Market Evolution Program Update

1
Market Evolution Program Update

• Drew Phillips/Edward Arlitt
• Leonard Kula/Jason Chee-Aloy

2
Environmental Information Tracking

• Awaiting passage of regulation

3
Multi-Interval Optimization

• Progress
• Finalizing detailed design
• Software development is underway
• Work is underway internally on Market Rule
  amendments to support MIO modifications
• Technical Panel submission expected in November

4
Multi-Interval Optimization

• Stakeholdering
• 11 Working Group Sessions to date
• Next Working Group Sessions
• October 8 with ITSC representatives
• October 28
• MOSC - October 22
• Technical Panel presentation - October 14

5
Multi-Interval Optimization
6
Wholesale/Retail Integration

• Edward Arlitt

7
Wholesale/Retail Integration

• Wholesale/Retail Integration is being shaped by
  the activities of other MEP initiatives and the
  OEB initiative regarding the delivery of Demand
  Side Management and Demand Response activities
• IMO monitoring developments in these forums

8
Wholesale/Retail Integration

• IMO wants to ensure that the strategy components
  in each of these issues align with the
  evolutionary plan being developed in the other
  MEP stakeholder working groups. For example
• The future of the buy side of the market and
  Load Serving Entities
• The Day Ahead Market (financial exposure,
  participation, etc.)

9
Day Ahead Market

• Leonard Kula

10
DAM Overview

• Working Group
• Benefits
• Design
• Pricing Methodology
• Next Steps

11
Day Ahead Market Working Group

• Over 30 members (with diverse membership)
• Meets every 10-14 days (24 meetings held since
  March)
• Substantial consensus to develop a comprehensive
  DAM consistent with that implemented or planned
  for neighbouring markets
• security constrained unit commitment model
• LECG (consulting firm) provides expert advice
• At the June 11 MAC meeting, unanimous consensus
  was reached
• Acknowledgement that DAMWG stakeholdering process
  is effective
• Agreed with recommendation to continue to develop
  the DAM design until the end of the year, with a
  view to specifying design details, resolving
  issues raised by stakeholders, defining benefits
  and resolving funding issues

12
Day Ahead Market - Benefits

• Improved reliability
• Allows for direct participation of all loads in
  market
• Additional opportunity for demand-side response
• Improved commitment process
• Allows IMO to commit sufficient resources to meet
  forecast demand
• Drivers to ensure committed resources show-up in
  real-time
• Utilizes 3-part offer construct
• Imports and exports priced and scheduled
  day-ahead
• Moves intertie transactions from real-time to DAM
  and reduces intertie trading uncertainty
• Should reduce number of failed intertie
  transactions
• Should reduce Intertie Offer Guarantee (IOG)
  uplift payments

13
Day Ahead Market - Benefits

• Improved point of convergence for forward
  products
• DAM provides a transparent and predictable price
  that converges on the real-time market price
• Lower volatility - DAM price volatility lower
  than real-time market price
• Greater liquidity - DAM explicitly allows
  non-dispatchable load bids and virtual
  participation
• Price convergence - virtual participants in DAM
  encourage price arbitrage between DAM and
  real-time market
• DAM price better than real-time market price as
  an index - facilitates forward price curve
  development ? contracting

14
Day Ahead Market Proposed Design

• Key features
• A financial market administered by the IMO, which
  accepts supply offers and demand bids and clears
  the market at day-ahead prices.
• Creates a 2-settlement system, with the real-time
  market (RTM) a balancing market.
• Integrates a 3-part bid process to optimize unit
  commitment for
• Supplies available to the DAM to meet loads
  buying in the DAM
• Supplies available to the RTM to meet RTM
  forecast load
• A multi-pass process for committing units,
  arranging DAM schedules, and defining DAM prices,
  plus indicative schedules for the RTM.
• The use of uplifts to cover commitment costs not
  recovered from market revenues.
• The simultaneous optimization of energy and
  operating reserves, and the optimization of the
  market over the 24 hour period.

15
Day Ahead Market - Pricing Methodology

• Work began on the DAM with the intention of
  designing a DAM consistent with the current
  pricing mechanism of the Real-Time Market (RTM) -
  uniform pricing
• reflected in the DAM objectives and guiding
  principles
• a number of DAMWG sessions discussed how a DAM
  based upon a uniform pricing methodology would be
  settled
• Conclusions of DAMWG (August 2003)
• A day-ahead market under a uniform pricing regime
  would be costly to implement and maintain,
  complex and confusing, and is not recommended
• To be effective, a nodal pricing model must be
  used

16
Why not use uniform pricing in the DAM?

• Issues with uniform pricing in real-time market
  amplified in DAM
• Complex system of congestion management payments
  (CMSC) in real-time market ? multiplied with DAM
• very difficult (impossible?) to settle
• obscures DAM price
• Uniform price sends incorrect locational signals
  for supply and demand-side investments ?
  reinforced in DAM
• Strategic bidding issues will substantially
  increase
• constrained-off generators have incentive to
  decrease offer to maximize CMSC for not running
• constrained-on generators have incentive to
  increase offer to capture the value of their
  energy (paid as bid)
• more prevalent with DAM because of settlement
  complexity
• Still not convinced that we can generate a set of
  schedules in the DAM under uniform pricing that
  are consistent with real-time schedules

