ICA Demand Curve Analysis

Transcription

1 ICA Demand Curve Analysis Preliminary Findings Regarding the Demand Curve for a Two-Season Auction PREPARED FOR Independent Electricity System Operator Market Renewal Incremental Capacity Auction Stakeholders PREPARED BY Kathleen Spees Yingxia Yang Lily Mwalenga Matthew Witkin Oct 18/19, 2018 Copyright 2018 The Brattle Group, Inc.

2 Disclaimer The modelling outcomes found in this presentation are indicative of possible long-term outcomes under the capacity auction after the market reaches equilibrium conditions when new entry would need to be attracted. These results represent a limited range of potential outcomes based on a specific set of assumptions regarding supply, demand, and resource costs. These numbers are not a projection of capacity prices that may be expected in the initial years of the ICA, and do not represent the IESO's expectations of prices or other clearing results. These numbers should not be used for the purposes of making investment decisions, and are not a substitute for market participants own business judgement. 1 brattle.com

3 Agenda Overview How Might the Seasonal Auction Work? How Should Seasonal LOLE Risk be Allocated? How Should the Price Cap be Established? What if the Winter Season Becomes Tighter? Next Steps 2 brattle.com

4 Overview Under a seasonal auction, summer and winter demand curves will need to be developed for the Incremental Capacity Auction We will assist by informing the IESO and stakeholders about the potential cost, reliability, and price volatility implications of various demand curve shapes A workable range for the summer and winter curves will be included in the high level design Specific parameters will be developed later in the detailed design phase Our objectives today are to: Introduce how key demand curve concepts can be applied in the context of a seasonal capacity auction Present initial findings from a modeling assessment of seasonal curves performance across cost, reliability, and price volatility metrics Seek stakeholder input and feedback 3 brattle.com

5 Overview Refresher: Modeling Approach Approach Simulate a distribution of potential outcomes in the two-season auction using a Monte Carlo analysis of realistic shocks to supply and demand, across 1,000 independent simulated years Develop different potential demand curves Clear supply and demand to calculate prices and quantities in the auction for each season Average annual price over all simulated years must equal annual Net CONE, consistent with a market that supports entry at longrun marginal cost Primary Model Results Cost, reliability, and price volatility outcomes in both summer and winter seasons Compare performance tradeoffs with different demand curve shapes Supply and Demand Shocks (Illustrative) Net CONE 4 brattle.com

6 Overview Indicative Tuned Demand Curves Initial analysis indicates that the summer demand curve may need to be significantly higher than winter, with possibly 90% of annual revenues coming from the summer season Contracted Winter Contracted Winter Target: 0.01 LOLE Target: 0.09 LOLE Tuned Demand Curves Capacity auctions will have year-to-year variability in supply and demand Average Realized Price Demand curve parameters manage the relationship between price and quantity volatility realized Reliability, price volatility, and other performance metrics are affected by adjusting curve parameters (e.g. min/max capacity limit, price cap, slope, shape) Annual Net CONE Winter Curves can be tuned to achieve the target level of reliability, in this case: 0.09 LOLE summer LOLE winter = 1-in-10 annual 5 brattle.com

7 Overview Preliminary Insights on Key Questions In our initial analysis, we have identified a few key questions that may drive the workable range of seasonal curves Question How Might the Seasonal Auction Work? How Should Seasonal LOLE Risk be Allocated? How Should the Price Cap be Established? What if the Winter Season Becomes Tighter? Preliminary Insights Procurements of annual and seasonal resources can be co-optimized to meet seasonal demands while achieving the lowest total annual cost Annual loss of load events (LOLE) risk is the sum of summer and winter LOLE More LOLE risks should be allocated to season with higher cost supply Price caps reduce the excess supply above reliability requirement, but also increase price volatility Demand curve should be adjusted with increasing the reliability requirement for winter and maximum capacity limit to procure more resources 6 brattle.com

8 Agenda Overview How Might the Seasonal Auction Work? How Should Seasonal LOLE Risk be Allocated? How Should the Price Cap be Established? What if the Winter Season Becomes Tighter? Next Steps 7 brattle.com

