Resource Adequacy Straw Proposal. Seasonality. for addressing. July 31, 2015 MISO Staff

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1 Resource Adequacy Straw Proposal for addressing Seasonality July 31, 2015 MISO Staff

2 Executive Summary MISO appreciates the stakeholder feedback it received in response to its Issues Statement on Facilitating Resource Adequacy in the MISO Region in March 2015 and subsequent discussions. As a result of the feedback it received MISO prioritized three key issues to focus future efforts Seasonality, Locational Considerations and Generation Interconnection Queue. This paper will discuss straw proposals to the address the Seasonality needs in the current design. Seasonality MISO s current processes do not explicitly ensure transparency of resource adequacy across all seasons and do not provide desired flexibility to market participants to match resources to load. In addition, stakeholders expressed an interest in a less than annual requirement to account for the seasonal diversity thus providing additional flexibility to meet load and reserve obligations. To address these issues, MISO proposes adding the following elements to its current design for implementation by April 1, 2017 for the resource planning year Seasonal auction intended to address flexibility needs Seasonal resource accreditation intended to assure resource transparency Seasonal requirements (reserve margins) intended to account for the seasonal diversity of resources and load MISO will work with stakeholders over the next five months to define these elements further leading to an initial conceptual design and tariff filing by the end of Additional detailed design filings will be evaluated jointly with stakeholders to provide a transparent design process. 1

3 Background The MISO region benefits from participating in a resource adequacy mutual insurance pool. MISO s individual Load Serving Entities ( LSEs ) receive a significant reduction in the capacity they need to meet their Load Obligation plus Planning Reserves reducing the reserve requirement from around 18% to about 15%, which translates into about $2 billion per year in benefit. Membership responsibilities and obligations of this pool are governed by MISO s annual summer-oriented Resource Adequacy Requirements ( RARs ). These requirements were designed for a summer-peaking system use and may not ensure transparency and reliability in the winter and shoulder-season months as the resource landscape changes 1 due to shifts in economics and regulations. Moreover, as reserve margins continue to shrink, appropriate risk alignment with respect to mutual insurance pool membership obligations and benefits will become increasingly challenging. In the MISO region, markets have been developed to support reliable grid operation as efficiently as possible, while aligning obligations and assumed risks with benefits in an impartial manner. For Resource Adequacy, this translates into RARs that enable LSEs efficient decisions today and support their efforts in the future. MISO proposes to enhance its RARs to address reliability and risk alignment concerns presented by the changing landscape. In doing so, MISO will also recognize that LSEs and States will require flexibility in demonstrating Resource Adequacy in all seasons. Issues driving seasonality Current RARs are summer focused, which do not explicitly ensure the MISO region is resource adequate throughout the Planning Year and do not provide sufficient flexibility to allow the efficient use of resources to meet seasonal demand and risk profiles. After the winter of 2014, MISO staff and stakeholders began to evaluate seasonality s impact on resource adequacy. This effort led to the development of indicative analysis (see Figure 1 below) of the impact that seasonal risks and opportunities have on a summer focused approach to Resource Adequacy. In an extreme case, resources procured through the current summer focused RARs may not be enough to serve peak demand during the winter, depending on resource availability and performance within the footprint. MISO staff considered parameters of additional design criteria that could ensure MISO s RARs facilitate achieving resource adequacy for each season in the Planning Year. With fewer resources expected to be available, an improved RAR construct should provide LSEs additional flexibility to accredit resources throughout the Planning Year. This could be achieved, for example, by allowing new generators and retirements to be reflected during the Planning Year. LSEs also could be provided additional flexibility to enter and terminate PPAs at will during the Planning Year. Both of these options would help increase utilization of resources. There are three core elements for improved design to mitigate the issues driving seasonality: flexibility, reliability, and efficiency. 1 The electric industry is going through resource portfolio changes and a reduction in overall reserve margins due in large measure to retirements of coal-based generation resources that are being replaced in part by generation fueled by natural gas and renewables. 2