17
A Nodal Pricing Model for DAM

• Most of the problems associated with the use of
  uniform pricing in the DAM and real-time market
  disappear with nodal pricing
• Nodal pricing eliminates the need for CMSC side
  payments.
• All the strategic bidding incentives created by
  CMSC disappear.
• And the DAM would function better
• Simpler to administer settlements
• More transparent and intuitive prices
• Consistent results with the RTM, making the DAM
  prices more useful references for other forward
  markets
• Nodal price sends correct locational signals for
  supply and demand-side investments

18
Nodal pricing - what is it?

• The nodal price at any location is the
  offer/bid-based cost of redispatching the system
  to supply energy to the next increment of load at
  that location...
• Given the security-constrained dispatch
• Given the binding constraints and contingencies
• Given the offers/bids of the participants
• Nodal prices are market-clearing prices (not pay
  as offered/bid)

19
Nodal pricing possible design

• Dispatchable facilities would be settled based
  upon nodal pricing
• generators/importers would receive the nodal
  price
• dispatchable loads/exporters would pay the nodal
  price
• Remaining (most) loads would receive a uniform
  price consisting of a weighted average of the
  Ontario nodal prices for loads
• The difference between the nodal prices at the
  receipt and delivery locations provide a set of
  congestion rents that are paid to the holders of
  internal transmission rights

20
Nodal Pricing - Next Steps

• No decision has been made by the DAMWG or IMO on
  nodal pricing recommendations
• Investigation by the IMO and involvement of the
  DAMWG will continue in parallel with a broader
  stakeholdering process
• A position needs to be formulated by the IMO and
  the industry by the end of Q1 2004 if market
  enhancements, including nodal-based Day Ahead and
  real-time markets, are to be implemented in a
  timely manner

21
DAM Design - Next Steps

• High level design concepts
• internal transmission rights
• settlement timelines and prudentials

22
Nodal Pricing Stakeholder Process

• Drew Phillips

23
Nodal Pricing The Context

• Investigation of a nodal pricing model has
  implications beyond the Day Ahead Market and will
  attract interest from a broader set of
  stakeholders
• Education, analysis and consultation are the
  pieces needed to allow IMO and stakeholders to
  develop grounded positions

24
Nodal Pricing The Stakeholder Plan

• Continue to use the DAMWG to discuss nodal price
  issues
• Engage broader stakeholder audience through
  workshops and self-study material that will be
  made available on the IMO website
• Utilize MOSC as additional forum to discuss
  issues as they arise

25
Workshops

• Workshop 1 (early December)
• How nodal prices are determined (theory)
• The role of transmission rights
• How the current dispatch algorithm determines
  nodal (shadow) prices
• Economic arguments for nodal pricing
• Experience in other markets
• Workshop 2 (early January)
• Analysis of nodal prices to date

26
Long-Term Resource Adequacy

• Jason Chee-Aloy

27
Overview

• Stakeholdering
• Long-Term Resource Adequacy Working Group Draft
  Strawman Conclusions and Recommendations
• Long-Term Resource Adequacy Working Group
  Consensus Points and Issues
• Next Steps

28
Long-Term Resource Adequacy Stakeholdering

• Long-Term Resource Adequacy Working Group
  (LTRAWG)
• Over 25 members (w/ diverse membership)
• Meets every 2 weeks (18 meetings have been held
  since March)
• Completed Feasibility Assessment (June 2003)
• agreed on objectives, evaluation criteria,
  paths/options, conclusions and recommendations
• LECG (consulting firm) has provided and continues
  to provide expert advice
• At the June 11 MAC meeting, unanimous consensus
  was reached
• Acknowledgement that LTRAWG stakeholdering
  process is effective
• Agreed with conclusions and recommendations
  contained in Feasibility Assessment

29
LTRAWG Draft Strawman Conclusions and
Recommendations

• Long-term resource adequacy encompasses all
  interrelated aspects of the Ontario electricity
  market
• The following draft LTRAWG recommendations
  contain necessary elements that will help Ontario
  move toward a complete and workable approach to
  addressing long-term resource adequacy within a
  competitive market framework

30
Draft Strawman Conclusions and Recommendations

• The principle recommendations contained in the
  Strawman are
• 1) Work to introduce more realistic prices better
  reflecting their scarcity value, in conjunction
  with the implementation of some form of nodal
  pricing, the development of greater
  price-sensitive demand-response, and increased
  competition amongst suppliers
• 2) LSEs (multiple) should be created and
  authorized to undertake the function of supplying
  energy to default customers (who do not choose an
  alternate supplier, e.g. retail marketer)
• These LSEs would not have capacity procurement
  obligations

