the operational control of a single MP, have sufficient metering for settlement purposes, and meet IESO operational communication requirements between each of the facilities) 54

55 Minimum Consecutive Hours of Delivery (MCHD)* Existing market design requires all resources to be able to deliver energy for at least 1 hour 1. Review Participation Requirements For non-energy limited resources it is assumed that the resource will respond when called upon for as many hours as needed The ICA will have a MCHD requirement Resource adequacy assessments during detailed design will inform the decision concerning the MCHD duration The MCHD for ICA is likely to be greater than one hour given initial assessment of forecasted load profiles and supply mix The MCHD will also be used as an input when determining Eligibility and Qualified Capacity * This Design Feature was previously referred to as Minimum Dispatch Duration 55

56 New vs. Existing Resources 1. Review Participation Requirements There are some requirements that will be applicable to all resources (i.e., both new and existing) For example: meeting participation/registration requirements, being an eligible resource type, and meeting the minimum size and aggregation requirements (if applicable) All resources (notionally, those that have already completed commissioning) will be required to provide a set of representations and warranties related to their project e.g., the project is in compliance with all applicable Laws and Regulations In addition to the common requirements, new or modified resources will also have to demonstrate that certain processes have been initiated or provide evidence that certain requirements have been met These requirements may differ based on project size/resource type 56

57 General Requirements New Resources 1. Review Participation Requirements For the purposes of determining applicable ICA eligibility requirements, resources that are not built/available prior to submitting an eligibility package will be considered to be new resources* Participants must commit that new resources will be available by the Commitment Period (CP) The IESO recognizes that based on the Length of the Forward Period and varying development timelines for different resources, some resources may need to start development work in advance of clearing the auction Eligibility requirements that are applicable to new resources have been established so that participants have the ability to manage project risk and determine when to initiate certain processes in order to be available for the CP * The definition of new used in other aspects of ICA (e.g., MYC eligibility) may differ 57

58 General Requirements (cont d) New Resources 1. Review Participation Requirements As part of the eligibility review, there will be no requirements related to project permitting, project development experience, or project financing Project permitting and financing will need to be demonstrated in order to complete milestones during the Forward Period Participants will be required to provide a description of how the project will reach commercial operation by the CP Includes, but may not be limited to, expected dates by which various milestones are expected to be met and details regarding any processes that have already commenced 58

59 Project Awareness 1. Review Participation Requirements The IESO recognizes the importance of potentiallyimpacted communities being made aware of proposed projects Allows any issues to be flagged as early as possible Existing permitting and approvals processes that are external to the IESO will be the primary mechanism for participants to engage with communities about their projects Project awareness requirements under the ICA are intended to support these existing processes 59

60 Project Awareness (cont d) 1. Review Participation Requirements New projects will be required to demonstrate that they have made local municipal government and Indigenous communities aware of the project they are proposing to develop How participants will demonstrate that they have made local municipalities and Indigenous communities aware of their proposed project will be established during detailed design Additional details (e.g., resource types and project size threshold that this would apply to, if any) will be determined during detailed design 60

61 Site Access 1. Review Participation Requirements Acquiring access to the site on which the project will be located prior to the auction improves the IESO s confidence that a project will materialize during the Forward Period Demonstrates that the participant has made some upfront commitment to the project Other jurisdictions (e.g., ISO-NE, PJM) require that a participant has access to the site prior to participating in an auction Site access was also a requirement in previous IESO procurements 61

62 Site Access (cont d) 1. Review Participation Requirements Participants with new projects will be required to demonstrate that they have secured access to the site on which the project will be located May only be applied to certain resource types and/or projects above a certain size threshold After clearing the auction, any changes to the site location will be subject to limitations such that the revised location does not affect the outcomes of the deliverability assessment that was conducted e.g., the same grid connection point must still be proposed Documents required to demonstrate site access will be determined during detailed design 62

63 Connection Assessment Timelines Transmission Connected Projects 1. Review Participation Requirements Projects seeking a transmission connection may initiate a System Impact Assessment (SIA) prior to the auction Participants may initiate their SIA at any point they deem appropriate based on their assessment of the timelines required to come into service in advance of the Commitment Period Compared to historical procurements, this approach provides participants with more opportunity to obtain information on potential scope and cost of connection requirements in advance of the auction 63

64 Connection Assessment Timelines Distribution Connected Projects 1. Review Participation Requirements Projects seeking a distribution connection will not be permitted to apply for a Customer Impact Assessment (CIA) in advance of the auction LDCs generally allocate distribution connection capacity based on the order in which applications for CIAs are received; requiring applications for a CIA to occur after the auction will allow all resources to compete in the auction, after which the cleared capacity resource is able to enter the LDC connection queue LDCs also provide the opportunity for a proponent to request a meeting and exchange information with the LDC in advance of applying for a CIA IESO has begun engaging with LDCs about possible coordination which could further mitigate the risk of a new resource clearing the auction and not being able to complete a CIA 64

65 Participation of Regulated Entities 1. Review Participation Requirements Participation of Regulated Entities has been restricted or limited in some past procurements For the ICA, resources that are not subject to rate regulation, but are owned by Regulated Entities, or affiliates of Regulated Entities, will be eligible to participate 65

66 Imports Overview 1. Review Participation Requirements In other jurisdictions, imports have provided opportunities to cost effectively meet capacity needs When determining what type of resources would be eligible to import capacity to Ontario, the following factors were considered: Alignment with eligibility for internal resources Ensuring that the resource/jurisdiction will be capable of providing the committed capacity to Ontario (with a consideration for existing commitments in the home or neighbouring jurisdictions) Keeping requirements as simple as possible for easier integration into operating agreements Applicable Laws and Regulations Ability to have necessary visibility/information related to new projects 66

67 Imports Eligibility for Resource, System and Portfolio Backed Imports 1. Review Participation Requirements Keeping in mind the above considerations, the following eligibility requirements will apply to imports for the initial auction Resource-backed and system-backed imports will be eligible, portfolio-backed imports will not be eligible Allowing portfolio-backed imports would introduce additional complexity to inter-system operator operating agreements, capacity qualification and settlement processes 67

68 Imports Eligible Resource Types 1. Review Participation Requirements All generation types (except coal) will be eligible to participate; demand response and energy efficiency will not be eligible The same capacity qualification process applied to internal generation resources can be applied to imports Coal-backed resource eligibility is consistent with what will apply internally Imports of DR and EE are not eligible in any other jurisdictions Only existing resources in external jurisdictions (i.e., those already built and ready to inject) will be eligible to participate in the ICA Different project milestones would need to apply for each jurisdiction external to Ontario; may also present administrative challenges to determine eligibility, track project progress and settle resources Unlikely that new facilities would be built in other jurisdictions for the purposes of participating in the ICA 68

69 Imports Agreements & Existing Capacity Position 1. Review Participation Requirements To be eligible, external capacity must be located in a jurisdiction with which the IESO has an agreement that establishes the processes/instructions regarding how the IESO will interact with external jurisdictions in relation to the treatment of external capacity resources that have a capacity obligation in Ontario New/amended agreements will be needed that cover the treatment of capacity imports; anticipate these will be in place prior to first auction Resources will need to confirm that they do not have an existing capacity position in another jurisdiction for the same capacity being offered into the ICA during the months of the Obligation Period Resources should not be counted on by multiple jurisdictions for the purposes of meeting resource adequacy Treatment of a resource that has capacity obligations in multiple jurisdictions is yet to be determined 69

70 Contracted Resources 1. Review Participation Requirements Merchant capacity from contracted facilities (i.e., existing incremental capacity or capacity resulting from an uprate) will be eligible to participate in the auction provided that the merchant capacity can be distinctly identified Incentivizes participants to maintain and develop merchant capacity 70

