Wholesale Electricity Markets. New England Independent System Operator. Commissioner Mark Vannoy Maine Public Utilities Commission

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1 Wholesale Electricity Markets and New England Independent System Operator Commissioner Mark Vannoy Maine Public Utilities Commission March 26, 2014

2 Overview and Background 2

3 Wholesale Electricity Markets Key Attributes/Objectives Reliability Short term - operational security Long term - supply and transmission adequacy Economic efficiency Open and fair access Transparency Absence of market power 3

4 Wholesale Electricity Markets Design Features Separation of generation and transmission Open access transmission Independent system operator Well-designed market rules and structures Enforcement Regulatory oversight 4

5 Background U.S. Wholesale Electricity Markets Federal Government and Agency Steps to Facilitate Wholesale Competition Public Utilities Regulatory Act 1978 (PURPA) Energy Policy Act of 1992 (EPAct 1992) Federal Energy Regulatory Commission (FERC) Orders 888, 889 and

6 Background U.S. Wholesale Electricity Markets Public Utilities Policies Act of 1978 (PURPA) Enacted to promote energy conservation and renewable/efficient generation technologies Created opportunities for Independent Power Producers (IPPs) to build and operate Qualifying Facilities (QFs) Required utilities to allow QFs to interconnect to their systems Required utilities to purchase power from QFs at the utilities avoided cost 6

7 Background U.S. Wholesale Electricity Markets Energy Policy Act of 1992 (EPAct 1992); FERC Orders 888, 889 and 2000 EPAct expanded FERC s authority regarding transmission access Open Access Transmission Tariffs (OATTS) Open Access Same-Time Information System (OASIS) Standards of Conduct Independent System Operators (ISOs) / Regional Transmission Organizations (RTOs) 7

8 Open Access Transmission Tariffs OATTs set the terms for access to and pricing for transmission service Intended to eliminate discrimination Required for all public utilities with jurisdictional transmission facilities FERC regulated Apply equally to transmission owner and third-party users 8

9 Open Access Same-Time Information System Internet-based, real-time information about transmission availability and prices Enables and facilitates market transactions Provides transparency 9

10 New England Bulk Power System 10

11 New England s Electric Power Grid at a Glance 6.5 million households and businesses; population 14 million 350+ generators 8,000+ miles of high-voltage transmission lines (115 kv and above) 13 interconnections to electricity systems in New York and Canada 31,750+ megawatts (MW) of generating capacity and approximately 1,850 MW of demand resources 28,130 MW all-time peak demand, set on August 2, buyers and sellers in the region s wholesale electricity markets $5 billion in transmission investment since 2002; approximately $6 billion planned over next 5 years $5 billion total energy market value in

12 Generation - New England System 12

13 Transmission New England System 13

14 2012 Energy Imports and Exports by External Area (GWh) 14

15 New England Independent System Operator (ISO-NE) 15

16 About ISO-NE Regional Transmission Organization (RTO) for New England Created in 1997 Private, not-for-profit corporation Regulated by FERC Independent of market participants 16

17 ISO-NE Oversight and Governance FERC regulated market rules and tariffs States New England States Committee on Electricity (NESCOE) Market participants New England Power Pool (NEPOOL) Board of Directors 17

18 ISO-NE Roles and Responsibilities Real time operation of the power system Administration of wholesale markets and tariffs System planning 18

19 Key roles Engineers Operators Analysts Economists Forecasters Trainers ISO-NE Staffing and Expertise 19

20 Power System Operations Plan and coordinate generator and transmission outages Forecast system load Dispatch generation Coordinate external transactions Operate grid in real time Invoke operating procedures to address emergency/pre-emergency conditions/events 20

21 Generator Dispatch ISO-NE dispatches resources in the region as one system Security-constrained, economic dispatch Key Objectives: Maintain reliability throughout the region Minimize the cost of power supply 21

22 ISO-NE Wholesale Electricity Markets Energy Daily market for purchase and sale of electric energy Capacity Three-year forward market that commits capacity to meet resource adequacy needs Ancillary Services Reserves and regulation for system operations 19

23 ISO-NE Energy Market Uniform Clearing Price Structure Day-Ahead Market Real-Time Market 23

24 Uniform Clearing Price (UCP) Each generator s bid reflects its own incremental operating costs Highest selected bid sets the UCP All generators receive the UCP Why does this make sense? Economically efficient Transparent Does not encourage gaming 24