4 Flexibility New Exit and Entry The current RARs do not provide sufficient flexibility for LSEs to navigate the changing landscape. For example, today s annual RARs require Market Participants ( MPs ) to replace a resource that retires in the middle of a Planning Year, even though the resource may not be needed to maintain reliability in nonsummer months. Further, if seasonal resources were recognized, there would be opportunities to efficiently replace the resource should it be required for reliability. Concern regarding this inflexibility is evidenced by the numerous requests by LSEs for FERC Waivers for Planning Year mid-year retirements. In addition to this resource replacement concern, there currently is a potential barrier to new entry when new resources come into service mid-planning Year, since they are not able to participate in the auction although they would likely be able to contribute towards achieving resource adequacy. Commercial Relationships The current RAR construct recognizes power purchase agreements ( PPAs ) and qualifies resources with respect to the summer months, while ignoring commercial arrangements that may be in effect for other periods during the year. This may limit LSEs flexibility with respect to entering into certain commercial relationships. For example, LSEs desire the flexibility to use PPAs that begin or expire mid-planning Year. LSEs also would like to have the option to enter into agreements to leverage non-summer Behind the Meter Generation, Interruptible and Direct Load Control, Energy Efficiency, and/or partial year off-system purchases. Policy, Regulatory, and Economic Uncertainty LSEs desire a more complete set of dynamic RARs to efficiently navigate unforeseen challenges in the future. A more dynamic set would provide both LSEs and MISO more options to accommodate change (i.e. increased solar penetration, changing economics, new regulatory requirements, increased penetration of distribution level resources). This would in turn reduce the likelihood of future radical changes to the RARs and, as a result, mitigate the risks of not achieving Resource Adequacy ( RA ) or not doing so in an efficient fashion. 3

5 Reliability A summer-oriented RARs construct does not explicitly ensure reliability or transparency in all seasons. Currently, MISO s Resource Adequacy construct operates in an uncertain environment in the non-summer months when MISO should be operating in an environment of measured risk 2. Uncertainty on the supply side stems in part from variations in resource availability 3. For example, some gas-fired resources are not winterized and therefore are not available to MISO to manage RA needs during all seasons. Moreover, other resources may not be available to MISO to manage RA needs during the nonsummer seasons due to inflexible operating parameters 4 resulting from not being staffed or environmental restrictions. Similarly, uncertainty arises from demand side fluctuations. For example, weather variations not captured by summer-oriented load forecast uncertainty may present significant challenges 5. MISO has identified the following factors that are not adequately accounted for in the current RARs: Seasonal Risks Driving Reliability Uncertainty: Resource performance correlation with ambient air temperature/time Variance of resource availability throughout the year Seasonal support from neighboring systems Seasonal variations in load forecast uncertainty Accuracy of load shape System topology changes Seasonal energy flows and transfer limits An extreme outcome of the seasonal risks identified above is summarized in the indicative waterfall chart that follows which was in part based on information obtained from the 2014 winter. The chart in Figure 1 illustrates how a summer-based reliability requirement may not achieve Resource Adequacy in an extreme winter scenario as a result of these identified risks. This scenario reflects a future in which historical surplus is depleted and only those resources that are committed towards meeting RAR are available to meet RA needs. The left side of the chart shows winter reserve margins after applying seasonal resource availability, with normal accounting of expected forced outage rates. It indicates a large seasonal reserve margin and suggests no cause for concern. However, this simple approach does not consider the coincident nature of winter availabilities and winter peak loads. The right side of the chart shows an extreme winter scenario where no LMRs are available in winter and where forced, planned, and maintenance outage rates reflect what was observed during the height of the 2014 winter. It also speculates that additional capacity not 2 Risk is defined as not knowing what the future holds but knowing the set of future outcomes and the odds of attaining each one (e.g., the odds of throwing a fair die and landing on 4 is 1/6). Uncertainty is defined as not knowing what the future holds but knowing the set of future outcomes and not knowing the odds of attaining any future state (e.g., the odds of throwing a loaded die and landing on a 4 is unknown a priori) 3 Resource availability refers to the accessibility of a resource by the system operator to meet resource adequacy needs. For example, CTs that have not been winterized are not available during the winter. Resource performance relates to the ability of a resource to contribute towards resource adequacy when it is available. For example, a non-wintered CT is available in the summer, but may have performance problems due to mechanical issues that force it offline. 4 Under current RARs, Capacity Resources that have radically inflexible offer parameters such as startup and notification times that equal or exceed 7 days are accredited the same as those that are highly flexible. 5 Summer oriented load forecast uncertainty does not reflect the impact of a prolonged summer or winter. Prolonged peak seasons have a compressing effect on maintenance seasons. This results in limited supply that is available to MISO to manage RA. 4

