Intertie Capacity Value for Alberta

Transcription

1 Intertie Capacity Value for Alberta PREPARED FOR PREPARED BY Johannes Pfeifenberger Judy Chang Kathleen Spees Yingxia Yang David Luke Oates Colin McIntyre November 1 st, 2017

2 This report was prepared for the Alberta Electric System Operator. All results and any errors are the responsibility of the authors and do not represent the opinion of The Brattle Group or its clients. Acknowledgement: We acknowledge the valuable contributions of many individuals to this report and to the underlying analysis, including members of The Brattle Group for peer review. Copyright 2017 The Brattle Group, Inc.

3 Table of Contents I. Overview... 2 II. Determining Capacity Import Capability... 3 III. Allocating Firm Capacity Import Capability among Market Participants and Interties... 6 IV. Risks allocated to importers V. Must-offer requirements for imported capacity I. Overview Alberta s interties with British Columbia, Montana, and Saskatchewan are providing a resource adequacy benefit to the province and have the potential to increase competition in the AESO s capacity market. To enable competition between internal and external resources in the capacity market, the AESO is evaluating various approaches to estimate the firm capacity import capability of the interties, both on an individual and simultaneous basis. The AESO is also evaluating how to allocate this import capability across various market participants that might have resources that can participate in the Alberta capacity market via the use of the interties. If qualified as capacity resources, the imports might be subject to similar must-offer requirements to internal capacity resources. To inform this design element of the AESO s capacity market, we discuss the practices of the four U.S. capacity markets with respect to how they manage capacity resources offered over interties with neighboring systems. The approaches to capacity imports vary considerably across these markets, in part because they reflect the unique circumstances of the historical development and evolution of each market. The best choice for Alberta will reflect its own unique circumstances, including its complex simultaneous import limit across the three interties, the existence of a merchant transmission project connecting Alberta and Montana (with wind resources located in Montana, selling into Alberta s market), the traditional lack of availability of firm transmission rights within the Alberta footprint, and current role of the importers as price takers in the AESO energy market. 2 brattle.com

4 II. Determining Capacity Import Capability AESO Question: How do other markets determine the amount of capacity that is eligible for sale over interties? What are some of the ways this can be calculated? All ISOs determine import limits considering the thermal, voltage, stability, and contingency limits of transmission lines. The import limits reflect the maximum amount of power an area can import from neighboring systems without reliability criteria violation throughout the year (i.e., even during adverse system conditions under N-1 contingency situations). This is typically referred to as the first contingency total transfer capability (FCTTC). 1 For the purposes of determining the amount of import capability available for firm energy transactions, ISOs often deduct a Transmission Reliability Margin to secure against transmission outages and a Capacity Benefit Margin that is set aside to import additional energy during scarcity events. The total amount of firm import capability is generally also considered to be the total transmission capability that can support capacity imports. After determining the maximum firm import capability, market operators need to decide whether to put all of the firm import capability on sale in the capacity auction, or reserve some import capability for uncommitted energy imports before making the remaining capacity available for market participants. The trade-off between making all firm import capability available for capacity market participation and reserving some for uncommitted import lies in the cost and reliability value that the system operators expect from the uncommitted import capability. Uncommitted import capability reduces the reserve margin needed to maintain resource adequacy targets, which lowers the amount of supply that needs to be procured in the capacity market. In general, the entire first contingency total transfer capability of an intertie that is not being used for committed capacity imports can be used to potentially reduce the market s reserve margin requirement. 1 For example, PJM uses a power flow model of its footprint and surrounding areas to determine its maximum capacity import capability. The starting point for the analysis is load and generation dispatch reflecting generation shortfall emergency conditions within the PJM footprint. In order to increase power flows into the footprint, PJM reduces modeled load outside its footprint and reduces generation capacity within its footprint. As inflows increase, PJM monitors first-contingency thermal and voltage limits of key transmission facilities. The maximum inflow achievable without violating transmission limits defines the maximum simultaneous capacity import capability. After determining this simultaneous capability, PJM repeats the calculation for each of five external zones to determine the individual import capabilities from those zones. See PJM Manual 14b Attachment G brattle.com