9 Seasonal Auctions Why Adopt a Seasonal Auction? The IESO has proposed adopting a seasonal capacity auction design in order to achieve several key advantages: Advantages of a Seasonal Construct Accurately represents supply and demand Ensures adequacy in both seasons, reflecting potentially different drivers of scarcity Enables resources that can only participate in one season (e.g. seasonal DR, importers/exporters, mothballs) Fully utilizes resources with very different summer & winter capacity ratings (e.g. hydro, thermal generation, solar) Avoids over-procurement in the season with lower demand Provides a transparent price signal for the value of capacity in each season Disadvantages of a Seasonal Construct More complicated than annual Benefits are small if the acute LOLE risk is only in one season 6-month seasons may not be granular enough to represent some types of LOLE risk in certain systems, e.g. systems that have significantly different reliability risks in shoulder months 8 brattle.com

10 Seasonal Auctions Seasonal Design Elements in Other Markets Ontario s ICA will be the first truly seasonal capacity auction, that fully integrates all seasonal supply to meet seasonal demand Market Commitment Period Target Capacity Clearing Price Seasonal Resource Participation AESO Annual Winter Annual Annual ISO-NE Annual Annual Composite Offers through Bilateral Aggregation MISO Annual Annual N/A NYISO Monthly or Voluntary Six- Month strips Monthly or Six- Month for Strips Monthly or Seasonal PJM Annual Annual Composite Offers through Bilateral Aggregation or in- Auction Matching IESO (Proposed) Seasonal Seasonal Seasonal Seasonal 9 brattle.com

11 Seasonal Auctions Co-Optimized Two-Season Auction Clearing Supply: Suppliers would participate in the auction by submitting up to three different offer types: -only Winter-only Annual Demand: Two demand curves for summer and winter needs Clearing: The auction would procure the combination of annual, summeronly, and winter-only supply to meet both seasons needs at the lowest combined cost Price-Setting: Based on marginal cost in each season Co-Optimized Seasonal Clearing Demand Annual + - Only Supply Winter Demand Annual + Winter- Only Supply Price Winter Price 10 brattle.com

12 Agenda Overview How Might the Seasonal Auction Work? How Should Seasonal LOLE Risk be Allocated? How Should the Price Cap be Established? What if the Winter Season Becomes Tighter? Next Steps 11 brattle.com

13 LOLE Allocation Adapting 1-in-10 to a Two-Season Market Core Concept: each season must be reliable enough to achieve the 0.1 annual LOLE target over the year LOLE + Winter LOLE 0.1 Annual LOLE Winter 0.1 LOLE 0.05 LOLE 0.01 LOLE 0.1 Winter LOLE 0.05 Winter LOLE 0.01 Winter LOLE Source and Note: The LOLE curves are fitted based on the IESO LOLE analysis. 12 brattle.com

14 LOLE Allocation Tradeoff in vs. Winter Target Quantities Accepting higher LOLE risk in summer allows lower summer capacity target (but requires a higher procurement of winter supply) Winter Requirement Requirement More LOLE Risk in More LOLE Risk in Winter 13 brattle.com

15 LOLE Allocation Curves Tuned to Differing LOLE Allocations Allocating more LOLE risk in summer results in reduced summer procurements ( and higher winter procurements) Contracted Winter Contracted Winter Targets Targets Average Realized Price Shifting LOLE Risk to Annual Net CONE Winter 80/20 Winter 60/40 Winter 90/10 90/10 80/20 60/40 14 brattle.com

16 LOLE Allocation Savings if Allocating More LOLE Risk to Allocating the majority of LOLE risk to summer is likely to be the most cost-effective approach, as long as low-cost winter supply remains abundant Incremental Capacity Procurement Cost Winter 15 brattle.com

17 Agenda Overview How Might the Seasonal Auction Work? How Should Seasonal LOLE Risk be Allocated? How Should the Price Cap be Established? What if the Winter Season Becomes Tighter? Next Steps 16 brattle.com