71 Contracted Resources Determination of Merchant Capacity 1. Review Participation Requirements Merchant capacity from facilities with a capacity style contract will be permitted to participate in the IESO with capacity in excess of their contracted amount Merchant capacity from facilities under a PPA style contract will need to ensure that any merchant capacity, and the associated energy production, can be distinguished from existing contracted capacity amounts such that the additional energy generated is not compensated under the PPA If this cannot be accomplished to the IESO s satisfaction, then separate metering may be the only option for participation in the ICA 71

72 Contracted Resources Approvals & Amendments 1. Review Participation Requirements As part of the eligibility review, participants that wish to offer merchant capacity from their contracted facilities will be required to: Meet with their Contract Manager to discuss participation in the ICA and any potential changes to their facility or amendments to their agreement How this will be demonstrated is yet to be determined, may be through an affirmation and/or provision of evidence that the necessary discussions took place Commit to have any required amendments finalized and executed prior to the Commitment Period, should the resource clear the auction Any amendment discussions would be between the participant and IESO Contract Management, and participation or clearing the ICA would not constitute an offer, representation, guarantee, or offer to amend a participant s contract The IESO will endeavour to provide additional information or conditions under which amendments would be facilitated 72

73 2. Determine Auction Parameters and Publish Pre-Auction Report 73

74 Auction Parameters 2. Determine Auction Parameters and Publish Pre- Auction Report Auction parameters will be determined and public report(s) will be released by the IESO in advance of the base and rebalancing auctions Transparent methodologies that inform how auction parameters are established will be made available 74

75 Auction Parameters 2. Determine Auction Parameters and Publish Pre- Auction Report Auction Parameters Demand Curve parameters Target Capacity Net CONE Slope of Demand Curve Minimum capacity limits Maximum capacity limits Max Auction Clearing Price Market Power Mitigation parameters To be determined, may include: Offer review thresholds Reference prices Minimum offer prices Locational parameters Capacity Zones Zonal Maximum Capacity Zonal Minimum Capacity 75

76 Pre-Auction Report 2. Determine Auction Parameters and Publish Pre- Auction Report Timing It is anticipated that the Pre-Auction report will be released approximately one year in advance of each base auction At a minimum, the following will be included in the Pre- Auction report: Auction parameters Pre-Auction Deliverability Indication (PADI) Review of changes from previous auctions 76

77 Target Capacity 2. Determine Auction Parameters and Publish Pre- Auction Report A preliminary Target Capacity will be included in the Pre- Auction report The final Target Capacity will be published closer to the auction Notionally, shortly before ICA offers are required Resource adequacy values generally do not change significantly from year to year, therefore, the final Target Capacity would not be expected to vary significantly from the preliminary Target Capacity As part of the annual pre-auction report, the IESO will also publish a forecast of future capacity needs for at least five years beyond the Commitment Period 77

78 Target Capacity 2. Determine Auction Parameters and Publish Pre- Auction Report Target Capacity = (Reliability Requirement) (Contracted/Regulated Contribution) Target Capacity will be determined through a welldefined and transparent process Transparency of the process will be similar to the Ontario Reserve Margin Requirements which is released annually to communicate Ontario s planning reserve margins required for the next five years Reliability Requirement will also consider programs such as the Industrial Conservation Initiative (ICI) Further details on Target Capacity and ICI in upcoming slides 78

79 Target Capacity Accounting for ICI and DR 2. Determine Auction Parameters and Publish Pre- Auction Report Industrial Conservation Initiative (ICI) is a program that allows participating industrial consumers to manage their portion of Global Adjustment (GA) costs based on their contribution to the top five (5) yearly peak demand hours (i.e., incentivizes reductions in demand during the peak hours) Demand Response (DR) is a resource type that will be eligible to participate in ICA. Consumers can offer their ability to reduce their electricity consumption in response to prices and system needs as a capacity product. DR is expected to continue to play an important role in Ontario's electricity system The issue: The IESO needs a way to ensure that DR resources that clear the auction (accounted for on supply side), are distinct from the response seen in relation to the ICI (accounted for on demand side) 79

80 Target Capacity Accounting for ICI and DR (cont d) 2. Determine Auction Parameters and Publish Pre- Auction Report In system adequacy studies, the load forecast used includes the effect of the ICI program, whereas a DR resource secured through ICA would be considered to be a capacity resource. If a load participated in both programs, the same load would contribute to a lower load forecast and be counted on as a capacity resource available to meet load This double counting could adversely effect the ability to meet Ontario s adequacy requirement Load will need to be accounted for appropriately in system adequacy assessments when determining Target Capacity Options for addressing this issue will be explored further through this engagement, with input from the Demand Response Working Group 80

81 Pre-Auction Deliverability Indication 2. Determine Auction Parameters and Publish Pre- Auction Report The Pre-Auction Deliverability Indication (PADI) will be part of the comprehensive Pre-Auction Report In advance of the first auction, the PADI will contain zonal level information that will indicate the major transmission constraints that define zonal boundaries During detailed design, options will be reviewed regarding what information from previous auction results can be included in future PADI Will need to weigh benefits of providing the market with potentially useful information to inform investment decisions against the need to ensure commercially sensitive information is not disclosed 81

82 Capacity Zones 2. Determine Auction Parameters and Publish Pre- Auction Report Capacity Zone Concept An area of the grid bounded by transmission limitations where the addition of capacity may be restricted or required The purpose of establishing capacity zones Provide locational indications to participants prior to the auction Reflects transmission constraints in auction clearing Provide zonal level price signals Principles The zone formation process should capture relevant bulk transmission limitations The zones formed should remain large enough to allow for competition The zonal arrangement should be reasonably stable and predictable 82

83 Capacity Zones 2. Determine Auction Parameters and Publish Pre- Auction Report The pre-existing ten IESO electrical zones will be considered as a starting point These zones were originally created to represent major transmission interfaces, which is also one of the purposes of establishing Capacity Zones Stakeholders expressed general support for continuing with the existing 10 zones, which are used in the current energy and DR markets During detailed design, pre-existing zone boundaries will be reviewed and any necessary modifications made Major transmission interfaces will be assessed from a capacity perspective and the assessment results used to determine if any zonal boundary modifications are needed 83

84 Capacity Zones 2. Determine Auction Parameters and Publish Pre- Auction Report From a capacity deliverability perspective, the capacity zones can generally be considered as: Export-constrained zones Import-constrained zones Unconstrained zones In neighbouring jurisdictions with multiple interconnections at different locations, it is anticipated that each intertie will be modelled separately based on the associated intertie transfer capability How these limitations will be incorporated into the auction clearing mechanism will be determined during detailed design 84

85 Zonal Maximum Capacity 2. Determine Auction Parameters and Publish Pre- Auction Report Concept: Zonal Maximum Capacity is the maximum capacity that can be allowed to clear in an export-constrained zone The purpose of setting Zonal Maximum Capacity is to: Prevent over-procuring capacity in export-constrained zones Provide indications to auction participants about the maximum capacity that will be procured in an export-constrained zone 85

86 Zonal Maximum Capacity 2. Determine Auction Parameters and Publish Pre- Auction Report Zonal Maximum Capacity will be identified for exportconstrained zones Export-constrained zones will have limited amounts of capacity that can be added to the zone A Probabilistic Approach will be used to determine the Zonal Maximum Capacity This methodology is consistent with system adequacy assessments Detailed methodologies and assumptions for the determination of Zonal Maximum Capacity will be established during detailed design 86

87 Zonal Minimum Capacity 2. Determine Auction Parameters and Publish Pre- Auction Report Concept: Zonal Minimum Capacity is the minimum amount of capacity within an import-constrained zone that will be required to be cleared The purpose of setting Zonal Minimum Capacity is to: Indicate the capacity required at a zonal level to meet adequacy requirements Provide an indication to auction participants about the amount of capacity that will be needed within a zone 87

