SCENARIO UPDATE. Non-Emitting Resources Subcommittee. NERSC Phase 2 Modelling Ontario s Future Electricity Markets PRESENTED TO

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1 NERSC Phase 2 Modelling Ontario s Future Electricity Markets SCENARIO UPDATE PRESENTED TO Non-Emitting Resources Subcommittee PREPARED BY Judy Chang Kathleen Spees David Luke Oates John Imon Pedtke August 16, 2018 Copyright 2018 The Brattle Group, Inc.

2 Overall Process The focus is on stakeholders viewpoints about future scenarios in Ontario. The IESO and Brattle will translate those futures into modeling assumptions Stakeholder- Developed Scenarios Stakeholders develop Future Trends, Key Drivers, Uncertainties Stakeholders develop future scenarios to be analyzed Translate Scenario Assumptions Brattle translates scenario input assumptions based on stakeholder scenarios IESO works with Brattle to develop details of market simulation Simulation Analysis Brattle and IESO simulate Ontario market under each scenario Stakeholders provide feedback before finalizing brattle.com 2

3 Agenda Overall Process Draft Scenarios Market Simulation: Scope and Approach Objectives and Scope Approach Next Steps Appendix brattle.com 3

4 Agenda Overall Process Draft Scenarios Market Simulation: Scope and Approach Objectives and Scope Approach Next Steps Appendix brattle.com 4

5 Draft Scenarios July 24 th Workshop Summary On July 24 th, we identified a range of plausible scenarios for testing possible outcomes after Market Renewal 1. Identify Drivers of Sector Evolution July 24 th Workshop 3. modelling: Evaluate Implications for Market Design & Participants Driver of Market Design Needs Current Trends Changing Supply Mix Fast Growth 2. Combine Trends and Drivers Into Qualitatively Different Futures Distributed Resources Intermittent Resources Deep Interconnections Electrification Evaluate Robustness of market design after Market Renewal across scenarios Explore market opportunities Identify future projects brattle.com 5

6 Draft Scenarios Scenario Narratives 1. Low Net Demand: After market renewal, markets meet demand while customer costs and the Global Adjustment fall as contracts roll off. In the absence of a carbon price or clean attribute market, carbon emissions may increase as contracts expire 2. Low Cost Clean Grid Driving Growth and Exports: Low-cost clean technology and storage, stimulated by a strong carbon price, create opportunities to export energy, attributes, and capacity 3. Booming Economy & Electrification: A strong economy and electrification drive increased load and incremental supply. Load is increasingly controllable by the IESO 4. Challenging Supply Conditions: Moderate load growth and retirement of a portion of nuclear supply creates a need for significant additional supply, while high technology costs and adverse policy environment test markets ability to incentivize investments 5. Decentralized Future: Customer and prosumer value is created outside the wholesale markets, spurring significant activity in the DER space. Change cases will explore two outcomes: 1) with DERs defecting from the grid (not visible or controllable by IESO), and 2) with DERs actively participating in wholesale markets brattle.com 6