18 Price Cap Concepts for Establishing Seasonal Price Caps Apart from LOLE allocation, the seasonal price cap is likely the most important parameter driving the performance of seasonal curves. We suggest several potential guiding concepts for driving seasonal curve design: Contracted Capacity Winter Winter Target Target Winter Price Cap Price Cap Average Realized Price Annual Net CONE Seasonal Price Caps, Guiding Concepts Total Annual Cap (summer + winter caps) should be approximately 1.5x to 2x Net CONE Minimum Cap for both seasons, possibly at 0.25x to 1x Gross CONE (we adopt 0.5x in this presentation, usually binding for winter) Quantity at the Cap set at or above the minimum acceptable for any one season (possibly 0.2 LOLE) Cap in the Tight Season should be high enough to mitigate the frequency of shortage events below the minimum acceptable (may be as high as 3-4x annual Net CONE if the long season always has a price of zero) 17 brattle.com

19 Price Cap Tuned Curves with Different Price Caps A higher seasonal price cap decreases the quantity of procurement, but also increases price volatility Contracted Winter Contracted Winter Target: 0.01 LOLE Demand Curve Cap at 1.7x Seasonal Price Cap at 1.5x Seasonal Price Cap at 1.35x Seasonal Price Target: 0.09 LOLE Average Realized Price Annual Net CONE Winter Demand Curves Cap at 0.5x Gross CONE (Imposed Minimum) 18 brattle.com

20 Agenda Overview How Might the Seasonal Auction Work? How Should Seasonal LOLE Risk be Allocated? How Should the Price Cap be Established? What if the Winter Season Becomes Tighter? Next Steps 19 brattle.com

21 Tighter Winter Curves Tuned to Tighter Winter Conditions If the winter season becomes tighter (more demand or less supply), then the winter prices will need to be higher and summer prices can be lower. Thus, the seasonal curves may need to adapt to changing conditions Contracted Winter Typical Winter Contracted Target: 0.01 LOLE Winter Curve: If Winter is the Tight Season Target: 0.09 LOLE Tighter Winter Target: 0.01 LOLE Curve: If is the Tight Season Average Realized Price Curve: if Winter is the Tight Season Annual Net CONE Winter Curve: If is the Tight Season 20 brattle.com

22 Agenda Overview How Might the Seasonal Auction Work? How Should Seasonal LOLE Risk be Allocated? How Should the Price Cap be Established? What if the Winter Season Becomes Tighter? Next Steps 21 brattle.com

23 Next Steps Preliminary Findings Design Elements Preliminary Findings Post HLD Questions to Explore Target Capacity (& LOLE Allocation) Price Cap (& Minimum Price Cap) Maximum Capacity Limit Slope and Shape Recommend allocating more LOLE risk to summer than winter, possibly 90/10 Winter curve is likely to exceed reliability target unless winter becomes tighter Annual cap may be 1.5-2x Net CONE Seasonal caps in the range of 1.5-2x expected seasonal price (results in a summer cap in the range of x Net CONE) Winter price cap may be at imposed min Foot point is a less important driver of curve performance, and can be adjusted to align with other chosen parameters Wider/flatter curve reduces price volatility but increases procured quantities and cost Are there options for updating LOLE allocation between auctions, or within each auction? Can the price cap be updated after each auction to adapt to emerging market conditions? What is an appropriate minimum to impose on the price cap? Might kinked curves offer opportunities to winter overprocurement while keeping higher price caps to protect against collapse of the winter price cap? 22 brattle.com

24 Next Steps Next Steps We request stakeholder input on these results and questions that should be analyzed in any future work on seasonal demand curves Timing Scope Oct 18/19 (today) Discuss initial modeling results to inform seasonal demand curves Request stakeholder input Q Workable range of system-wide, seasonal demand curves identified in the high-level design 2019/2020 Detailed parameters for seasonal and locational demand curves will be developed within the detailed design phase 23 brattle.com

25 Appendix 24 brattle.com

26 Appendix IESO Supply and Demand Balance Outlook IESO projects summer to be the tighter season for , with a consistent pattern of less supply and more demand than winter and some variability on the relative tightness of summer and winter Seasonal Supply-Demand Outlook Typical Year, Used to Represent Seasonal Supply/Demand Balance Rel. Req. for Rel. Req. for Winter Expiring Contracted Supply Available Supply under Contract Source and note: Available capacity and expiring contracted supply are based on IESO June 2018 forecast. 25 brattle.com