88 Zonal Minimum Capacity 2. Determine Auction Parameters and Publish Pre- Auction Report Zonal Minimum Capacity will be identified for importconstrained zones Import-constrained zones will need capacity to be located within the zone Both resource and transmission related reliability standards will be respected when establishing the Zonal Minimum Capacity The IESO will continue to explore how needs identified through Regional Planning studies and the ICA will interact 88

89 3. Submit Info for Eligibility and Qualifying Capacity 89

90 Overview 3. Submit Info for Eligibility and Qualifying Capacity Participants will be required to provide an information package about their resource for evaluation by the IESO Will include information related to both eligibility and capacity qualification Consistent with stakeholder feedback, eligibility requirements have generally been established to allow participants to manage their own resource development risks; the IESO will use financial mechanisms (e.g., "Auction Deposits" and "Completion Security") to manage resource adequacy risk Eligibility requirements also reflect the need to: Avoid creation of unnecessary barriers to participation Provide assurance to the IESO that the resource will be available for the Commitment Period* Protect price signals from the distorting effects of projects clearing the auction and subsequently failing to materialize * Mainly related to new projects 90

91 Assessment Deposit 3. Submit Info for Eligibility and Qualifying Capacity Participants will be required to provide a deposit for the assessment of all projects (both new and existing) when submitting eligibility and QC information The deposit will be used to cover IESO costs related to reviewing information, determining QC, and assessing deliverability (this will be separate to any costs incurred to complete the SIA or CIA process) Initial assessment deposit will be collected as a pre-defined amount, which is expected to be in the range of $10k to $50k Once these processes are complete, excess funds will be returned or additional funds will be requested based on actual IESO expenditures The final cost of the assessment may depend on factors such as: Whether the resource has previously completed a qualification/ deliverability assessment Project characteristics such as type of resource, size, location, and connection type 91

92 Demand Response Background 3. Submit Info for Eligibility and Qualifying Capacity Participants in the current DR Auction are required to provide information to support DR capacity qualification Provision of a Load Reduction Plan (which indicates how the capacity obligation will be satisfied) is optional and is only used for information purposes DR eligibility requirements under the ICA are expected to be similar to those under the DR Auction Requirements during the Forward Period may need to change due to the longer forward period in the ICA 92

93 Demand Response ICA Eligibility 3. Submit Info for Eligibility and Qualifying Capacity DR resources will be required to provide a plan of how capacity will be acquired/milestones will be met; will not be required to provide proof of contributors acquired or load reduction capability as part of eligibility information DR resources are expected to be developed in three years or less, and as such will likely only acquire contributors or make operational changes closer to the Commitment Period Where possible, the IESO will review baseline consumption at the load reduction source to ensure that the committed capacity is available Information will be collected to ensure resources will materialize during the Forward Period; however the IESO may request clarification of information provided when necessary and will have discretion to not accept projects that appear infeasible 93

94 Demand Response ICA Eligibility (cont d) 3. Submit Info for Eligibility and Qualifying Capacity Progress towards having the resource available by the Commitment Period will be monitored during the Forward Period through the milestone tracking process and reporting requirements DR may be subject to a streamlined tracking process which will have different milestones (e.g., related to securing contributors) than those applied to generation resources 94

95 Hydro Resources 3. Submit Info for Eligibility and Qualifying Capacity In previous IESO procurements, new hydro resources were required to provide information regarding both site access and fuel availability (including stream flow data) Under the ICA, hydro resources will not be required to provide information regarding fuel availability This is consistent with treatment of other resources, which will not be required to provide information related to fuel supply Hydro resources will be required to provide site access documents as part of eligibility Consistent with the requirements for other resource types Details regarding specific information that will need to be provided will be determined as part of the detailed design 95

96 4. Confirm Eligibility, Determine Qualify Capacity 96

97 Confirm Eligibility, Qualify Capacity 4. Confirm Eligibility, Determine Qualified Capacity Confirm Eligibility This will be a binary assessment (i.e., participants will be determined to be eligible or ineligible based on specified criteria) Capacity Qualification Process - Determines the max MW of capacity that a resource can offer into the ICA to support fair competition amongst all resource types Risk Allocation: - IESO Assumes Deliverability Assessment Risk for a given Commitment Period - Participant Assumes QC Risk (related to performance obligations and year-to-year reassessments) Communicate Results to Participants Eligibility determination (y/n), and Qualified Capacity determination for each resource (a single MW value, per resource, for each season) 97

98 Confirm Eligibility 4. Confirm Eligibility, Determine Qualified Capacity Participants will be required to submit information to substantiate project eligibility prior to the auction The IESO will review information submitted by participants to determine whether requirements have been satisfied Resources that satisfy all requirements will move on to capacity qualification; those that are determined to be ineligible will be provided reasons for the determination 98

99 Defining the Capacity Product 4. Confirm Eligibility, Determine Qualified Capacity Capacity Qualification Process should be closely aligned with both the overall Resource Adequacy Assessment methodology and Performance Obligations and Assessment Taken together these design elements create the Capacity Product that will be secured in the ICA Resource Adequacy Assessment Target Capacity Capacity Qualification Process Resource Specific Qualified Capacity Performance Obligation and Assessment Assess Ability to Deliver Obligation 99

100 Capacity Qualification Process General Principles 4. Confirm Eligibility, Determine Qualified Capacity Equalizes the contribution of capacity to resource adequacy from all resource types, supporting fair competition amongst all resource types The Capacity Qualification Process includes both a Resource Assessment and a Deliverability Assessment o o Resource Assessment considers the physical capability of the specific resource; results in Resource Assessment Quantity Deliverability Assessment considers the transmission constraints to determine the amount of capacity that can be supplied from the resource to where it is needed The output of the Capacity Qualification Process will be a single MW value per resource, for each Obligation Period o Qualified Capacity will be rounded to the nearest 0.1M 100

101 Capacity Qualification Process Resource Assessment 4. Confirm Eligibility, Determine Qualified Capacity In general, a seasonal ICAP and Forced Outage rate will be established for each resource eligible to participate in the ICA This value could be based on either the resource s expected contribution during a peak month or expected average over the entire Obligation Period Approved outages will not affect a resource s Resource Assessment Quantity (MW) *ICAP Installed Capacity **UCAP Un-forced Capacity 101

102 Capacity Qualification Process Resource Assessment - Thermal 4. Confirm Eligibility, Determine Qualified Capacity A seasonal ICAP value will be established through a combination of historical data (e.g., production data and/or form submissions) and Capacity Check Tests from previous Commitment Periods A Forced Outage rate will be established for each resource based on historical (actual) forced outage and energy production data and will be used to calculate the Equivalent Forced Outage Rate on Demand (EFORd) Resource Assessment Quantity (UCAP) = ICAP EFORd_Derate 102

103 Capacity Qualification Process Resource Assessment - Intermittent (wind and solar) 4. Confirm Eligibility, Determine Qualified Capacity Intermittent resources produce energy when fuel is available (e.g., wind is blowing, sun is shining) Principle: Resources will need to be assessed based on their contribution to resource adequacy to meet system adequacy needs Contribution to resource adequacy in this case will mostly be a measure of how well aligned the intermittent resource s production profile is with system needs. Where system needs are a function of demand and the rest of the supply fleet 103

104 Capacity Qualification Process Resource Assessment - Intermittent (wind and solar) 4. Confirm Eligibility, Determine Qualified Capacity Intermittent resources contribution to resource adequacy diminishes as their share of total supply mix increases (see example scenarios below) Example: As the penetration of solar increases, the coincidence of solar production to the net-peak demand declines, resulting in each additional unit of solar contributing less to resource adequacy System peak/time of system need Megawatts ON Demand Solar Output (2GW inst) Net Demand (2GW inst) Solar Output (8GW inst) Net Demand (8GW inst) Hour in Day 104

105 Capacity Qualification Process Resource Assessment - Intermittent (wind and solar) 4. Confirm Eligibility, Determine Qualified Capacity Below is an illustration of the "diminishing returns" nature of intermittent resources towards meeting resource adequacy needs Not considering this effect would likely lead to an overestimation of these resources contributions 105