7 Draft Scenarios Proposed Modelling Assumptions by Scenario Low Net Demand Low Cost Clean Grid Driving Growth and Exports Booming Economy & Electrification Challenging Supply Conditions Decentralized Future Ontario Net Demand No net load growth (130 TWh, 23 GW peak, shape/location informed by Outlook A) Moderate net load growth (150 TWh, 25 GW peak, informed by Outlook B) High net load growth (175 TWh, 29 GW peak, informed by Outlook C) High net load growth (175 TWh, 29 GW peak, informed by Outlook C) Gross load increases, but net load decreases (110 TWh, 19 GW peak) Fuel Prices $3.50/MMBTU (Indicative of Current Dawn Hub prices) $3.50/MMBTU (Indicative of Current Dawn Hub prices) $6.00/MMBTU (Higher gas demand drives higher prices) $8.00/MMBTU (Indicative of 2014 Dawn Hub prices) $3.50/MMBTU (Approximates Current Dawn Hub prices) Carbon Prices None Consistent with Federal Backstop ($50/tonne) Consistent with modest WCI price ($20/tonne) Consistent with modest WCI price ($20/tonne) Consistent with modest WCI price ($20/tonne) Potential Markets to Focus On MRP Only MRP + Clean Attribute Market + Enhanced A/S MRP + Customer Markets + Enhanced AS MRP + Enhanced A/S MRP + Clean Attribute + Customer Markets Non-Emitting Resources Cost reductions relative to current levels, PV: 30%; wind: 10%; storage: 20% Cost reductions relative to current levels, PV: 30%; wind: 10%; storage: 20% Cost reductions relative to current levels, PV: 60%; wind: 20%; storage: 40% Costs of PV, wind, and storage consistent with current levels Cost reductions relative to current levels, PV: 30%; wind: 10%; storage: 20% Contract Status of Existing Resources 60% of Current Fleet remains under Contract or Regulated (25% nuclear, 5% gas, 30% non-emitting) 40% of Current Fleet under Contract or Regulated (25% nuclear, 15% non-emitting) 60% of Current Fleet under Contract or Regulated (25% nuclear, 5% gas, 30% nonemitting) 50% of Current Fleet still contracted/regulated; 2,000 MW nuclear supply retired 40% of Current Fleet under Contract or Regulated (25% nuclear, 15% non-emitting) Additional Notes & Possible Change Cases Change cases: Add clean attribute market, Additional nuclear supply Additional transmission may be needed to export energy, capacity, and clean attributes Electrification loads more controllable by IESO May consider a change in the Tightness of Supply Change cases: Include Enhanced AS; DERs participate in wholesale markets Note: Specific input values in this table are indicative and subject to change, reported in 2018 real $. brattle.com 7

8 Agenda Overall Process Draft Scenarios Market Simulation: Scope and Approach Objectives and Scope Approach Next Steps Appendix brattle.com 8

9 Market Simulation Objectives and Scope Objectives: Build stakeholder understanding of and confidence in Ontario s Future Market Design by demonstrating how the markets may perform under a variety of future scenarios: Assess whether the MRP will provide revenues needed to meet Ontario s needs Estimate the potential shift in revenues between various wholesale market components (capacity, energy, ancillary services, clean attributes, others) The potential impact of key drivers on market prices and revenues The market revenue opportunities for a variety of resource types Scope: Simulate the IESO wholesale electricity market across various future scenarios developed by stakeholders Simulate the interactions across components of the wholesale market Measured outcomes will include: energy, operating reserve, and capacity prices, electricity sector CO 2 emissions, supply mix outcomes, and net market revenues earned by different resource types brattle.com 9

10 Market Simulation Recap: Revenue Opportunities for Resources We will estimate revenue opportunities for a selected set of resources by scenario Annualized Technology Cost Revenues Outside Wholesale Environmental Attributes Capacity Markets Flexibility and Ancillary Services Energy brattle.com 10

11 Market Simulation Questions Simulations Are Not Intended to Address The simulation will not address the following: Should the IESO contract for new supplies or extend existing contracts? Should nuclear refurbishment schedules be adjusted? What are the total system costs under each scenario? What are the forecasts of specific market prices and revenues in a specific year? How is the supply mix projected to change over time? brattle.com 11

12 Market Simulation Modelling Features for Ontario To effectively model Ontario, we simulate unique fundamentals and interactions across proposed markets Markets Energy Ancillary Services Capacity Environmental Outside of Customer / Dist. Wholesale Market Essential Features Intraday economics of hydro, storage, DR, interties Seasonal representations (high/low demand, freshet) Locational (zonal) pricing Ancillary product needs and co-optimized pricing Option: new flexibility products Not captured: sub-hourly intermittency and flexibility needs Entry and exit from least-cost supply under long-run equilibrium conditions Seasonal, locational capacity market Contracted resources not subject to market-based investment and retirement decisions Share of supply under contracts affect offers, negative pricing, and size of GA Option: Consider environmental or clean energy attributes of various resources and allow competition to determine lowest cost resource mix Option: Account for revenue opportunities outside the wholesale markets for specific resource types (e.g. distributed storage) Requires stakeholder input on specific business models envisioned brattle.com 12