27 Appendix Supply Modeling In-auction annual supply curves consist of three components Shape Blocks Supply offers at prices above zero Shape based on historical PJM offer curve shape Shock Block Zero-priced supply block Quantity varies with each draw to generate shocks to the supply curve Represents expected year-to-year variability from entry and exit (including policy-driven variability) Smart Block Zero-priced supply block Quantity adjusted such that the annual average price across all draws equals Net CONE Consistent with economic theory that supply will enter (or exit) until prices are at long-run marginal cost In-Auction Annual Supply Curve Components (Illustrative) Smart Block Shock Block Shape Blocks 26 brattle.com

28 Appendix Demand and Reliability Modeling Demand Curves Arbitrary number of price-quantity pairs Quantities are relative to the reliability requirement Prices expressed as % of Net CONE Reliability Simulation reliability results are evaluated with respect to loss of load expectation (LOLE) LOLE curve and target are based on IESO s most recent reliability modeling Using quantity outputs, the LOLE is tabulated over all simulation draws to estimate weighted-average reliability outcomes Demand Curve and Reliability (Illustrative) LOLE Curve Reliability Requirement: 0.1 LOLE 27 brattle.com

29 Appendix Annual Resource Supply Curve The supply curve for annual resources is based on PJM supply curve shape. Contracted supply is netted out from model (which has an effect like the same quantity of offers at $0) Annual Supply Curves 80% Contracted Netted Out from Auction Clearing (Similar Effect to Offers at $0) PJM Supply Curves 2009/10 to 2016/17 28 brattle.com

30 Appendix Seasonal Supply Curves We developed indicative seasonal supply curves considering potential quantities of seasonal supply that may be offered from various sources including contracted supply, imports, seasonal DR, and uprates -Only Supply Curves Winter-Only Supply Curves 29 brattle.com

31 Appendix Reliability Requirement Shocks We model a shock size of 1.4% when calculating the standard deviation of the deltas between 3-yr forecast summer reliability requirement values and trend values This shock size is within the range of shock sizes for other similar sized markets within PJM, ISO-NE, and MISO Linear Fit vs. 3-yr Forecast Values Linear Fit +1 S.D. IESO Shock Size vs Other Markets Shock Size ISO-NE Avg Historical Rel. Req. Standard Deviation Of Shocks (UCAP MW) (%) (UCAP MW) IESO Deviation from Historical Trend 27, % 244 Deviation from 3-yr Forecast Trend 27, % 395 3yr - 2yr Forecasts 27, % 669 4yr - 3yr Forecasts 27, % 662 Other Markets MISO Zone 7: Michigan 24, % 359 ISO-NE System 32, % 567 PJM EMAAC 39, % yr Forecast Values Linear Fit Linear Fit -1 S.D. PJM PJM MISO IESO IESO Source: IESO Historical forecast in 2007 and for future reliability requirement Sources: ISO-NE FCA1 FCA7 MISO 2013/ /17 PJM 2009/ /17 BRA 30 brattle.com

32 Appendix Input Assumptions Input Assumptions under Typical Year Notes: *Demand is based on 90/10 LOLE allocation. **New resource costs are indicative values based on Brattle s pre-screening analysis. Winter Supply and Demand Annual Supply Offers (UCAP MW) 23,541 23,541 Seasonal Supply offers (UCAP MW) 2,650 3,150 Seasonal Imports (UCAP MW) 2,000 2,000 Total Supply Offers (UCAP MW) 28,191 28,691 Demand* (UCAP MW) 26,276 25,468 Shock in % Annual Supply Shocks % of Annual Supply Offers 3.6% 3.6% Seasonal Supply Shocks w/o Imports % of Seasonal Supply Offers 6.3% 6.3% Import Shocks % of Import Quantity 20.0% 20.0% Seasonal Supply Shocks w/ Imports % of Seasonal Supply Offer w/ Imports 9.6% 9.5% Demand Shocks % of Reliability Requirement 1.4% 1.4% Net Supply Shocks % of Reliability Requirement 4.0% 4.1% Shock in MW Annual Supply Shocks (UCAP MW) Seasonal Supply Shocks w/o Imports (UCAP MW) Import Shocks (UCAP MW) Seasonal Supply Shocks w/ Imports (UCAP MW) Demand Shocks (UCAP MW) Net Supply Shocks (UCAP MW) 1,049 1,035 New Resource Costs** Gross CONE (2018$CAD/MW-day UCAP) $385 Energy and Ancillary Service Offset (2018$CAD/MW-day UCAP) $40 Net CONE (2018$CAD/MW-day UCAP) $ brattle.com