106 Capacity Qualification Process Resource Assessment - Intermittent (wind and solar) 4. Confirm Eligibility, Determine Qualified Capacity Methodologies being considered: Effective Load Carrying Capability: Is a percentage that expresses how well a resource (individual or resource fleet) is able to contribute to resource adequacy, calculated via probabilistic reliability modeling Peak Window: Historical production over a specific set of hours that are coincident with the peak demand are used to determine the statistically expected available capacity of the resource The methodology chosen will allow for: Individual resources will be assigned a unique Qualified Capacity that considers their historical production performance 106

107 Capacity Qualification Process Resource Assessment - Intermittent (wind and solar) 4. Confirm Eligibility, Determine Qualified Capacity Methodologies being considered (cont d) Incorporates diminishing returns Does not incorporate diminishing returns Based on ELCC Peak Window method where window hours are aligned with Ontario demand net of intermittent production Peak Window method where window hours are aligned with Ontario demand One (or a combination) of the above methodologies will be included in the HLD The exact methodology will be determined during detailed design 107

108 Capacity Qualification Process Resource Assessment - Energy Storage 4. Confirm Eligibility, Determine Qualified Capacity Principle: The capacity value of energy storage is a function of: Power injection capability (MW) Energy reservoir size/hours of storage (MWh) Load shape Supply mix Illustrative example: Highlighting the relationship between Qualified Capacity and energy reservoir size (hours of storage) Figure: The Potential for Energy Storage to Provide Peaking Capacity in California under Increased Penetration of Solar Photovoltaics CPUC: California Public Utilities Commission 108

109 Capacity Qualification Process Resource Assessment - Energy Storage 4. Confirm Eligibility, Determine Qualified Capacity Qualification will be based on a dependable maximum sustained output (DMSO) over a specified time period and impacted by outage rates Energy Storage resources Qualified Capacity (in units of UCAP MW) will be determined by derating the ICAP of the resource by its outage rate (EFORd), and the ICAP value is established as follows: ICAP = Dependable Maximum Sustainable Output (DMSO) Precise calculation of DMSO will be determined during detailed design. Will consider power rating (MW), energy reservoir size (MWh), and results of Capacity Check Test(s) The specified time period relates to a number of continuous hours over which output must be sustained. The process for determining this time period will be established during detailed design and will be a function of expected load shape and supply mix. It will also be aligned with the MCHD (introduced in stage 1 Review Participation Requirements ) 109

110 Capacity Qualification Process Resource Assessment - Hydro 4. Confirm Eligibility, Determine Qualified Capacity Principles: Hydro resources will be qualified such that their Qualified Capacity is reflective of available energy (i.e., fuel availability) over predefined assessment hours Qualification must differentiate between two possible components: A "run-of-river" component and a "dispatchable" component The amount of each component can vary widely between hydro facilities 110

111 Capacity Qualification Process Resource Assessment - Hydro 4. Confirm Eligibility, Determine Qualified Capacity Methodology being considered: Peak Window methodology using historical production data to determine a statistically expected amount of available capacity during times of system need Rationale: This proposed methodology should be able to account for the varying levels of run-of-river and dispatchable components in each hydro facility Resources that have higher levels of the dispatchable component should be able to shift output to align with times of system need (and hence influence their QC) while resources that are mostly run-of-river will have their QC based primarily on the historical coincidence of their production with times of system need 111

112 Capacity Qualification Process Resource Assessment - Demand Response (DR) 4. Confirm Eligibility, Determine Qualified Capacity Participant submits quantity for which they wish to qualify Participant submitted quantity is verified by IESO (eligibility stage) Must conform with the MCHD Resource Assessment Quantity may then be further reduced based on performance data from historical activations or results of Capacity Check Test(s) 112

113 Capacity Qualification Process Resource Assessment - Imports 4. Confirm Eligibility, Determine Qualified Capacity Imports are split into two categories; system backed and resource backed System backed Capacity will be taken as offered and assumed to be injected at the border. Resource backed QC will be based on treatment of Ontario resources of that type (in addition, must demonstrate deliverability to the border; yet to be determined how losses will be addressed) Both system and resource backed imports will be subject to a deliverability assessment within Ontario that also accounts for intertie limitations NOTE: Portfolio backed imports will not be eligible 113

114 Capacity Qualification Process Resource Assessment - New Resources The IESO will qualify new resources based on the best available data set (e.g., GADS or CEA, similar Ontario units, Simulated data). This information will be used to establish a resource s ICAP and forced outage rates where historical data does not exist Under certain circumstances, and upon request by the participant, the IESO may qualify the new resources capacity based on participant provided data (either simulated or from manufacturer) Data provided must be in a standardized IESO format IESO is considering using DR Capacity Check test results as well as activation data to create a DR class average, which may then used as a performance factor when establishing Qualified Capacity for new DR resources Class averages may be created separately for aggregated portfolio vs. Single Contributor resources 4. Confirm Eligibility, Determine Qualified Capacity 114

115 Capacity Qualification Process Deliverability Assessment 4. Confirm Eligibility, Determine Qualified Capacity Deliverability Assessment is part of the Capacity Qualification Process for all resources For each qualification submission, the Deliverability Assessment will determine the largest portion of the submitted capacity that is deliverable from the submitted connection point The Deliverability Assessment will also identify any system points where the submission is competing with another submission(s) based on a deliverability constraint that cannot accommodate all of the submissions Whether this process can be applied to DR resources is yet to be determined Deliverability will be assessed through all transmission levels The IESO has carried out preliminary engagement with LDCs to discuss distribution level deliverability considerations 115

116 Capacity Qualification Process Deliverability Assessment (cont d) Deliverability for a specific resource could be based on either: Enduring Deliverability Assessment: After a resource clears the auction the result of the Deliverability Assessment for that resource would endure for a number of subsequent auctions Annual Deliverability Assessment: Deliverability will be reassessed for every resource in advance of every auction The ICA will use an Annual Deliverability Assessment approach for all resources that are not subject to a Multi-Year Commitment This approach allows for increased competition in each auction Multi-Year Commitments will include an enduring deliverability assessment for the full duration of the commitment This will provide certainty as to the level of financial commitment the project will have 4. Confirm Eligibility, Determine Qualified Capacity 116

117 Capacity Qualification Process Deliverability Assessment 4. Confirm Eligibility, Determine Qualified Capacity The Resource Assessment Quantity for each resource may be reduced based on results of the Deliverability Assessment, establishing the resources Qualified Capacity (UCAP) Qualified Capacity identifies the max MW of capacity that a resource can offer into the ICA Qualified Capacity = fn(resource Assessment, Deliverability Assessment) 117

118 5. Submit Auction Offer 118

119 Submit Auction Offer Offer Price & Quantity 5. Submit Auction Offer Shortly before the auction, participants will have the opportunity to submit offers into the auction up to their Qualified Capacity amount Resources are allowed to submit multiple price-quantity pairs (laminations) and specify, for each lamination above the first one, whether the offered quantity can be cleared in Full or Partial Full: offered quantity must be cleared in entirety Partial: offered quantity can be cleared partially in 0.1MW increments Resources can submit in three different offer types: summer-only, winter-only and/or annual Annual offers may be expressed in terms of total capacity revenue requirement for the Commitment Period, whereas summer and winter only offers would express the capacity revenue requirement for each Obligation Period 119

120 Submit Auction Offer Offer Price & Quantity 5. Submit Auction Offer The IESO will determine whether the clearing price will be adjusted to account for inflation between the time of the base auction and the Commitment Period, or if participants should offer in future dollars at the time of the auction The rate that MYC resources are paid for Commitment Periods following the first will be adjusted for inflation Generally, it is expected that ICA-related Market Rule changes would only apply to obligations secured from future auctions (subject to any urgent rule amendments), although this will continue to be considered It is expected that Market Rule changes made during the Forward Period would generally become effective after the associated Commitment Period (i.e., future changes would not be expected to affect a capacity obligation that was previously secured) Treatment of MYCs to be determined 120