13 Market Simulation Modeling Approach Responses to some stakeholder questions about the modeling approach: Feature Inputs Model Function Results/Outputs Model Approach Future scenarios from stakeholders to specify critical drivers (e.g., regulated and contracted supply, load shape and levels, technology cost) Simulate a single future year: purposely not a specific target year Leverage latest Ontario Planning Outlook and 18-month outlook base assumptions (except for the scenarios that came from stakeholders) Supplement with IESO and other stakeholder provided data where applicable Operations based on locational energy and co-optimized A/S markets Offers reflect incentive for $0 or negative offers for some contracted resources; Model distributed storage, pumped hydro storage, and hydro opportunity costs; and ancillary service opportunity costs Retirements are based on economics (after contract expiration) Entry of new market-based supply based on economics (gas, renewables, demand response, storage, hydro, and/or nuclear) Market Prices Resource Mix Potential Revenue Streams by resource type System Impacts brattle.com 13

14 Agenda Overall Process Draft Scenarios Market Simulation: Scope and Approach Objectives and Scope Approach Next Steps Appendix brattle.com 14

15 Next Steps We will continue to engage with stakeholders at several points throughout the modelling exercise to collect study guidance and share results August, 2018: Finalize modelling scenarios and assumptions after stakeholder feedback Q3-Q4 2018: Present initial findings Q4 2018: Present final results brattle.com 15

16 Contact Information Kathleen Spees Principal Washington, D.C Judy Chang Principal, Director Boston, MA David Luke Oates Associate Boston, MA 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. or its clients. brattle.com 16

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19 Agenda Overall Process Draft Scenarios Market Simulation: Scope and Approach Objectives and Scope Approach Next Steps Appendix brattle.com 19

20 Appendix Technology Cost Assumptions NREL s Annual Technology Baseline projects cost declines of approximately 20% for wind and 60% for utility-scale PV by 2030 Sources: LBNL Tracking the Sun 10, LBNL 2016 Wind Technologies Market Report, Bloomberg Lithium-ion Battery Costs and Market, NREL 2018 ATB All costs converted to CAD at 1.25 CAD/USD brattle.com 20

21 Appendix Ontario Contract Expiry As contracts expiry over the next two decades, an increasing portion of the supply stack will be exposed to market forces By 2030, approximately 60% of current contracted + regulated supply will remain: nuclear and hydro plus some gas, wind, and PV By 2035, only 40% will remain, nearly all hydro and nuclear Sources: Ontario Planning Outlook 2016 brattle.com 21

22 Appendix Example: Indicative Market Size Results will indicate the relative size and pricing of markets under each scenario, and as we vary key levers such as share of supply under contract Customer Costs ($/MWh) Revenues Outside Wholesale Environmental Attributes Capacity Markets Flexibility and Ancillary Services Energy Global Adjustment Potential Markets Planned Markets Current Scenario 1 Scenario 2 Scenario 3 brattle.com 22

23 Appendix Example: Price and Supply Stack by Day We will also zoom in on specific locations and days to illustrate outcomes such as daily storage charge cycles or outcomes at summer peak and freshet Load Curtailment Generation Energy price $0/MWh Energy Price brattle.com 23

24 Scenario: Low Net Demand Eco/Electric Load Growth CDM (at least in response to cost) GDP? (NAFTA Impact?) Decrease to moderate electric demand Electrification (EVs) could increase Demand Story: Lower demand exacerbating over supply and lower marginal cost lower electricity spot prices lower market renewable Policies and customers want cost effective solutions How will future investments be made (Maintaining assets, building new ones) External Market Conditions NAFTA? Trade Barriers External electricity supply needs (e.g. meet RPS) Ex- rate // $CDN Provincial vs. Federal Carbon? (Public?) Cost Effectiveness Policies Increase Tech / Innovation Pro - Nuclear Fuel Prices Lower Renewable variable cost Low national gas prices Present Ontario carbon policy lower fuel prices Implications for Ontario Market Design Reconciling maintaining cost effective resource adequacy for needed revenue adequacy More market products? Efficiency of need market mechanisms Ability of Market to meet public policy objectives Emerging Technology Storage (as a market participant, tech.) Pairing storage with other resources Tech enabling aggregation Enabling real-time market response SMR Nuclear tech increased flexibility Customer Preference Clean? Carbon? Innovative tech Cost effectiveness Lower costs Choice and control (prosumer) Distributed Energy Resources Load aggregation Increase customer participation Need for regulatory reform (DER Integration) LDC Consolidation LSE-like investment/operation Others Government intervention (e.g. contracts, programs) Alberta NY NE CA, etc. brattle.com 24 brattle.com 24