33 Appendix Detailed Modeling Results Average Price Reliability Procurement Cost Frequency Average Expected at Cap LOLE ICA Cost Standard Deviation Average Reserve Margin Average Quantity as % of Rel. Req. Average Excess (Deficit) Above Rel. Req. Standard Deviation of Excess (Deficit) Frequency Below Rel. Req. Frequency Below 1-in-5 Cost if Ontario Were 100% Merchant Demand Curve ($/MW-d) ($/MW-d) (%) (days/yr) (%) (%) (MW) (MW) (%) (%) ($ mil/yr) ($ mil/yr) Typical Year; 60/40 LOLE Allocation, Cap at 2.44x Net CONE $659 $102 5% % 102% % 5% $3,257 $731 Winter, Cap at 0.56x Net CONE $33 $20 0% % 102% % 0% $152 $20 Total Annual $346 $61 0% % 102% % 5% $3,409 $751 Typical Year; 80/20 LOLE Allocation, Cap at 2.44x Net CONE $641 $118 6% % 102% % 6% $3,139 $682 Winter, Cap at 0.56x Net CONE $49 $24 0% % 102% % 0% $228 $33 Total Annual $345 $71 0% % 102% % 7% $3,367 $714 Typical Year; 90/10 LOLE Allocation; Price Cap at 1.35x Seasonal Price, Cap at 2.44x Net CONE $626 $130 7% % 102% % 7% $3,051 $651 Winter, Cap at 0.56x Net CONE $64 $28 0% % 102% % 0% $300 $46 Total Annual $345 $79 0% % 102% % 8% $3,352 $697 Typical Year; 90/10 LOLE Allocation; Price Cap at 1.5x Seasonal Price, Cap at 2.72x Net CONE $627 $173 7% % 102% % 7% $3,047 $643 Winter, Cap at 0.56x Net CONE $65 $28 0% % 102% % 0% $305 $46 Total Annual $346 $100 0% % 102% % 8% $3,352 $689 Typical Year; 90/10 LOLE Allocation; Price Cap at 1.7x Seasonal Price, Cap at 3.08x Net CONE $626 $222 6% % 101% % 6% $3,031 $632 Winter, Cap at 0.56x Net CONE $66 $27 0% % 102% % 0% $309 $47 Total Annual $346 $125 0% % 102% % 7% $3,340 $679 Tighter Winter; 90/10 LOLE Allocation, Cap at 1.73x Net CONE $199 $58 5% % 100% % 5% $959 $196 Winter, Cap at 1.66x Net CONE $492 $166 0% % 101% % 0% $2,397 $523 Total Annual $345 $112 0% % 101% % 6% $3,357 $ brattle.com

34 Contact Information KATHLEEN SPEES Principal Boston, MA YINGXIA YANG Senior Associate Washington, DC The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc. 33 brattle.com

35 About The Brattle Group The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governmental agencies worldwide. We combine in-depth industry experience and rigorous analyses to help clients answer complex economic and financial questions in litigation and regulation, develop strategies for changing markets, and make critical business decisions. Our services to the electric power industry include: Climate Change Policy and Planning Rate Design and Cost Allocation Cost of Capital Regulatory Strategy and Litigation Support Demand Forecasting Methodology Renewables Demand Response and Energy Efficiency Resource Planning Electricity Market Modeling Retail Access and Restructuring Energy Asset Valuation Risk Management Energy Contract Litigation Market-Based Rates Environmental Compliance Market Design and Competitive Analysis Fuel and Power Procurement Incentive Regulation Mergers and Acquisitions Transmission 34 brattle.com

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