121 Submit Auction Offer Auction Deposit Participants that wish to offer resources into the auction will be required to provide an auction deposit The auction deposit serves to ensure that offers in the auction are from creditworthy counterparties who intend on fulfilling obligations should they clear the auction Other jurisdictions require some form of auction deposit for both new and existing resources 5. Submit Auction Offer In order to participate in the ICA, participants will need to provide an Auction Deposit for each participating resource Deposit will need to be provided at a specified date just prior to the auction, in the correct format or the resource will not be eligible to participate Certain participants may be exempt from providing an Auction Deposit if a resource has a capacity obligation for the previous Commitment Period and they have posted Performance Security 121

122 Submit Auction Offer Auction Deposit (cont d) 5. Submit Auction Offer The Auction Deposit amount will differ for new and existing resources, but in both cases will be adjusted should a resource partially clear the auction EXISTING Auction deposit based on: quantity participant is willing to offer a factor of the maximum auction clearing price (approx. 3-5% in other ISOs) the Obligation Periods for which the offer applies (i.e., seasonal or annual offer) NEW Auction deposit based on: quantity participant is willing to offer factor of maximum auction clearing price (approx. 5% to 15% in other ISOs) the Obligation Periods for which the offer applies (i.e., seasonal or annual offer) Capacity does not clear Cleared Capacity Capacity does not clear Cleared Capacity Auction Deposit is returned upon request* Auction Deposit amount is returned upon request* after completion of resource registration, meter registration and posting of performance security Auction Deposit is returned upon request* Auction Deposit becomes Completion Security; returned as Milestones are met during the Forward Period *Participants may choose to retain Auction Deposit with the IESO for participation in subsequent Rebalancing Auctions, or convert Auction Deposit to Performance Security 122

123 Inefficient Suppression of Capacity Auction Prices Overview 5. Submit Auction Offer In the long run, well functioning capacity auctions provide economic signals to inform participants whether to invest in new facilities, make capacity improvements to existing facilities, or retire Auction prices that do not result from pure competition make it more difficult to preserve efficient price signals Inefficient suppression could result from: Out-of-market actions that reduce the target requirement Subsidized entry of new resources, including the intentional suppression of prices by Load Serving Entities (LSEs)/large loads 123

124 Inefficient Suppression of Capacity Auction Prices Out-of-market actions that Reduce the Target Requirement 5. Submit Auction Offer Stakeholder input previously identified a concern over uncertainties related to future capacity auction outcomes from unanticipated changes in the Target Capacity, particularly in light of the incremental nature of the ICA Could result if new contracts were entered into by the IESO once the auction is in place Greater uncertainty may increase participants exposure (or perceived exposure) to risk, potentially resulting in higher priced offers being submitted Transparent methodologies that inform how the Target Capacity is determined and enhancements to information provided to allow participants to improve projections of the Target Capacity in future auctions can help mitigate the potential or perceived impact of any outof-market actions 124

125 Inefficient Suppression of Capacity Auction Prices Subsidized Entry of New Resources 5. Submit Auction Offer LSEs and participants with large load positions have a direct incentive to intentionally suppress capacity prices through subsidized entry of new resources This incentive is less of a concern in Ontario given: Ontario does not have LSEs, and A lack of net loads currently (or anticipated) large enough to benefit from these actions Subsidized resources that are developed or facilitated by programs or mechanisms (external to the auction) with the intent of achieving policy objectives can indirectly result in suppressed auction clearing prices 125

126 Inefficient Suppression of Capacity Auction Prices Three Potential Mitigation Approaches to Address Subsidies 5. Submit Auction Offer 1. Action to Mitigate All Subsidies Intent is to replicate the theoretically competitive price in the absence of any subsidies Addressed most directly though a full Minimum Offer Price Rules (MOPR) solution 2. No Mitigation of Subsidies An approach where there is no intervention by the IESO on capacity auction outcomes related to the potential impact of subsidies 3. Targeted Approach to Mitigate Subsidies Requires the identification of subsidies that warrant action and ignores others 126

127 Inefficient Suppression of Capacity Auction Prices Three Potential Mitigation Approaches to Address Subsidies (cont d) 5. Submit Auction Offer Approach Pros Cons Action to Mitigate Impact of all Subsidies No Mitigation of Subsidies Maintains an efficient price signal for the value of capacity Price that would prevail in the absence of market intervention and consistent with the signal needed to attract new capacity Less conflict with policy goals Least complex solution to administer (does not require estimates/assumptions to determine MOPR levels and when to apply) Avoids issues of over-building Consistency with the ICA s incremental design (contracted and regulated facilities are not eligible to participate) May be inconsistent with government policy goals May result in over-building, particularly when resources that do not clear will continue to be developed Administratively complex, estimates and assumptions may lead to divergence from efficient price May reduce the impact of the ICA in supporting competitive entry (results in a signal that may postpone entry/encourage retirements) Introduces more uncertainty around projections of auction outcomes in the future 127

128 Inefficient Suppression of Capacity Auction Prices Three Potential Mitigation Approaches to Address Subsidies (cont d) Approach Pros Cons Targeted Approach to Mitigate Subsidies Can be less disruptive to policy objectives as it tries to identify and mitigate only the most impactful subsidies Provides some protection in maintaining an efficient and potentially predictable price signal for the value of capacity If deemed necessary, this approach can be targeted to reduce incentives for large loads to intentionally suppress prices, particularly in smaller zones Complexity in determining which subsidies are actionable and which can be ignored Significant number of assumptions may pose a risk of not achieving desired outcome (assumptions must be made ex ante) The long-term success of the auction requires the ability to exist along side government policy objectives Need to recognize that certain policy objectives may be achieved outside of the ICA The foundational assumption that the auction will be incremental recognizes that certain policy objectives have historically been achieved through other means 5. Submit Auction Offer 128

129 Inefficient Suppression of Capacity Auction Prices Ontario Considerations 5. Submit Auction Offer Any potential solution to help mitigate the impact of subsidised entry must reflect differences between Ontario and neighbouring jurisdictions Ontario is a one-province jurisdiction The format and impact of the mechanisms used to achieve policy objectives in multi-state jurisdictions in the U.S. can be different than those implemented in Ontario The Ontario auction is incremental Although the ICA will be the primary tool to maintain resource adequacy, resources that are developed under a contract will not be able to participate in the auction There is a risk that a mitigated solution to address the impact of subsidies could ultimately erode to a no-mitigation solution if resources that do not clear the auction are developed anyway 129

130 Inefficient Suppression of Capacity Auction Prices Next Steps 5. Submit Auction Offer The IESO recommends not to implement a process to mitigate the impact of all subsidies and will continue to assess the merits of implementing either a targeted mitigation approach or if determined not to be a significant risk, do not mitigate subsidies in auction outcomes The assessment will include the potential use of other auction design features to help mitigate the potential or perceived impacts of subsidized resources Multi-Year Commitments or adjustments to demand curve parameters can help reduce price volatility resulting from subsidies In addition, the IESO will continue to communicate the benefits of market-based solutions for achieving government policy objectives 130

131 6. Run Auction, Convey Obligations, Post-Auction Results 131

132 Run Auction 6. Run Auction, Convey Obligations, Post-Auction Results Format: Single-round, sealed-bid auction will be conducted A sealed-bid auction mechanism is a simpler design, quicker to implement and simpler for both the IESO and Market Participants to administer A sealed bid auction mechanism is expected to have less market power mitigation issues than a descending clock auction mechanism Timing: Base auction would occur during the winter months (at steady state) It is based on the Forward Period of approximately three and a half years and with Commitment Period starting in May 132

