ICA Demand Curve Development: Proposed Approach for Ontario PRESENTED TO Market Renewal Incremental Capacity Auction Stakeholder Group PRESENTED BY Kathleen Spees Johannes Pfeifenberger Yingxia Yang John Imon Pedtke January 24th, 2018 Copyright 2017 The Brattle Group, Inc.
Agenda Overview Modeling Approach Illustrative Results Next Steps 1 brattle.com
Overview The IESO and stakeholders have engaged in a comprehensive discussion of the conceptual approach and principles for developing a capacity auction demand curve in Ontario The IESO has asked us to assist by informing the IESO and stakeholders about the potential implications of various demand curve shapes on auction outcomes for the purpose of the high level design (specific parameters will not be developed until the detailed design stage) Our objectives today are to: Share a proposed approach to evaluating a range of demand curves, considering Ontario s unique market and policy context, and Request stakeholder input on the approach, questions, and results needed to inform the demand curve Based on feedback from stakeholders, we will provide a preliminary analysis by April 2018 and support the development of a workable range for the system demand curve in the high-level design by Q3 2018 2 brattle.com
Overview Objectives to Consider in a Demand Curve The starting point to drive demand curve design is a clear set of design objectives and performance criteria. We are seeking input on the specific reliability objectives to adopt and performance criteria to prioritize Demand Curve Objectives Reliability Maintain 1-in-10 LOLE target Possibly: Rarely drop below a minimum acceptable reserve margin corresponding to a 1-in-5 LOLE level where IESO might intervene Possibly: Meet specific reliability targets in summer and winter seasons Efficient Prices Support long-run average price at Net CONE, consistent with a market capable of attracting sufficient merchant entry to attain reliability objectives Short-run prices consistent with current fundamentals, going above Net CONE during shortage and below Net CONE during surplus Possibly: Rationalize prices according to the incremental value of capacity Mitigate Price Volatility Reduce price volatility impact from lumpiness and small movements and uncertainties in supply, demand, and transmission Few outcomes at the administrative cap Other Reduce susceptibility to market power Minimize contentiousness and uncertainty from administrative parameters 3 brattle.com
Overview Experience in Other Capacity Auctions Other markets have considered marginal reliability value, Monte Carlo analysis, and stakeholder input when developing capacity demand curves ISO-NE Originally adopted a vertical demand curve (resulting in performance concerns) Developed downward-sloping curve based on Monte Carlo simulation Current demand curve is based on marginal reliability value of incremental capacity PJM Used Monte Carlo approach to assess demand curve performance and propose new curve in 2014 Engaged in stakeholder discussions on changes Periodic review of demand curve shape every 4 years Demand Curves in other Jurisdictions PJM ISO-NE Reliability Requirement AESO Candidate Curve (1 of 3 being considered) NYISO NYISO Demand curve parameters are fully re-evaluated every 4 years, with annual updates Slope and zero crossing point informed by marginal reliability value Pricing points informed by financial model of reference technology revenues AESO Design effort is in progress Monte Carlo model to assess price and reliability impacts of candidate demand curves Started with base assumptions and used stakeholder questions and input to refine assumptions and curve parameters Currently narrowed down to three recommended curves Sources: PJM 2014 Triennial Review of VRR Curve, PJM Manual 18, 2014 ISO-NE Testimony, 2016 ISO-NE MRI Based Demand Curve Approval, NYISO 2016 Tariff Revisions Approval, NYISO 2016 ICAP Demand Curve Reset, AESO Draft Proposed Demand Curve Shapes 4 brattle.com
Agenda Overview Modeling Approach Illustrative Results Next Steps 5 brattle.com
Modeling Approach Overview of Proposed Modeling Approach Approach Incorporate supply and demand curves Clear supply and demand to calculate prices and quantities in the auction Simulate a distribution of outcomes using a Monte Carlo analysis of realistic shocks to supply, demand, and imports, based on Ontario-specific empirical data Average price over all draws must equal Net CONE,* consistent with a market that supports entry at long-run marginal cost (though prices in any one year reflect short-term supply/demand fundamentals) Both annual and seasonal market designs will be considered with separate inputs for supply, demand, and shocks Primary Model Results Estimate average, range, and distribution of price, quantity, and reliability outcomes Compare performance of different demand curve shapes relative to objectives/criteria Supply and Demand Shocks (Illustrative) Range of Price Outcomes Demand Shocks Supply Shocks Range of Quantity Outcomes Net CONE *An indicative Net CONE parameter will be adopted for the purposes of this analysis, considering the Net CONE of a range of potential reference technologies. A sensitivity analysis will also be conducted to evaluate the extent to which different values would affect the demand curve shape. 6 brattle.com