6 tested during the 2014 winter is unavailable in cold weather as a result of insufficient firm fuel supply. If supply availability reflected these worst case assumptions, MISO would experience a supply shortfall. As stated, the scenario outlined in the waterfall chart is extreme, however its probability is unknown and thus MISO is operating is an environment of uncertainty. Currently, MISO assumes a negligible Loss of Load Expectation ( LOLE ) in non-summer months. However, given the indicative analysis above, this assumption should be validated through the consideration of appropriate seasonal inputs. Figure 1: Indicative Analysis of a Summer-Based Reliability Standard Efficiency MISO uses markets as a vehicle to help achieve reliability, thus the success of both the reliability and markets objectives are strongly interdependent. Markets should support reliable grid operation in an efficient and transparent manner. Efficient markets do so by appropriately aligning participant obligations with benefits and providing flexibility to MPs. MISO s current Resource Adequacy construct does not explicitly ensure reliable grid operation in all periods of the year nor does it do so in the most efficient manner, as illustrated in Figure 2 below. For example, nothing in the current requirements inhibits an MP from using summer only Load Modifying Resources ( LMRs ) entirely to satisfy its annual resource requirements (some LSEs do this today). This may be acceptable as long as only some LSEs do this and the focus on LOLE lies in the summer months. With some 10,000 MW of current LMRs clearing in the Planning Resource Auction ( PRA ) and more expected to clear in the future as generation reserves erode, widespread use of LMRs for capacity needs could cause MISO to regularly be in emergency situations even in non-summer months because these resources can only be called upon in emergencies. This also could present a reliability issue given that LMRs are only required to be operable in the summer. Further, MPs using LMRs to meet their capacity obligation receive the benefits of the mutual insurance pool throughout the year while incurring obligations 5

7 only in the summer. A resource adequacy construct that explicitly accounts for seasonal issues will allow the market to determine the value of LMRs. Additionally, the mutual insurance pool represented through the existing RARs does not appropriately align participant benefits and obligations associated with seasonal resource performance and availability. For example, Capacity Resources (~130,000 MW) that clear in the PRA must offer energy in the day-ahead market every hour of the year. This full year must offer requirement based on summer peak is not the most efficient use of resources that are not needed during the shoulder months. In addition, a more efficient construct could allow diversity contracts, and non-summer resources to qualify in meeting seasonal resource requirements. A better alignment of benefits and obligations is desired to reflect seasonal resource performance and availability. As illustrated in Figure 2, annual commitment based on summer peak is likely inefficient. The horizontal line at the top of the chart represents the amount of resources committed based on the current summer-oriented RARs. The area below the line highlighted in red represents resources that may not be needed throughout the year to maintain reliability. Figure2: Indicative Inefficient Resource Commitment Annual PRMR 6