133 Illustration of Auction Clearing 6. Run Auction, Convey Obligations, Post-Auction Results 133

134 Locational Considerations 6. Run Auction, Convey Obligations, Post-Auction Results Transmission constraints will be reflected in auction optimization Zonal Maximum/Minimum Capacity and intra-zonal deliverability constraints will be implemented in the auction engine Zonal price differentiation from the system-wide uniform price will occur when zonal constraints are binding Export-constrained zones would have relatively lower prices if the Zonal Maximum Capacity is reached Import-constrained zones would have relatively higher prices should the auction need to clear resources with higher offer prices than the uniform clearing price in order to meet Zonal Minimum Capacity Whether or not to introduce price separation caused by binding deliverability constraints will be determined as part of ongoing work on the Auction Mechanics design element 134

135 Post-Auction Communications 6. Run Auction, Convey Obligations, Post-Auction Results Indicative Content Post-Auction Report Market monitor report Individual resources A Post-Auction Report will be publicly available shortly after the auction. At a minimum, the following information will be included: Auction clearing price for each season and applicable zonal clearing prices Cleared capacity, including summary of breakdowns (e.g., by technology type, new/existing resource) Comparison of cleared capacity with targets Qualitative discussion of auction clearing results including key changes to market fundamentals and from previous auctions A review of auction performance regarding competitiveness and efficiency Resource-specific auction outcomes will be communicated individually to the applicable participants 135

136 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations 136

137 Meet/Assess Forward Period Obligations 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Resources that obtain obligations from either the base or rebalancing auctions will be required to meet certain Forward Period obligations These obligations ensure that a resource is ready to deliver capacity during the Commitment Period Failure to meet certain obligations will have implications (e.g., fees/charges, reduction or loss of obligations, requirement to replace capacity through Rebalancing Auctions, etc.) These obligations may vary by resource type (i.e., new or existing, generation or DR). These obligations will include the following: Meeting Project Milestones Provision of Project Progress Status Reports Post Performance Security 137

138 Completion Security 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Completion Security is held by the IESO from new resources only, and serves the following purposes: Incentivize new resources to advance their project such that it will be able to deliver on their capacity obligation Provides the IESO with security that can be drawn on in the case that participants do not comply with non-performance implications Auction Deposit for new resources will be converted to Completion Security upon clearing the auction 138

139 Completion Security (cont d) 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Completion Security will be calculated based on offer quantity and a factor of maximum auction clearing price May be in the range of 5% to 15% similar to other ISOs Reductions through parental guarantees will be explored during detailed design During detailed design the IESO will consider whether it is also appropriate for Completion Security requirements to vary by resource type The amount of Completion Security may increase or decrease as the resource, through participation in rebalancing auctions, secures additional obligations or sells parts of previously secured obligations, respectively 139

140 Completion Security (cont d) 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations As Milestones are met, portions of Completion Security will gradually be returned back to the participant Reflects changing risk profile as a project achieves milestones Completion Security will be returned if a resource sheds all of its obligations through rebalancing auctions 140

141 Capacity Check Test (cont d) 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations New resources with a capacity obligation will be required to validate during the Forward Period that they will be able to deliver their obligated capacity in the Commitment Period For most resources, the IESO will rely on tests performed as part of existing facility commissioning processes (i.e., no additional capacity check tests requirements for these resources) Commissioning tests for new resources will validate the equivalent ICAP of the cleared UCAP from the auction For existing resources, the IESO will assess if results from any prior commissioning or equivalent capacity tests can be used to ensure that the resource will be able to provide its cleared capacity 141

142 Capacity Check Test (cont d) 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Resources that are not otherwise obligated to perform commissioning tests (e.g., DR), may be required to demonstrate capability through other mechanisms during the Commitment Period Failing a commissioning test or not providing required information may result in a reduction in, or loss of, obligations during the Commitment Period 142

143 Project Milestones 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Project milestones provide a set of check points that can be used to mitigate risk that new resources will not b able to deliver their capacity obligation and incentivize participants to deliver on their Forward Period obligations New resources will be required to meet a combination of timed and non-timed milestones during the Forward Period Timed milestones are generally related to the timing of rebalancing auctions to ensure necessary actions can be taken if a critical Milestone is not met Non-timed milestones may be completed at anytime during the Forward Period There may or may not be Completion Security refunds associated with meeting specific milestones 143

144 Project Milestones 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Failing to meet timed milestones may also result in new resource being forced to participate in the next rebalancing auction Certain types of resources (e.g., DR) or resources below certain threshold may have a different set of milestones and tracking requirements IESO will require evidence, such as Independent Engineer certificates and other supporting documentation, that the new resource has met a milestone If applicable, Completion Security reduction associated with the milestone will only be processed upon receipt of the required evidence 144

145 Project Milestones (cont d) 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations During the forward period, participants will be required to meet the following milestones: Project Financing Secured Executed Connection Agreement (timed milestone) Permits Obtained Commercial Operation Reached/Commissioning Completed (this would include all market registration requirements as applicable) Other milestones may be established during detailed design Executed Connection Agreement is a timed milestone and must be completed ~18 months prior to the Commitment Period (in alignment with date of the first RA) For DR projects, there may be different milestones which are tied to acquiring a certain percentage of contributors at various stages during the Forward Period (similar to ISO-NE) 145

146 Project Progress Reports (PPRs) 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations To provide the IESO with an understanding of a project s ability to deliver their capacity by the Commitment Period, periodic status updates during the course of the forward period are necessary Participants will be required to provide PPRs on a periodic basis to provide an update on the progress of their project The IESO may require resources to participate in a rebalancing auction when determined to be incapable of delivering their capacity by the commitment period; how this determination is made will be established during detailed design Frequency of reporting is expected to be quarterly, but may increase closer to the end of Forward Period or if delays are anticipated Providing a PPR will be mandatory, and may result in nonperformance implications (e.g., financial charges) 146

147 Performance Security Background 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations Performance Security supports Commitment Period obligations, like Completion Security supports Forward Period obligations Loads are required to post Prudential Support in order to participate in the energy market; generators are exempt from this requirement Performance Security mitigates non-payment if: Participation in rebalancing auction results in a negative position for the resource (i.e., sold obligations at higher price) during Commitment Period The resource attracts non-performance charges that are higher than their capacity payments during the Commitment Period 147

148 Performance Security (cont d) 7. Meet Forward Period Obligations 8. Assess Forward Period Obligations All capacity suppliers will be required to provide Performance Security prior to the start of Commitment Period in the form of a Letter of Credit Performance Security will be based on a factor of obligation MWs, number of Obligation Periods, and auction clearing prices Reductions through credit ratings may be explored during detailed design 148

149 Rebalancing Auctions Overview Rebalancing Auctions Rebalancing Auctions (RAs) are held after the base auction and provide an opportunity for both the IESO and participants to respond to changing supply and demand conditions RAs result in adjustments to the Base Auction (or previous RA) positions for each Obligation Period This market-based mechanism is used by all other jurisdictions with forward capacity markets 149

150 Rebalancing Auctions Overview (cont d) Rebalancing Auctions Clearing prices established in the RAs provide the signal to the marketplace of the degree of supply scarcity as the Commitment Period approaches If the system is tight on supply in the rebalancing auction, clearing prices will be high, and vise versa Participants that acquire a capacity obligation in the RA are paid the RA clearing price (and those that sell are compensated the RA price) May result in a participant being better or worse off after adjusting their position in a RA 150

151 Rebalancing Auctions Overview (cont d) Rebalancing Auctions Rebalancing auctions play an important role: For participants, in providing risk mitigation and additional opportunity to participate For system operators, in supporting efficiency and maintaining resource adequacy Allowing additional capacity to be procured after the base auction e.g., if load forecast increases prior to Commitment Period Allowing the release of capacity, when appropriate, to help reduce capacity costs for consumers e.g., if load forecast declines prior to Commitment Period Allowing capacity resources to exit an existing position e.g., risk mitigation mechanism for resources that may not be available in time for the Commitment Period Enabling new shortterm resources that emerge after the base auction to compete for a capacity obligation 151