5 Figure 1 Import Capability for Energy and Capacity Transactions PJM is one example of a market that considers uncommitted import capability in the determination of its resource adequacy target. PJM has a total simultaneous capacity import capability (on a First Contingency Total Transfer Capability basis) of approximately 8,000 MW. 2 PJM has determined that 3,500 MW of this total simultaneous import capability will not be made available to be committed for imports in its capacity auction. This leaves 4,500 MW of simultaneous import capability available for capacity import commitments in PJM s capacity market. PJM also determined that these 3,500 MW of uncommitted import capability will reduce its market-wide resource adequacy target by 2,377 MW, as shown in Table 1. In other words, of the 3,500 MW of uncommitted import capability, an average of 2,377 MW of energy is anticipated to be imported during PJM emergency conditions. PJM s approach to evaluating the reserve margin benefits of uncommitted intertie capability is conservative because it assumes that only the 3,500 MW set aside for this purpose will be used for uncommitted imports will be used, as opposed to the full uncommitted capability shown in Figure 1. 2 See PJM s Planning Period Parameters for the Base Residual Auction, June 10, 2016, PJM had determined a First Contingency Total Transfer Capability of 9,700 MW in See p. 9 of: 4 brattle.com

6 Table 1 Benefits of Uncommitted Import Capability in PJM (2017) Installed Reserve Reliability Margin Requirement (% of Peak Load) (MW) Resource Adequacy Requirement for: Isolated System [A] 17.32% 179,950 System with 3,500 MW of Uncommitted Imports [B] 15.77% 177,573 Resource Adequacy Benefit of Uncommited Imports: [A] [B] 1.55% 2,377 Sources and Notes: Based on PJM peak load forecast of 153,384 MW. PJM, 2017 PJM Reserve Requirement Study, p. 20, October 12, 2017, /media/committeesgroups/committees/mrc/ / item irm study.ashx As Table 1 illustrates, the 3,500 MW set aside uncommitted import capability is not as reliable as a committed capacity import, but nevertheless provides a resource adequacy benefit to the PJM market. This is because it is not guaranteed to be available up to a predefined MW level during a system emergency. In other words, one MW of import capability that is not committed in the capacity market generally has less resource adequacy value than a MW of committed capacity import. 3 PJM s analysis suggests that each additional MW of import capability set-aside for non-firm imports has less reliability benefit than the last. PJM analyzed the diminishing returns and determined that setting aside 3,500 MW for uncommitted imports was an appropriate tradeoff point. 4 The resource adequacy benefit of uncommitted imports can be estimated using a reliability model such as the General Electric Multi-Area Simulation model (GE MARS) or Astrape Consulting s Strategic Energy & Risk Valuation Model (SERVM). 5 To evaluate the benefits of 3 It is important to avoid double counting of the interties for resource adequacy reasons. Intertie capacity set-aside for uncommitted import resources reduces the resource adequacy procurement need but does not satisfying the procurement obligation. On the other hand, intertie capability that is used for the import of resources committed in the capacity market is satisfying a portion of the identified resource adequacy need but does not serve to reduce that need. 4 See PJM, 2017 PJM Reserve Requirement Study, p. 20, October 12, 2017, /media/committees-groups/committees/mrc/ / item irm-study.ashx 5 Each U.S. market uses a different approach to estimating non-firm capacity benefits, though all are conceptually similar to the approach discussed here. See: Pfeifenberger et al., Resource Adequacy Requirements: Reliability and Economic Implications, p. 12, September 2013, Available: ments_pfeifenberger_spees_ferc_sept_2013.pdf; PJM, 2017 PJM Reserve Requirement Study, p. 20, October 12, 2017, 5 brattle.com

7 Alberta s interties from import capability that is not anticipated to be committed in the capacity market, the model could be run twice. In the first run, resource adequacy in Alberta would be modeled without interties. This would establish the reserve margin and installed capacity needed to achieve Alberta s resource adequacy requirements (e.g., the resources needed to maintain 100 MWh per year expected unserved energy) as an isolated system. In the second run, Alberta s uncommitted intertie capability would be added. The difference in reserve margin and installed capacity requirement between these two runs reflects the reliability benefit of the uncommitted intertie capability. How much of total import capability should be assumed to remain uncommitted in the capacity market is a somewhat challenging question. PJM requires that 3,500 MW would remain uncommitted for capacity imports and considers only this amount of uncommitted intertie capability in its reserve margin and resource adequacy determinations. ISO-NE and NYISO also add to the uncommitted intertie capability considered in their reserve margin determinations any transmission capability that is reserved under existing transmission contracts but does not involve resources that participate in the capacity auctions (e.g., energy-only imports), merchant transmission capacity that the merchant owners have certified to not bid into capacity markets, and other uncommitted intertie capability that has not historically been committed in their capacity markets. III. Allocating Firm Capacity Import Capability among Market Participants and Interties AESO Question: How should interties with multiple owners be handled in the capacity market? Should external entities be allowed to sell more capacity into Alberta s capacity market than their firm transmission rights would allow them to deliver? There may be more interest in importing capacity from external systems than the maximum capacity import capability described in Section II. In the face of scarce capacity import capability, the AESO will have to determine how to allocate the available import capability among the different external resources interested in using the intertie it to import capacity into the province. 6 As we discuss below, interface constraints that limit the simultaneous import capability of multiple interties add further complexity to this process. There are several potential approaches to allocating scarce firm import capability among market participants: 6 In many U.S. capacity markets, external resources must hold firm transmission rights (sometimes on a long-run basis) to the border of the ISO. The ISOs also impose deliverability requirements to ensure that energy supplied by an external capacity recourse is able to effectively meet local load. 6 brattle.com