8 Stakeholder feedback MISO presented proposal questions at its June Resource Adequacy Policy Forum for Stakeholder review and requested feedback, by sector, to help guide MISO s development of a proposal. MISO received comments from all sectors regarding suggested Seasonal construct design elements and relative priority. Sector comments were concentrated into the following four areas: Consideration for forward looking capacity market Seasonal resource accreditation and requirement Number of distinct assessments and timing of auction administration Desire for actionable price signals The majority of sectors supported MISO s recommendation to explore a seasonal construct. IPPs, Power Marketers, and Retail Choice companies 6 did not feel that a seasonal construct would provide meaningful improvement to MISO s capacity process and instead argued that MISO should focus on a forward looking, multi-year capacity market structure that sends appropriate price signals. For the sectors that supported a recommendation to explore a seasonal construct, MISO received consistent suggestions regarding the need to for RARs to capture the seasonal differences in input data and additional flexibility in rules to recognize changes in resource mix or commercial arrangements during the Planning Year. Specifically, these commenters recommended that MISO reflect seasonal differences in resource capacity, such as non-summer wind patterns. They also recommended that MISO consider seasonal variations around anticipated transmission system conditions, such as load forecast and topology. Sectors also desired additional flexibility to reflect changes in resource availability and with effective dates for Power Purchase Agreements. Capturing seasonal differences of input data can allow MISO to assess resource adequacy throughout the planning year with more precision. Sector comments support our recommendation outlined in the Reliability and Flexibility section of the whitepaper. There was also broad sector support to adopt a process that would clear seasonal auctions within the Planning Year that would address, at a minimum, separate assessments for Summer and Winter. A minority of sectors recommended that MISO explore further granularity by also including separate assessments for the Fall and Spring periods. Regardless of the number of separate assessments within the Planning Year, the majority of sectors recommended MISO continue to administer its auction process once per year to minimize administrative burden on LSE staff. Finally, stakeholders indicated that seasonal outcomes should produce actionable price signals reflective of level of reliability achieved. This implies that any methodology have design criteria that is principled with clarity about when design changes may be required. 6 Retail Choice companies are Ameren and Noble Solutions (Illinois) 7

9 Design Objectives MISO proposes measuring the solution alternatives against a common set of criteria. Proposed objectives are broken down into design criteria and external considerations Design Criteria Reliability Flexibility Efficiency Transparency External Considerations Stakeholder Voices Process Clarity Design Criteria Flexibility LSEs must have flexibility to follow the system load profile with the appropriate resource mix, including the use of baseload resources to cover their customers demand throughout the year, and seasonal resources to fill in additional needs. This flexibility will enable resources to be committed only when they are needed, and allow retirements to transpire seamlessly. Further, the design should support the traditional resource planning obligations of LSEs, and their desire to reflect the diverse set of annual and seasonal resources they will use to achieve Resource Adequacy. Stakeholders across sectors strongly supported these criteria in establishing a seasonal construct, with some sectors citing this as the primary consideration. In particular, stakeholders were very invested in options to replace capacity and accredit capacity at its appropriate seasonal peak. Reliability The reliability of resources throughout the year is a core feature that must be maintained or improved with the new design. MISO must explicitly provide resource assurance across all seasons through the establishment of seasonal reserve requirements. These requirements need to acknowledge seasonal differences in demand and supply to ensure reliability and transparency is achieved during all seasons. Stakeholders across sectors strongly supported these criteria in establishing a seasonal construct, with some sectors citing this as the primary consideration. Efficiency Any solution should result in better economic use of regional resources. Resource Adequacy Requirements should qualify and require only the resources needed for a specific season; resources designated for summer may not be needed for winter. Additionally, the design should better consider the relative merits of resource classes (i.e., Load Modifying Resources vs Generators). For example, it is neither a reliable or most efficient outcome if all the Planning Reserve Margin Requirement (PRMR) in a Local Resource Zone (LRZ) is met using Load Modifying Resources only. 8

10 Stakeholders across sectors strongly supported these criteria in establishing a seasonal construct, with some sectors citing this as the primary consideration. In particular, stakeholders were very interested in only procuring resources as needed. Transparency MISO must provide adequate transparency into non-summer resource adequacy to allow for seasonal risk assessment and facilitate discussions between LSEs and States. This transparency should provide clarity on the relative risks due to variations in capacity, load, and transmission limitations throughout the year. External Considerations Stakeholder Voices The solution must be flexible enough to accommodate varying regulatory frameworks within the MISO region. The current construct includes jurisdictional areas under traditional regulated resource planning and retail choice areas. New proposals should maintain or improve alignment of process to accommodate both jurisdictional frameworks. Process Clarity Proposal design and evaluation criteria need to be simple enough to effectively communicate changes being made along with ongoing business practices and outcomes with correct decision makers at each stakeholder organization. 9