25 Day-Ahead Energy Market 25

26 Electricity Auctions: Background Daily auctions for electric power Determine wholesale electricity prices Regionally-based markets Buyers and sellers are: o Large energy users (buyers) o Distribution utilities/retailers (buyers, serving homes & businesses) o Power plant owners (sellers) o Financial traders (buy and sell) 26

27 We are Part of the Eastern Interconnection 27

28 Clearing the Market: Price and Quantity Supply Price = $52 Quantity Demand 28

29 Ensuring Supply & Demand Balance on the Operating Day ISO-NE operates to system to ensure balance in real time ISO-NE establishes the financial obligations of market participants based on actual performance How? 29

30 Real-Time Energy Market Balances actual production and load during the operating day with quantities bid in the Day-Ahead market Market settlement system Actual production and load are metered Financial obligations determined by ISO-NE 30

31 Energy Prices Structure (Locational Marginal Prices) Prices vary by time (hourly $/MWh) Prices vary by location Prices vary by market (day-ahead vs. real-time) 31

32 Locational Marginal Prices (LMPs) LMPs are the sum of three components Energy component Same $/MWh across region Marginal Loss component $/MWh that varies by location Congestion component $/MWh that varies by location 32

33 Locations of LMPs Node Corresponds to a physical bus or collection of buses within the network Hub Representative selection of nodes to facilitate long-term commercial energy trading - The hub price is a simple average of LMPs at all hub locations Load Zone Aggregation of nodes - Zonal price is the loadweighted average of the prices of all nodes in the zone External/proxy node Location that serves as a proxy for trading between ISO-NE area and its neighbors 33

34 Illustration of LMPs by Component and Location Hourly System Demand: MW , hour ending 16 ID Name Type LMP Energy Congestn Loss 4000.H.INTERNAL_HUB HUB Z.MAINE LOAD ZONE Z.NEWHAMPSHIRE LOAD ZONE Z.VERMONT LOAD ZONE Z.CONNECTICUT LOAD ZONE Z.RHODEISLAND LOAD ZONE Z.SEMASS LOAD ZONE Z.WCMASS LOAD ZONE Z.NEMASSBOST LOAD ZONE

35 Financial Transmission Rights (FTRs) Market mechanism to hedge congestion risks Financial, not physical, rights 35

36 Energy Prices Day-Ahead vs. Real-Time Day-Ahead and Real-Time market prices tend to be approximately equivalent on average, over time Real-Time market can be more volatile 36

37 ISO-NE LMPs January 2014 Day-Ahead Market Real-Time Market 37

38 Forward Capacity Market (FCM) 38

39 A Forward Capacity Auction is..... a forward procurement, auction-based locational capacity market Intended to send appropriate price signals to attract new investment, including Demand Resources and maintain existing resources where and when they are needed, thus ensuring the reliability of the New England electricity grid Allows new capacity (capacity planned to build but not commercial) to set the market clearing price, while accounting for locational capacity requirements, thereby providing a market-based measure of the cost of new entry 39

40 Objectives of a Forward Capacity Market Procure enough capacity to meet New England s forecasted demand approximately three years in advance Provide compensation for the fixed cost of an existing generation Import or Demand Resource Attract new Resources to constrained regions through an additional source of income Implement a penalize-for=non Performance approach for not providing capacity during a shortage event 40

41 Operating Reserves Market 41

42 What is Operating Reserve? Operating Reserve Capacity Capacity over and above what is required to provide energy in the Control Area in order to ensure reliability; this capacity is available for dispatch during system contingencies Operating Reserves allow the Control Area to withstand contingencies Reserve capacity requirements are based on large foreseeable loss of supply o Contingency examples: Large generator trips, line trips 42

43 How Does Operating Reserve Capacity Work? In the event of a system contingency, available operating reserve capacity will be activated to provide energy This energy replaces the energy service that was lost as a result of the contingency o e.g. Unit tripped off-line, can no longer generate energy o e.g. Transmission line outage prevents delivery of energy Replacement energy can be available in two ways o On-line: A generator that is running at less than maximum can increase its output o Off-line: A generator that can be started rapidly can be called to turn on and produce energy 43

44 Classification of Operating Reserve Capacity On-line: "Ten-Minute Spinning Reserve" (TMSR) Off-line: "Ten-Minute Non-Spinning Reserve" (TMNSR) On-line or Off-line: "Thirty-Minute Operating Reserve" (TMOR) Capability of on-line Capability of off-line Capability of resources to unit to provide resources to provide provide energy within 30 increased energy energy within 10 minutes minutes within 10 minutes Off-line generation Can be either-on-line or Partially loaded on-line turbine, diesel or hydro off-line resource generator generators Generally the larger Limited by ramp rate Load interruption generation turbines and Economic Dispatchable Asset Load interruption DARD Maximum Related Demand (DARD) can also qualify 44