8 Grandfathering: Owners of intertie transmission rights pre-dating the capacity market can be granted long-term, or permanent, capacity import rights on that intertie. AESO could allocate import capability to these owners proportional to their ownership share. ISO-NE takes this approach with capacity import rights associated with the Phase I/II HVDC intertie with Québec. Owners of the line receive Import Rights that they may use to import capacity up to the maximum import capability assigned by ISO-NE. 7 First-Come, First-Serve: Under this approach, external resources wishing to offer into the capacity market may request capacity import rights on an intertie. The market operator grants import rights (e.g. through a process similar to the transmission reservation process used for firm energy transactions) to qualified external resources up to the maximum import capability of the individual intertie (assuming the external capacity resource owner can arrange for firm transmission service to reach the destination market), while also respecting the simultaneous import capability of the system. Both NYISO and PJM use this approach to assign capacity import rights. 8 The first-come, first-served approach links capacity import rights to a specific market participant and requires that these rights be claimed prior to the capacity auction. This also means that these rights are not readily tradable among market participants. As a result, this approach is not necessarily the most efficient approach because it may not allocate capacity to the lowest-cost external sources. Allocation to Transmission Developers: Firm capacity import rights can be allocated directly to any interties associated with merchant transmission projects. The owners of those transmission projects can then use associated rights over the interties to deliver their external capacity into the system, or sell them to another entity wishing to import capacity. This approach can be implemented straightforwardly if the intertie in question (e.g., a merchant HVDC line) is not part of a simultaneous import limit. If a simultaneous import limit exists, the market operator will need a mechanism to ensure that it is not violated. This can be accomplished by requiring import rights holders to clear their rights through the capacity auction where the simultaneous import limits are enforced (see additional discussion below). NYISO allocates import rights to owners of four existing merchant interties connecting New York City and Long Island to ISO-NE and PJM and has a similar process for allowing developers to claim rights on newly developed merchant lines. 9 7 See Phase I/II HVDC-TF Transmission Service Administration Agreement, November 29, See NYISO Installed Capacity Manual, August 2017, Section /Operations/icap_mnl.pdf See PJM Manual 18, Section See NYISO Installed Capacity Manual, August 2017, Section brattle.com

9 Auction for Capacity Import Rights: A centralized import rights auction could be used to allocate capacity import rights that subsequently can be used to offer external supply into the capacity auction. The import rights auction would take place prior to the capacity auction and would allow the system operator to sell capacity import rights on each intertie to the highest bidder, while also enforcing simultaneous import limits. External resources would bid into the capacity import right auction based on their expected revenues in the centralized capacity market. The auction would award capacity import rights to external resources that value them the most. This approach can significantly improve economic efficiency relative to a first-come first-served approach described above. However, we are not aware of any markets who utilize this approach and economic efficiency could be further improved by allocating capacity import rights during the capacity auction itself, described next. Allocation within the Capacity Auction Clearing: With this approach, capacity import rights are allocated to external resources simultaneously with clearing the capacity market. External resources compete directly with internal resources in the capacity market, accounting for the limited import capability of each intertie and the simultaneous import capability of the system. If there is more external supply than import capability, external resources will receive a lower clearing price than internal resources because the intertie limit is binding. ISO-NE uses this approach to allocate the portion of its capacity import capability that is not already allocated to grandfathered rights holders. 10 This approach will tend to be more efficient than the first-come, first-serve, or independently auctioning capacity import rights approaches. The capacity import limits discussed in Section II are typically defined for each intertie individually as well as for all interties simultaneously. The simultaneous limit tends to be smaller than the sum of the import limits from each of the neighboring systems individually. In Alberta, the simultaneous import capability often limits inflows over the BC-AB, MATL, and SK interties. 11 AESO will need to determine how to allocate Alberta s simultaneous import capability across individual tie lines. Figure 2 shows illustrative maximum firm simultaneous capacity import capability into Alberta that could support imports into the province s capacity markets. 12 The figure also shows the import capability for the Alberta-BC tie-line by itself (i.e., without imports from other markets). In the illustrative example shown in the figure, the simultaneous firm import capability may not be large enough to accommodate firm imports, up to individual intertie import capabilities, 10 See ISO-NE Market Rule 1, Section III (d) The interface limit on AB-BC + MATL can also restrict flows. 12 ATC duration curves shown in the figure are based on ATC values that do not account for LSSi and contingency reserve requirements in Alberta. 8 brattle.com