152 Rebalancing Auctions Frequency of Auctions Rebalancing Auctions The IESO previously recommended that two or three rebalancing auctions be considered during the Forward Period One rebalancing auction was deemed by stakeholders as providing insufficient opportunity to adjust positions Establishing the number of RAs to hold required a trade-off between: Providing additional flexibility to adjust capacity positions for both participants and the IESO The burden of administering and participating in numerous auctions and the risk of insufficient participation The incremental nature of the auction leads to a lower volume of MW available to participate relative to a full capacity market design 152

153 Rebalancing Auctions Frequency of Auctions (cont d) Rebalancing Auctions Fewer MW participating in the ICA poses a potential liquidity concern as the number of rebalancing auctions increases Less liquidity in the market increases the risk price volatility, which increases risk for participants Fewer RAs provides the benefit of reducing costs of administering an additional auction for the IESO and participants Two rebalancing auctions will be conducted prior to the Commitment Period for each base auction Note that for the first auction there will not be two RAs 153

154 Rebalancing Auctions Timing of Auctions Rebalancing Auctions Various factors need to be considered when establishing the timing of the rebalancing auctions, including: Providing a sufficient number of months between the two RAs to administer the pre-auction, auction, and post-auction processes The proximity with other base/rebalancing auctions throughout the year The establishment of timed milestones during the Forward Period A need to allow the final rebalancing auction to reflect the most up-to-date forecasts of the supply/demand outlook during the Commitment Period The rebalancing auctions will be held on a fixed schedule (expressed as the number of months ahead of the Commitment Period) A predictable fixed schedule provides a framework in which participants and the IESO can plan Forward Period activities 154

155 Rebalancing Auctions Timing of Auctions (cont d) Rebalancing Auctions The first rebalancing auction will be approximately months ahead of the Commitment Period The first rebalancing auction allows participants to adjust their capacity positions depending on the status of early development work (for new types of resources) or changes to the anticipated cost/benefit analysis for short-lead time resources that acquired a position in the base auction The first RA will be set such that it falls shortly after the Executed Connection Agreement (ECA) milestone Participants that miss the ECA milestone will be required to participate in the first rebalancing auction The precise timing will be made after the determination of when the ECA milestone is established 155

156 Rebalancing Auctions Timing of Auctions (cont d) Rebalancing Auctions The second rebalancing auction will be approximately three months ahead of the Commitment Period Uncertainties related to the supply/demand parameters are expected to be reduced the closer to the Commitment Period the auction is held Allows for the efficient participation of short lead-time resources and a final opportunity for new longer lead-time resources to adjust their capacity position depending on the status of the project Consistent with when all other jurisdictions hold their final RA Base Auction R.A. # mo. ahead Forward Period ~3.5 years R.A. #2 3 mo. ahead May - Oct Commitment Periods Nov Apr 156

157 Rebalancing Auctions Participation Requirements Rebalancing Auctions Similar to the base auction, each RA requires certain participation requirements to be established Provides assurance that resources interested in participating in an RA are capable of satisfying their obligations during the Commitment Period Participation requirements for the RAs will be made as consistent as possible with the base auction requirements Consistency in participations requirements between the base and RAs will help reduce the possibility of inefficient outcomes emerging that may potentially be exploited The product being procured in each RA remains the same as the base auction, thus the participation requirements should be aligned How milestones are reflected in rebalancing auction participation requirements will be determined during detailed design 157

158 Rebalancing Auctions Obligation Transfers Rebalancing Auctions A feature that would allow the transfer of obligations between participants outside of rebalancing auctions Provides participants additional opportunity to adjust or acquire a capacity position Must be balanced with impact of potentially reducing the number of MW in the RAs Obligation Transfers outside of rebalancing auctions will not be permitted in the initial design of the ICA Participants who wish to adjust or acquire a capacity position following the base auction have the opportunity to do so through the RAs Reduces complexity and costs of administering a process to ensure transferred resources are equivalent in their ability to meet the capacity obligation As described earlier, liquidity concerns remain a risk to the predictability of RA auction clearing outcomes due to auction being incremental 158

159 9. Deliver Capacity Obligation 10. Assess Performance 159

160 General Principles 9. Deliver Capacity Obligation 10. Assess Performance A Pay-for-Availability is an incentive mechanism that will be implemented to ensure that a participant has delivered on its Capacity Obligation resulting from the auction Pay-for-Availability mechanism is constructed based on decisions made on each of the following aspects: 1. Must-Offer 2. Outage Planning & Reporting 3. Capacity Check Tests 160

161 Must Offer Background 9. Deliver Capacity Obligation 10. Assess Performance Must Offer obligations and corresponding assessments form an integral part of the ICA capacity product definition Helps ensure capacity is available in the time windows when resource adequacy events are most likely Protects against the exercise of market power by constraining the ability of suppliers to economically or physically withhold from the energy and ancillary markets Provides IESO with visibility into the resources that are available for dispatch, enhancing ability to maintain reliable and efficient operations 161

162 Must Offer Background (cont d) 9. Deliver Capacity Obligation 10. Assess Performance There are three main features of Must Offer : 1. Hours: Need to establish the hours during which resources will be obligated and assessed to make their capacity available 2. Amount: Need to establish the minimum amount each resource type is required to make available 3. Timeframe: Need to identify the timeframes (Day-ahead, or Real- Time, or both) during which a participant is required to make their capacity available 162

163 Must Offer Background (cont d) 9. Deliver Capacity Obligation 10. Assess Performance Each feature (Hours, Amount, & Timeframe) is described from two perspectives: Obligations, and Assessments Obligations: Refers to performance obligations that will be incorporated into the Market Rules Assessments: Refers to the way in which the IESO will assess whether obligations have been met, and the corresponding nonperformance implications Where applicable, resource-specific considerations are also presented in the subsequent slides 163

164 Must Offer Hours 9. Deliver Capacity Obligation 10. Assess Performance Obligation: Resources are required to make their capacity available during a pre-defined set of hours Pre-defined set of hours will be established to reflect the set of hours during which there is the greatest resource adequacy need These hours will be determined during detailed design Assessment: Generally, all resources will be assessed based on an average availability across the pre-defined set of hours The horizon (daily, weekly, monthly, or seasonal) over which this average is calculated and compared against the Capacity Obligation amount will be determined during detailed design Resource-specific exceptions: Demand Response: Assessment may be similar to the existing methodology used in today s DR Auction, where the capacity made available in each hour of the pre-defined set of hours will be compared against the Capacity Obligation amount 164

165 Must Offer Amount 9. Deliver Capacity Obligation 10. Assess Performance Obligation: Resources are expected to make their capacity available up to their real-time capability Assessment: Resources will be assessed based on the capacity offered compared to their Capacity Obligation, for the pre-defined set of hours (with some exceptions) Resource-specific exceptions: Self-scheduling: Assessment will be based on schedules, as these resources do not submit offers, consistent with the Capacity Qualification Process for these resources Intermittent (wind, solar, and some types of hydro): Assessment will be based on production data, consistent with the Capacity Qualification Process for these resources 165

166 Must Offer Timeframe 9. Deliver Capacity Obligation 10. Assess Performance Obligation: All resources with capacity obligations are required to make their capacity available in both the Day-Ahead and Real-Time energy markets Assessment: Generally, all resources will be assessed based on the capacity made available during the Real- Time timeframe The extent to which the ICA will also need to assess the capacity made available in the Day-Ahead timeframe will be explored further during detailed design Resource-specific exceptions: Storage: Only offers submitted during the Day-Ahead timeframe for the pre-specified set of hours will be used to assess availability 166

167 Deliver Capacity Obligations Over-Availability Incentive Mechanism 9. Deliver Capacity Obligation 10. Assess Performance Under performance against a resource s Must Offer obligations will result in non-performance charges being applied, however this assessment is only anticipated to consider average performance across all assessment hours The IESO is also considering the merits of including an Over- Availability Incentive Mechanism that would seek to provide a more targeted incentive to ensure suppliers are making capacity available during times of system need 167