11 Solution Alternatives To address the issues identified above, MISO must modify its processes to transform uncertainty into measured risks. This transformation to understanding seasonal risks will enable MISO and its Stakeholders to harness the flexibility that seasonality presents, while enhancing system reliability through mechanisms that support grid reliability and providing appropriate transparency and risk alignment. Figure 2: Removing Uncertainty Will Ultimately Drive Efficiency, Appropriate Risk Alignment and Reliability LOLE studies and PRA processes do not appropriately evaluate nonsummer Uncertainty Measured Risks Measure risks in nonsummer through LOLE and Resource accreditation changes Provide flexibility Enhance reliability Ensure efficiency and appropriate risk alignment Enhancements Alternatives considered are focused towards Adjust resource requirements to appropriately match the load duration curve, with requirements that are higher in summer months, potentially lower in shoulder periods, and somewhere in the middle in winter months, and Create resource accreditation processes that appropriately reflect a resource s seasonal ability to contribute towards achieving resource adequacy on a seasonal basis 7. 7 For example, capacity credits for wind resources will be higher in the winter than the summer. 10

12 Alternative 1 - Seasonal Auctions In a seasonal auction construct, MISO would execute multiple seasonal auctions per year. These auctions would produce seasonal Auction Clearing Prices reflecting the value of a resource being able to contribute to the Resource Adequacy needs for that season. Alternative 2 - Annual Auction with Seasonal Constraints Under an enhanced annual construct, MISO would continue to execute one auction per year; however, it would include additional constraints. For example, one constraint would be an upper limit on the quantity of summer-only resources that can be used to meet the region s PRMR, in accordance with the increased load forecast for the summer period. This auction would produce potentially varying Auction Clearing Prices within the same zone, if the constraints bind, reflecting the value of a resource being able to contribute to seasonal Resource Adequacy needs. Alternative 3 - Seasonal After-the-Fact MW Accounting Under this option MISO would eliminate the auction process from its RARs. This would result in a MW accounting mechanism similar to the Fixed Resource Adequacy Plan (FRAP). LSEs would simply align their Load Obligation with approved planning resources by season. MISO would determine if each LSE had enough capacity to meet each seasonal PRMR. Should there be an identified deficiency; MISO would administer a penalty charge. Alternative 4 - Status Quo MISO evaluated each solution against the current RAR. While status quo was not considered as an effective solution, it provided a baseline upon which to judge other options. Other Considerations MISO acknowledges that energy market reforms and/or additional capacity performance incentives (e.g. Pay-for-Performance) may contribute to reliability and better risk alignment. However, given that both of these efforts can complement one or more of the identified solutions staff chose not to identify them as solutions to the seasonal issues, in and of themselves. Specifically, energy market reforms were not independently considered given they are ongoing regardless of the changes to be made in the Resource Adequacy construct. Likewise, development of new capacity performance incentives are also absent from this evaluation due to lack of evidence that current tools cannot be effective and the unproven effectiveness of such mechanisms. Therefore, for the MISO region, enhancing its Resource Adequacy Requirements as described below is the most appropriate framework from which to begin working towards achieving these objectives while providing transparency and awareness. MISO also considered more prescriptive approaches to addressing the defined concerns. One example of this approach would be to establish specific capacity characteristics that are deemed essential for meeting specific reliability needs such as firm fuel or flexibility. However, these approaches carry risks, including the risk of setting more stringent requirements than necessary and mischaracterizing resources in accounting for which resources meet the established reliability needs. An example of mischaracterizing a resource would be improperly concluding that a fuel delivery contract constituted firm delivery when it did not. For these reasons, MISO determined that a prescriptive approach is currently not a viable solution. 11