10 from BC, Saskatchewan, and MATL at the same time. 13 AESO can choose to allocate the simultaneous import capability among the interties in a number of different ways. The actual allocation methodology will be determined in future. AESO already uses a similar process to allocate requests for energy market imports among the three interties. 14 Under any allocation mechanism, the result would be that capacity imports over the individual interties could be limited to less than their individual firm import capabilities. In some cases, capacity imports might be permitted up to the individual intertie firm import capability, but in no case could imports exceed the individual intertie firm import capability. Figure 2 Illustration of Alberta Simultaneous and BC AB Intertie Import Capability Sources and Notes: Alberta import ATC Jan Feb. 2016: ATC duration curves shown in the figure are based on ATC values that do not account for LSSi and contingency reserve requirements in Alberta. Simultaneous import capability shown in the chart is purely illustrative and does not represent a recommendation. Simultaneous import capability can either be allocated through non-market approaches or market-based approaches such as through the capacity auction itself. NYISO uses a non-market allocation approach. The NYISO process, which we recommend against, allocates the simultaneous import capability to individual ties in proportion to each intertie s individual 13 The BC-AB import limit of 480 MW is based on the maximum firm capacity BC Hydro makes available for firm energy sales on the BC-AB intertie. 480 MW corresponds to approximately the 85 th percentile of ATC on the BC-AB intertie since The simultaneous limit of 625 MW shown in the figure, which corresponds to the 85 th percentile simultaneous ATC into Alberta since data became available in 2013, is meant to be illustrative and does not constitute our recommendation. See Alberta import ATC data: 14 See Section 9 of AESO, Information Document Available Transfer Capability and Transfer Path Management, ID # R, 9 brattle.com

11 import capability. 15 Simultaneous import capability can also be allocated across interties using a first come, first-served approach. PJM currently uses this approach. 16 A more efficient allocation of simultaneous import capability to individual interties would utilize an auction-based approach. An auction-based procedure (e.g., as part of the capacity auction clearing mechanism) would select import bids while respecting both individual intertie limits and simultaneous limits. Such an auction could result in 1) imported capacity receiving the same capacity price as internal resources if there are fewer external resources than available import capability over the interties; 2) imported capacity receiving a discount relative to internal resources due to a binding individual intertie limit, or 3) imported capacity receiving a discount due to the binding simultaneous limit. PJM utilized this approach (prior to its recent capacity market modifications, which require that all capacity imports are unit-specific and dynamically controllable by PJM utilizing so-called pseudo-ties ) and ISO-NE continues to use it. If applied in Alberta, this approach could result in imported capacity resources obtaining a capacity price that is lower than the uniform Alberta-internal price. Such an outcome may be consistent with the fact that Alberta s unconstrained transmission policy applies only to internal resources and loads, but not to intertie limits. IV. Risks allocated to importers AESO Question: To what risks are capacity importers exposed (e.g. risk of binding transmission capabilities, risk of incurring a performance penalty if transmission service is curtailed during a delivery period)? External resources take on a variety of risks in obtaining a capacity market obligation, just as internal resources do. First, external resources are usually obligated to arrange for firm end-toend transmission service to ensure that the resources is deliverable as a capacity resource. This imposes on importers the additional risk associated with obtaining firm transmission service on multiple systems, some of which may depend on timely completion of transmission upgrades. In addition, external resources could face some additional capacity market risks related to their location. We summarize these below: 15 This process results in potentially highly inefficient outcomes. For example, in recent auctions only 89 MW of the NYISO s simultaneous capacity import limit was allocated to the 2,000 MW intertie with Ontario. 16 See PJM Manual 18, Section brattle.com