25 Scenario: Low Cost Clean Grid Driving Growth and Export Eco/Electric Load Growth Low costs will drive exports Export technologies/expertise in clean tech Using waste for energy Story: Load increasing due to electrification Policy shift towards more environmentally friendly polices Continued decline in technology prices External Market Conditions Selling EAs/RECs into other jurisdictions if there is a market Could be a global shift in energy policies Higher carbon prices REC/EA market Carbon Price Fuel Prices $0 marginal cost supply Policies Government needs supportive environmental policies Need Policy/regulatory changes that support energy storage Unified energy policy for Canada? Distributed Energy Resources Requires a decentralized energy system Could mean less opportunities for exports Implications for Ontario Market Design Impacts of $0 cost-supply suppressing energy prices No incentive for conservation because energy prices remain low Could also cut out technologies or products like peak shaving Need flexible options to meet system needs Export requires more transmission Waste energy Energy storage Customer Preference Continued pressure for lower rates Customers want clean electricity Opening retail market could drive LSEs and further lower costs to consumers Emerging Technology drive towards lower costs and grid parity Others Impacts of this scenario on reliability What would be the costs? Loss of inertia as technology resources are connected Export requires more transmission brattle.com 25 brattle.com 25

26 Scenario: Booming Economy & Electrification Eco/Electric Load Growth High demand growth (Global) Robust economy Flattening daily profile High market participation & price responsiveness Story: Maximize export penetration Electrification of mass transit Commercial/residential new build & retrofit to electricity for space heating Abundant elect. supply at low prices Supply central & de-central External Market Conditions NAFTA resolved Trade robust access to low cost technology Continued global direction toward low carbon world High Carbon Price Policies Open Borders allow imports from surrounding jurisdictions Technology neutral no supply mix policy Support for electrification Fuel Prices High Carbon/Fuel prices initially then driven down by excess supply Implications for Ontario Market Design Maximize potential of local renewable energy resources Diminished significance of centralized market (not the only game in town) Customer Preference Lowest possible prices Fuel choice/flexibility No constraints Emerging Technology Penetration of low cost storage Greater customer participation through technology/ai/block chain Vehicle to grid Power to gas Simple transparent Maximize value with minimal effort Distributed Energy Resources Big part with grid resources too Aggregators will play important role e.g. LDCs and others Others Climate Change impacts real & visible brattle.com 26 brattle.com 26

27 Scenario: Challenging Supply Conditions Eco/Electric Load Growth Increased demand (EV)/ increased concentrated demand Story: Trade barriers significant material cost increase Regulatory risk for investors/ government interference Nuclear closures High energy prices Constraints on interties External Market Conditions Increased imports Policies Subsidies created increase growth (i.e. EV) High cost of carbon Shift from rate base to tax base Increased EV Emerging Technology Trans active energy High Energy/MCP Fuel Prices High national gas price Implications for Ontario Market Design Grid defection Increase need/expansion AS market (reliability) High cap/energy prices Contracts Optimizing existing assets Customer Preference Increase self-supply/behind meter Affordability Reliability increase storage Distributed Energy Resources Increased deployment Others Grid defection (increase costs to smaller number of consumers) Zombie Apocalypse brattle.com 27 brattle.com 27

28 Scenario: Decentralized Future Eco/Electric Load Growth Net Grid load goes down & volatile Overall electric load increases as cars and H&C electrify Story: Distributed resources Energy storage deployed widely Sophisticated communications between bulk transmission and DER on LDC Advanced communication and control Trans active energy pricing External Market Conditions Global Security Climate Change resiliency Increased opportunities for imports/exports Net Metering Carbon Pricing Rate structures Policies Emerging Technology Solar, energy storage, wind Geo price down Aggregation Improved automation Block chain (AI) Fuel Prices High natural gas prices High gasoline prices Distributed Energy Resources Implications for Ontario Market Design Marginal fuel price is less relevant DER will drive a larger need for ancillary service markets Customer Preference Self Sufficiency reliability, resiliency Low cost Choice Cost control Energy Conservation Others brattle.com 28 brattle.com 28