168 Deliver Capacity Obligations Over-Availability Incentive Mechanism (cont d) 9. Deliver Capacity Obligation 10. Assess Performance The mechanism could be designed such that at the end of each Obligation Period each resources availability is assessed during a sub-set of hours (e.g., top 100 hours of system need) Resources that under-performed compared to their capacity obligation would be charged for non-delivery The mechanism could also use the funds collected from underperforming resources and provide payments to resources that overperformed as an additional incentive mechanism Further consideration is needed regarding how this mechanism, other ICA performance assessment and settlement mechanisms, and existing market incentives could work together to provide desired incentives 168

169 Outage Planning and Reporting 9. Deliver Capacity Obligation 10. Assess Performance Obligation: Participants will be required to submit outage data (planned and forced outage) This obligation is consistent with the existing Market Rules and Market Manuals Assessment: Given the implications of assessing availability and Qualified Capacity, participants will be incentivized to submit planned/maintenance outages for IESO approval in accordance with existing Market Rules, which is expected to reduce the number of outages otherwise classified as forced The impact of planned outages will not impact a resources performance against the must-offer amount obligation, consistent with the Qualified Capacity Process 169

170 Capacity Check Test 9. Deliver Capacity Obligation 10. Assess Performance Obligation: Resources will be obligated to demonstrate their ability to deliver on their Capacity Obligation The IESO envisions only conducting Capacity Check Tests in the absence of real-time production data that demonstrates a resource s capability up to their Capacity Obligation or equivalent Assessment: The resource will be required to demonstrate the ICAP equivalent of the Capacity Obligation during the Capacity Check Test Implications of not meeting full obligation discussed in later slides (stage 11) 170

171 11. Capacity Payments and Charges 171

172 Capacity Payments and Charges Overview 11. Capacity Payments and Charges Settlement of payments and non-performance charges for capacity suppliers will be applied in, or after, the Commitment Period only No settlement would occur during the Forward Period As stated in the previous section, the IESO will implement a payfor-availability mechanism: Suppliers will receive monthly payments for meeting their obligations Non-performance charges will apply for not making sufficient capacity available Capacity payments and any applicable non-performance charges will generally be settled monthly over the Commitment Period Some true-ups may need to occur after the end of each Obligation Period 172

173 Capacity Payments and Charges Overview (cont d) 11. Capacity Payments and Charges For each resource type, performance assessments may vary depending on obligations and consistent with qualification Assessment periods can be hourly, specified window, daily average, monthly average, or average over Obligation Period Actual assessment periods will be defined during detailed design Preference for consistency across resource types where possible 173

174 Capacity Payments and Charges Overview (cont d) 11. Capacity Payments and Charges Capacity payments include: Availability Payments for Base Auction Availability Payments for Rebalancing Auctions Capacity charges include: Check Test Failure Delayed Commercial Operation Under-Availability Dispatch Non-Performance Administrative 174

175 Capacity Payments and Charges Availability Payments for Base Auction 11. Capacity Payments and Charges The base auction will result in clearing prices and Capacity Obligations for each Obligation Period An Availability Payment will be calculated for each Obligation Period on a monthly basis as: Availability Payment Base Auction Amount = Obligation MWs Base x Auction Price Base 175

176 Capacity Payments and Charges Availability Payments for Rebalancing Auctions 11. Capacity Payments and Charges Each rebalancing auction will result in new auction clearing prices and changes to obligations for participating resources Rebalancing auction may result in a resource: Acquiring new obligations for an Obligation Period Acquiring additional obligations for an Obligation Period Reducing obligations for an Obligation Period from either the Base Auction or first Rebalancing Auction Availability Payment Rebalancing Auction Amount = Obligation MW changes Rebal1 x Auction Price Rebal1 + Obligation MW changes Rebal2 x Auction Price Rebal2 176

177 Capacity Payments and Charges Check Test Failure Charge 11. Capacity Payments and Charges Capacity Check Test failure charges will apply following an unsuccessful test where a resource was unable to deliver capacity up to its capacity obligation This charge is expected to claw-back availability payment for the portion of capacity not delivered Claw-back may be retroactive to (a) the start of Obligation Period, (b) the last successful Capacity Check Test, or (c) the resource performing to the full obligation amount in the energy market Failed Capacity Check Test may result in reduced obligations until the next successful Capacity Check Test Recurrent failures may result in termination of obligations for the Commitment Period 177

178 Capacity Payments and Charges Delayed Commercial Operation Charge 11. Capacity Payments and Charges When a new resource is unable to deliver capacity during an Obligation Period as a result of delays in developing the project, a Delayed Commercial Operation charge will apply This charge will be a factor of the capacity availability payment; potentially in the range of 1.2x-1.5x This will not impact future QC assessments It will be applied for each day that capacity is not delivered 178

179 Capacity Payments and Charges Under-Availability Charge 11. Capacity Payments and Charges When a resource does not make its capacity available in the energy market in accordance with the applicable ICA obligations, an Under-Availability Charge will apply This will be based on auction clearing price and amount of obligation not made available through offers and a weighted average availability payment rate (base auction and rebalancing auction prices, as applicable) Under-Availability Charge may be calculated monthly as: = [Monthly Charge Factor] x [MWs not made available] x [Weighted Average Availability Payment Rate] 179

180 Capacity Payments and Charges Under-Availability Charge (cont d) 11. Capacity Payments and Charges The value of the Monthly Charge Factor may vary across an Obligation Period to reflect varying expectations of resource adequacy needs The IESO will explore during detailed design the interaction of the Monthly Charge Factor with concept of an Over-Availability Incentive Mechanism in order to ensure implications during system needs are aligned and not excessive 180

181 Capacity Payments and Charges Dispatch Non-Performance Charge (for DR resources only) 11. Capacity Payments and Charges DR resources, when activated, must reduce load within pre-defined thresholds to ensure system reliability Failing to reduce load within these threshold will result in dispatch non-performance charges being applied It is expected to be similar in nature to existing DR Auction Dispatch Charge (CT 1317) Factors impacting the amount of charge include: actual consumption, bid quantity, dispatch schedule, auction clearing price and non-performance factor Performance may impact future QC assessments 181

182 Capacity Payments and Charges Administrative Charges 11. Capacity Payments and Charges Administrative Charges will be applied during Commitment Period to capacity resources that fail to meet certain Market Rule obligations Examples may include: Failure to provide meter data for resources that are not metered by the IESO Failure to schedule Capacity Check Test upon request by the IESO Additional administrative charges may be explored during detailed design 182

183 12. Cost Recovery 183

184 Cost Recovery Customer Base 12. Cost Recovery Net costs must be recovered from loads to fund capacity payments to resources that clear the ICA The net cost of capacity is defined as monthly total payments paid to suppliers minus any net nonperformance charges applied to the participants Costs are expected to be recovered from all domestic Ontario consumers (i.e., excluding exports) When settling LDCs this is also anticipated to include load displaced by embedded generation on the distribution system 184

185 Cost Recovery Allocation Methodology 12. Cost Recovery ICA cost allocation methodology will be consistent with the existing methodology under the Industrial Conservation Initiative (ICI) program: That is, based on contribution to system peak demand Ensures alignment of load reduction incentives with ICI New set of charges will be introduced in Market Rules Class A loads will pay ICA costs based on their peak demand factors Class B loads will pay ICA costs based on their monthly consumption Certain loads are exempt from paying capacity costs under GA regulation, extension of these exemptions to ICA costs will be considered during detailed design 185

186 Cost Recovery Zonal vs. System-wide 12. Cost Recovery Total ICA capacity costs will be allocated uniformly across all internal loads This allocation is consistent with the existing ICI methodology 186

187 QUESTIONS & COMMENTS 187