13 MISO Recommendation Only two solutions offer an appropriate match to the design criteria as a whole (indicated by green). Both options - Seasonal Auctions and Annual Auction with Seasonal Constraints are seasonal extensions of the current design. It should be noted that transitioning to a seasonal construct is a 2014 IMM State of the Market Recommendation (Potomac Economics, 2014). Both solution options offer Planning Reserve Margins that are appropriate for the season along with seasonal resource accreditation. The Seasonal Auctions option is the preliminary recommendation of MISO staff. This option is preferred as it offers increased flexibility and process clarity over its annual counterpart. These added benefits arise from separate and distinct seasonal auctions occurring through the year. Multiple auctions during the Planning Year will provide additional options for resources to opt in or out of the construct. These separate auctions will also increase process clarity. Each auction would result in a single Auction Clearing Price representing the seasonal value of Planning Resources. This approach aligns with our current auction process and would enable MISO to build on its current efforts to explain the auction process to its vast array of stakeholders. Conversely, an annual auction with seasonal constraints may produce up to four different prices based on an auction process that has multiple seasonal constraints, adding to the complexity of the single auction. If the constraints do not bind, then this approach would create a single price across all seasons. This effect is no different than what occurs in today s energy market; when no congestion occurs, a single system wide energy price is established (ignoring losses). 12

14 Attachment A Evaluation of Solution Options 13

15 Evaluation of Solutions Options A high-level evaluation of the solution options against these considerations is below, with the solutions being rated as either inadequate (red), limited (yellow), or appropriate (green) against each design criteria and external consideration. For completeness and transparency, the status quo set of RARs has also been included in this matrix. This evaluation does not convey a ranking/priority on considerations, nor is it intended to capture the entirety of the evaluation effort, which will include additional stakeholder input. Figure 4: High Level Decision Matrix Status Quo Solution Design Criteria Transparency Reliability Flexibility Efficiency External Considerations Process Clarity Stakeholder Voices Seasonal After-the- Fact MW Accounting Seasonal Auction Annual Auction with Seasonal Constraints Key: Inadequate Limited Appropriate Decision Matrix Explained Transparency Do MISO resource adequacy processes provide stakeholders the tools and information they need to efficiently demonstrate resource adequacy throughout all season? MISO s RAR processes, including the LOLE studies, PRA, and OMS MISO survey, provide transparency in summer months, where risk has historically been located. This provides a limited response to transparency considerations under a status quo solution. The Seasonal After-the-Fact MW accounting solution is weaker in this regard, as it provides limited forward visibility, although the transparency across seasons would be improved. However, the lagging nature of this indicator leads to an inadequate rating on transparency. 14

16 A seasonal evaluation, whether conducted through a single auction or through multiple auctions, provides increased transparency in non-summer months and provides the same forward visibility as current processes, leading to an advantage to a seasonal auction or an annual auction with seasonal constraints this criterion. Reliability How well would the proposal ensure reliability across all seasons? All proposed solutions provide reliability; the main variation between the solutions rests upon how well the solutions address non-summer reliability risk. The current construct provides limited insight into non-summer season risk, leading to a limited rating. Additionally, the Seasonal After-the-Fact MW Accounting method, due to its lagging indicator, could cause unforeseen reliability issues, leading to a limited rating. The seasonal auctions would be designed to maintain current levels of reliability in summer months and also to provide explicit reliability in non-summer months, which lead to an appropriate rating. Flexibility How much flexibility would be provided for LSEs to align resources with seasonal capacity differences with seasonal demand variation? The current construct was rated very poorly on the flexibility provided, as evidenced by MISO staff analysis, stakeholder comments and requested waivers. This led to an inadequate rating The MW accounting method could be designed to provide additional flexibility, but it lacks the optionality of a residual auction and the flexibility of a mutual insurance pool approach to resource adequacy. This provides a limited response to flexibility concerns. Both seasonal constructs would be designed to increase flexibility. However, there is some risk around new capacity exit and entry, especially if such changes do not align with the start of a season. Either seasonal construct could be designed to accommodate this concern, but the potential of holding separate seasonal auctions throughout the year could allow for fresher data to be used and limits new entry/exit concerns. This leads to an appropriate rating for a seasonal auction and a limited rating for an annual auction with seasonal constraints. It should be noted that this rating assumed seasonal auctions would occur throughout the year, and stakeholder feedback recommending that auctions be conducted either simultaneously or within a short period of time would eliminate this difference in rating between the seasonal auction or the annual auction with seasonal constraints. 15