45 Reserve Market Design ISO-NE Reserve Market Two Components 1. Real-Time Reserve Market 2. Forward Reserve Market 45

46 Market Analysis and Reports Annual Market Performance Reports & Annual Forum Mid-Week Market Update Weekly Market Report. Monthly Market Performance Reports Monthly & Weekly LMP Indices Quarterly Market Performance Reports Regional Network Load Cost Weekly Market Performance Reports Wholesale Load Cost 46

47 Market Monitoring; Mitigation ISO-NE s Internal and External Market Monitors Monitor the wholesale electricity markets Identify ineffective market rules and tariff provisions Identify potential anticompetitive behavior by market participants and recommend mitigation Provide comprehensive market analysis for policy decision-making 47

48 ISO-NE System Planning Resource and Transmission Adequacy 48

49 Resource and Transmission-Related Activities Maintain Reliable Operations Resource Adequacy Load Forecasting Development of annual resource needs [Installed Capacity Requirement (ICR)] Qualification of resources (e.g., demand resources and generation) Administration of the ISO Generation Interconnection Queue Transmission Planning Transmission Needs Assessments and Solution Studies Reliable analysis Transmission cost review Market resource alternatives Interregional Planning activities Economic Studies 49

50 Activities Result in a Comprehensive Plan for New England Regional System Plan (PSP) published annually RSP12 posted in ISO s website RSP13 will be posted in the September 2013 timeframe Stakeholders participate and provide input on needs assessment, study results and transmission alternatives through the Planning Advisory Committee (PAC) Transmission Project List updated three times a year and presented to the PAC PAC typically meets on a monthly basis Numerous other stakeholder committees and working groups 50

51 Functions that Ensure Resource Adequacy Markets Provide signals to attract sufficient resources (generation, demand resources and imports) to satisfy regional capacity needs (ICR) Three-year-forward Forward Capacity Market (FCM) promotes the development of new resources Locational Forward Reserve Market (FRM) provides incentives for fastresponse resources to respond to system contingencies The ISO Performs studies to determine annual resource requirements Determining ICR to meet New England s forecasted demand Capacity, Energy, Loads and Transmission forecast (CELT), annual Emission Reports and Seasonal Assessment reports Addresses issues related to power plant fuel diversity, environmental requirements, economic concerns and new technologies 51

52 New Generation Additions in New England MW added since 1999 Capacity (MW) Cumulative Generation 52

53 Connecting to the Power System Process is FERC jurisdictional and standardized ISO-NE is responsible for interconnection processes Generator proposals are subject to ISO-NE reliability review; ISO-NE can require additional facilities or upgrades to ensure reliability Proposals are studied in the order received Interconnection queue is maintained (public) End result if a three-party Interconnection Agreement among the ISO, generator and transmission owner 53

54 ISO is Responsible for Regional Transmission Planning Regional transmission system is composed of networked facilities, mostly 115 kv and above, also known as Pool Transmission Facilities (PTF) ISO is responsible for planning the regional transmission system to provide Regional Network Service (RNS), pursuant to a FERCapproved transmission tariff Summarized in annual Regional System Plan Stakeholder engagement through the Planning Advisory Committee RNS is provided to all regional load, used by all resources Transmission Owners responsible for planning their local transmission systems (non-ptf) Addressed by Local System Plans 54

55 Major Milestones in the Regional Transmission Planning Process ISO performs Needs Assessment to identify the timing and details of system needs Stakeholders provide input Conceptual transmission solutions may be suggested to meet identified system needs Recognizes Market Solutions Solution Studies identify the most cost-effective transmission solutions Planned transmission solutions are identified through Solution Studies Must address needs established in Needs Assessments, and Must have received ISO approval under reliability review of the ISO Tariff Major changes needed in this area to comply with FERC Order 1000 and competitive solicitation of Solutions Transmission Cost Allocation (TCA) review determines project costs eligible for regional support Localized costs are excluded 55

56 Transmission Investment in New England 56

57 Closing Thoughts Physical properties and essential nature of electricity differentiate it from other markets Electricity production and transmission implicate significant security and public policy issues that markets must accommodate Market structures and rules develop and evolve over time Note: Source material and graphics for several of these slides provided by ISO-NE. 57