Modeling Approach Supply Modeling In-auction supply curves consist of three components Shape Blocks Supply offers at prices above zero Shape based on historical PJM offer curve shape Scaled to total MW of in-auction supply (only a subset of the Ontario market) In-Auction Supply Curve Components (Illustrative) 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) Shape Blocks Smart Block Zero-priced supply block Smart Block Shock Block Quantity adjusted such that the 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 7 brattle.com
Modeling Approach 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 8 brattle.com
Modeling Approach Candidate Curves to Evaluate We plan to test a range of demand curves for performance in Ontario s context We are seeking input from stakeholders on the specific curves to evaluate, as well as questions that are specific to performance in Ontario s context Potential Curves to Evaluate Other regions curves: PJM, NYISO, ISO- NE, Alberta Steeper vs. flatter curves; higher and lower price caps Convex and linear curves Curves tuned to reliability objectives Questions in Ontario s Context How does the incremental nature of the auction affect demand curve performance and design? How should seasonal curves consider revenue sufficiency and reliability across seasons? What are the tradeoffs between seasonal and annual approaches? 9 brattle.com
Modeling Approach Unique Characteristics of Ontario s Market Ontario s market has a number of unique characteristics that we will consider and account for in the demand curve analyses Components Ontario s Unique Characteristics to be Considered Supply Large share of rate-regulated / contracted supply (leaving a residual share as in-auction supply, with that share growing over time) Total market size similar to New England, New York, or sub-regions of PJM, but merchant share of the auction will be significantly smaller Shocks to supply influenced by policy uncertainties Demand Demand shocks informed by Ontario-specific peak load variability and forecast uncertainty Will use an indicative screening analysis of Net CONE in Ontario, considering a range of possible reference technologies Both annual and seasonal auction design alternatives to be considered (until a final decision is made) Reliability Reliability requirement of 0.1 LOLE Ontario LOLE curve based on generation fleet and demand profiles Transmission Scale of potential capacity trade with neighboring regions Evaluating the shape of locational demand curves postponed until detailed design phase 10 brattle.com
Agenda Overview Modeling Approach Illustrative Results Next Steps 11 brattle.com
Illustrative Results Example Demand Curves Analysis for ISO-NE Stakeholders in New England proposed a number of curves for testing Engaged in an iterative, collaborative process with ISO New England stakeholders to identify and evaluate a range of potential demand curves Final ISO-NE proposed curve was a consensus recommendation within the workable range, and reflecting a balance of design objectives Representative Subset of Demand Curves Evaluated on Behalf of ISO-NE and Stakeholders Final Proposed Curve Tuned to 1-in-10 reliability Moderate price volatility Drops below 1-in-5 reliability 7% of the time 12 brattle.com
Illustrative Results Example Demand Curves Analysis for ISO-NE Cleared price and quantity distributions of different tested demand curves using Monte Carlo modeling approach 13 brattle.com
Agenda Overview Modeling Approach Illustrative Results Next Steps 14 brattle.com
Next Steps We request stakeholder input and feedback to inform our analysis of a workable range of parameters for the system-wide demand curve for Ontario Timing January 24 (today) Scope Brattle proposed demand curve analysis Request for input April 17 Initial analysis presented to stakeholders Responses to stakeholder questions Additional stakeholder input collected Q3 2018 Recommended workable range of demand curve parameters to be included in high-level design proposal 15 brattle.com
Next Steps Questions for Stakeholders Brattle will work to incorporate feedback and respond to questions posed by the Stakeholder Group. Potential questions to consider: What unique features of Ontario s market should be accounted for when developing the ICA demand curve? What questions do stakeholders have about proposed model approach? What specific metrics should be used to evaluate demand curve performance? What specific demand curve shapes or performance questions would be helpful to evaluate? What scenarios would be helpful to evaluate? 16 brattle.com
Contact Information KATHLEEN SPEES Principal Boston, MA Kathleen.Spees@brattle.com +1.617.234.5783 JOHANNES PFEIFENBERGER Principal Cambridge, MA Hannes.Pfeifenberger@brattle.com +1.617.234.5624 YINGXIA YANG Senior Associate Washington, DC Yingxia.Yang@brattle.com +1.617.234.3389 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. 17 brattle.com
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 18 brattle.com
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