17 Efficiency How well does the proposal align risk with benefits, to incent efficient behavior? Stakeholders and MISO staff have both identified limitations in the efficiency of the current PRA, resulting in a misalignment of risks incurred and benefits received in the auction (such as with LMRs as discussed previously). This lead to an inadequate rating for the status quo construct under this criterion. Also, a Seasonal After-the-Fact MW accounting method incentivizes LSEs to hold extra resources to account for non-weather adjusted peaks, reducing the efficiency of the solution and leading to an inadequate rating. Both the seasonal auctions would be designed to allow for increased efficiency as discussed previously, better aligning risks and benefits through recognizing variations in requirements throughout the year and appropriately assessing the value of seasonal resources such as intermittent and LMRs, causing these solutions to receive ratings of appropriate. Process Clarity Is the proposed process understandable? Our current auction is complex, but stakeholders have built an appropriate understanding of the processes. A Seasonal After-the-Fact MW accounting methodology is less complicated than our previous construct. This solution was rated as appropriate under this criterion due to this low learning curve and simplicity. Multiple seasonal auctions allow for more simplicity in regards to single price signals, with each auction resulting in one price. Additionally this auction format requires similar data entry from stakeholders as today, leading to an appropriate rating. Conversely, a single annual auction is more complicated than the current construct, as it would have additional data requirements to reflect seasonal concerns and could produce multiple price signals. This leads to a limited alignment of an annual auction with seasonal constraints to the process transparency. Stakeholder Voices Does the proposal align with stakeholder needs / wants? As mentioned previously, stakeholders and MISO staff have identified multiple areas for improvement in the current process, leading to an inadequate rating to the status quo. Although this concept has not been thoroughly discussed in recent stakeholder forums, MISO believes that the MW accounting methodology would not be viewed favorably by stakeholders due to its high cost and incentive to over commit generation. Both a single seasonal auction and multiple seasonal auctions had strong, although not universal, support from stakeholders, leading to appropriate ratings. It should also be noted that stakeholders generally preferred a single data submission, regardless of the actual clearing process used in the auction. This could lead to a single annual auction, although stakeholders indicated comfort with multiple auctions being performed sequentially within the span of a few months. 16