12 Intertie Limit Risk: Due to limited import capability across the interties, external resources face the risk that they receive a lower capacity price than internal resources if more external resources offer to provide capacity than the interties would allow for. This could be the case even if some of the external resources are lower cost than internal resources. Importers also run the risk of obtaining a capacity obligation in the capacity market but not able to secure the necessary import rights for whatever reason. In U.S. markets, external zones can clear at reduced prices relative to the importing system, 17 and some of the external resources may not be able to fulfill their capacity commitment if (as noted above) they simply are not able to obtain the necessary firm transmission rights. Performance Risk: ISOs need to ensure that capacity imported from external areas will perform at the same level as internal resources. Thus, ISOs generally require external resources to meet stringent qualification requirements, typically including a demonstration that the external area will not curtail the import transaction when the importing zone needs the capacity. In some markets, external resources may be penalized if the intertie is full but they are not online during an operating emergency. In other markets, external resources are not penalized for failing to deliver energy when the intertie is full. 18 Additional Administrative Risk: All capacity market participants face the risks associated with changes in market rules and design parameters, such as the shape of the demand curve. External resources face additional uncertainties around future changes in the requirements on capacity imports and the general preference of system operators to meet their reliability requirement using resources under their direct control See ISO-NE Market Rule I, Section III , See NYISO ICAP Market Results, PJM has previously utilized this approach, but has since replace it with a requirement that all capacity imports need to be unit-specific and use pseudo-ties (over firm end-to-end transmission service) to electrically move the resource into the PJM balancing area. 18 For example, external resources are not required to deliver energy into NYISO during emergency event if the intertie is full. However, external resources are penalized if the external ISO curtails exports into NYISO. See NYISO Installed Capacity Manual, August 2017, Section For example, see Complaint of Potomac Economics, LTD, before FERC, page _Filed-Version.pdf 11 brattle.com

13 V. Must-offer requirements for imported capacity AESO Question: Are there must offer requirements for capacity imports? If external capacity sells into the market in year 1, do they have an obligation to offer in year 2? If they are subject to must offer, how do importers leave the capacity market? With the exception of PJM, U.S. markets do not require external resources that previously cleared in a capacity auction to re-offer into the subsequent capacity market auctions. Existing internal resources can elect to offer into the auction, sell their capacity off-system, or retire. External resources may offer and clear the capacity market but (with the exception of PJM) are not required to offer in subsequent years. This flexibility is intended to allow supply resources of all kinds to seek out the most economic opportunity, though it has the potential to slightly increase the variability in capacity market prices. In contrast to other systems, PJM imposes a capacity market must-offer requirement on all existing resources. 20 As of its most recent forward auction, PJM applies the must-offer requirement on both internal resources and external resources that have cleared in a past auction. 21 Retiring resources, as well as resources that become inoperable due to events outside the operators control or due to government intervention, are not required to offer. Additionally, resources are not required to offer into a subsequent auction if they can demonstrate that they are providing capacity to another market. 22 PJM s must-offer requirements provide some additional price certainty in its capacity market, but may discourage external resources from offering into its markets. Both ISO-NE and NYISO have special provisions for capacity imports under grandfathered contracts, largely from Hydro-Québec s system. Under the long-term Interconnection Operators Agreement between ISO-NE and Hydro-Québec, the latter is required to provide capacity during an emergency event in ISO-NE. 23 Payment for capacity (and energy) imports from Hydro- Québec are not provided through ISO-NE s capacity and energy markets, however, but are 20 See PJM OATT Attachment DD Section 6.6: 21 See PJM Manual 18, Section See PJM OATT Attachment DD Section 6.6(g) 23 See Article 6 of Interconnect Operators Agreement between ISO-NE and Hydro-Québec Transénergie. /co_agree/ioa_1_27_2012.pdf 12 brattle.com

14 instead provided directly by the intertie s owners. 24 In New York, all of Hydro-Québec s longterm committed intertie capacity is subject to must-offer obligations into the system s seasonal and monthly auctions. 25 Please note that U.S. ISOs all impose an energy must-offer requirement on resources clearing their capacity markets. The four surveyed ISOs generally impose the same energy must-offer requirements on external resources as internal resources. 24 See Asset Owners Agreement Among New England Hydro et.al. and Hydro-Québec Transénergie See NYISO OATT, Attachment S, Section and External Rights Availability in NYISO s public data 13 brattle.com

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