18 Assessing Preferred Option against Benefits of Annual Construct For three years starting in 2009, MISO administered a monthly set of RARs. Starting in 2008, FERC issued a number of orders requiring MISO to make compliance filings to primarily address 1) implementation of mechanisms for locational capacity 2) development of a permanent solution to ensure deliverability of Load Modifying Resources. As a result, MISO commenced an extensive stakeholder process in 2010 to develop innovative and effective new tools that were to be consistent with the FERC orders. This process resulted in transitioning from a monthly to an annual process starting in the Planning Year. The transition during the compliance period yielded a number of benefits including: Lower administrative costs when compared to monthly or seasonal compliance periods (MISO, 2010). Aligning compliance period with the term of the summer oriented LOLE analysis. (Testimony Filing to Enhance RAR By Incorporating Locational Capacity Market Mechanisms;, 2011). Establishment of a forward capacity procurement and planning requirements which provide economic signals regarding optimal location for construction of planning resources that will be required in future years (Affidavit of Kevin Larson on Behalf of Midwest Indpendent Transmission System Operator, INC, 2010). As MISO and stakeholders evaluate potential RAR enhancement options, it will weigh them against the administrative benefits identified at the time the transition from a monthly to an annual commitment period took place. For example, the preferred option proposes to execute more than one auction per year. While executing 2 or even 4 auctions a year is less than 12, the added administrative cost does merit additional consideration when weighted against the benefit. For example, MISO staff s preliminary assessment is that the benefit of additional auctions is greater in the face of retirements and new resources coming online. With regard to the alignment with the LOLE Studies and forward procurement, MISO staff envisions implementation options that still maintain this benefit by continuing to align the studies with the commitment period. Similarly, the preferred option may be implemented in a fashion that maintains the forward commitment period enjoyed by the annual construct. Pricing Impacts One of the key functions of any RTO is to facilitate the availability of adequate resources to reliably meet the demands ( load ) in their region. Reliability has to do with having the right amount of capacity, with the right characteristics, at the right locations, at the right times, at prices consumers are willing to pay. A logical next step in preserving an appropriate level of RAR is to establish seasonal requirements (i.e., at the right times) to encourage the proper mixture of Planning Resources to be available in the right locations in the MISO Region during the right seasons, in the most economic and efficient manner. The seasonal auctions will establish transparent Auction Clearing Prices ( ACP ) by season. These seasonal prices will reflect the value of incremental capacity necessary to meet the reliability standard established by MISO. These seasonal prices will reflect the supply and demand balance for each season and will capture the going forward capacity costs plus the opportunity costs for all cleared assets. Capacity owners will have to decide how to reflect fuel procurement and assurance issues in their offers on a seasonal basis 8. LSEs can choose to use these ACPs as they see fit, opting out entirely, as guidance for negotiating PPAs, or participating directly in the PRA as buyer or seller. On the one hand, seasonal auctions have the potential to induce additional supply that can only meet requirements during some 8 Please note that MISO continues to evaluate fuel assurance risk and future needs, whether addressed in future RA evaluations or market designs and this evaluation will continue to be in scope as the seasonal approach is advanced 17

19 seasons, thus driving ACPs lower for the benefits of end-use customers. On the other, a more explicit recognition of seasonal risk in the MISO footprint from a more accurate representation of seasonal demand and seasonal demand uncertainty, to resource accreditation that varies by season, can drive ACPs higher reflecting the value of credible, deliverable MWs in certain seasons. Regardless of the direction that seasonal ACPs move or the number of seasons, seasonal auctions that address identifiable risks that vary by season will more appropriately place a value on MWs available in season, promoting economically efficient resource procurement that achieves the reliability standard of 0.1 day/year LOLE across all seasons. MISO s proposed seasonal RAR enhancements have been tailored to meet the needs of the MISO Region and are therefore different than other RTO resource adequacy constructs implemented elsewhere. The seasonal RAR enhancements contain both an explicit Self-Scheduling and Opt Out (FRAP) option, so that LSEs can take steps to avoid or minimize any financial consequence of participating in the PRA. These concepts will protect LSEs that, for example, have engaged in state IRP and have acquired adequate seasonal Planning Resources to serve their Load, from being subject to any financial consequence of the PRA. At the same time, the seasonal RAR enhancements will establish an effective and transparent Auction Clearing Price for each of the Local Resource Zones by season. The proposed seasonal RAR enhancements modifications will continue to promote the ability of MPs to bilaterally contract for Zonal Resource Credits. 1 Please note that MISO continues to evaluate fuel assurance risk and future needs, whether addressed in future RA evaluations or market designs and this evaluation will continue to be in scope as the seasonal approach is advanced 18

20 Attachment B Timeline and Next Steps 19

21 Timelines and Next Steps MISO s goal is to implement a seasonal solution in the Planning Resource Auction. This requires an aggressive timeline to complete process changes prior to the start of Loss of Load Expectation studies, which will begin in June Timelines laying out the solution design and implementation phase to meet this goal are below. Figure 5: Solution Design and Tariff Filings Timeline August: Conceptual Design Discussion October Workshop 2: Seasonal implementation December: Conceptual Tariff Filing June: Detailed LOLE processes documented September Workshop 1: Definition of risks and seasons November Workshop 3: Wrap up and Tariff review February/ March: Additional Tariff Filings* September: Detailed Auction mechanics documented Figure 6: Implementation Timeline February: Winter capacity data submitted* October: Updated auction tool live April: First seasonal auction June: LOLE studies begin November: Generator and load data submissions due June: Planning Year begins * If required 20