31
Draft Strawman Conclusions and Recommendations

• 3) Ontario should continue to meet at least the
  NERC one day in ten years reliability standard
  however, Ontario and neighbouring US
  jurisdictions should work with NERC to introduce
  a more economic approach to defining this
  reliability standard
• 4) IMO should develop a resource adequacy
  (capacity) forward auction market to better
  ensure compliance with NERC reliability standards
  and to achieve appropriate levels of resource
  adequacy

32
Draft Recommendations

• RECOMMENDATION (1) Work to introduce more
  realistic prices better reflecting its scarcity
  value in conjunction with the implementation of
  some form of nodal pricing, the development of
  greater price-sensitive demand-response, and
  increased competition amongst suppliers
• The following elements need to be in place
• Prices should more accurately reflect shortage
  and near-shortage conditions, accounting for
  locational differences
• All loads must be represented by many active
  market buyers
• Sufficient price-responsive demand
• Competitive suppliers
• Liquid contracting markets
• Market power mitigation without unnecessarily
  suppressing competitive prices necessary to
  induce new entry

33
Draft Recommendations

• RECOMMENDATION (1) Continued
• Work to put some of these elements in place has
  begun (e.g. increased price-responsive demand,
  Pricing Team initiatives, etc.)
• This work should continue and expanded to include
  the missing elements
• Acknowledgement that investigations of nodal
  pricing are just beginning
• Some missing elements require changes outside of
  the IMO-administered markets

34
Draft Recommendations

• RECOMMENDATION (2) LSEs (multiple) should be
  created and authorized to undertake the function
  of supplying energy to default customers (who do
  not choose an alternate supplier, e.g. retail
  marketer)
• The implementation of Bill 210 effectively
  removed 50 of the loads (mainly default supply
  customers) from the market (as these loads pay a
  fixed electricity charge and have no incentive to
  be price-responsive)
• It is essential for default supply customers to
  be represented by active market buyers (with
  ability and incentives to participate in spot and
  contracting markets)
• Therefore, LSEs should be created with the
  obligation to supply energy to all default supply
  customers and thus, all loads would be
  represented by active market buyers (e.g.
  industrial loads, LSEs, retail marketers)

35
Draft Recommendations

• RECOMMENDATION (2) Continued
• Creation of multiple LSEs can provide the
  following market benefits
• Necessary counterparties to bilateral contracts
  and participation in the spot markets
• Incentives for more demand-response, demand-side
  management and conservation
• Incentives to develop distributed generation to
  serve their load customers
• OEFC no longer has to finance differences between
  spot prices and fixed charge
• Multiple LSEs provide greater buy-side
  competition, as opposed to one single buyer
• Default customers would be hedged from wholesale
  spot price volatility through fixed-rate
  contracts

36
Draft Recommendations

• RECOMMENDATION (2) Continued
• LSEs should not be obligated to procure forward
  resources (capacity) on behalf of their load
  customers
• Experience in the Northeast US markets (NYISO,
  PJM and ISO NE) has shown the following problems
• Complication with retail access creates
  significant risks for LSEs to procure forward
  resources
• Difficulties in determining appropriate
  deficiency charges to be levied on LSEs when
  resource obligations are not met
• Difficult to use actual performance and actual
  consumption measures
• Complexity associated with locational constraints
• Difficult to value installed capacity
  requirements in response to prices
• It is likely that Ontario would experience most
  of these problems if LSEs were to have the
  obligation of procuring forward resources
  (capacity)

37
Draft Recommendations

• RECOMMENDATION (2) Continued
• LSEs will be able to co-exist with LDCs (in
  their existing role) and retail marketers
• Criteria could be developed to allow large LDCs
  to establish an affiliate LSE
• Some markets have LSEs with default supply
  responsibilities alongside a competitive retail
  market
• Issues have not been fully addressed - OEB
  involvement has begun

38
Draft Recommendations

• RECOMMENDATION (3) Ontario should continue to
  meet at least the NERC one day in ten years
  reliability standard however, Ontario and
  neighbouring US jurisdictions should work with
  NERC to introduce a more economic approach to
  defining this reliability standard
• At the present time, Ontario is in compliance
  with the NERC standard administered through NPCC
• However, to better ensure future compliance with
  NPCC reliability criteria, Ontario should develop
  an explicit mechanism to help address resource
  adequacy

39
Draft Recommendations

• RECOMMENDATION (4) IMO should develop a
  resource adequacy forward auction market to
  better ensure compliance with NERC reliability
  standards and to achieve appropriate levels of
  resource adequacy
• In theory, a properly functioning market should
  result in an economically efficient level of
  resources. However, it is likely that this level
  of resources would be, on average, lower than the
  level called for under the present NERC
  reliability standards (and more likely lower than
  socially and politically acceptable levels).
  Therefore some form of explicit mechanism of
  assuring resource adequacy is required.
• The preferred method is a resource adequacy
  forward auction, this is consistent with the
  direction of the Northeast US markets and could
  provide for increased efficiencies towards
  addressing reliability on a regional basis

40
Draft Recommendations

• RECOMMENDATION (4)Continued
• A forward auction (e.g. auction held in 2005
  would oblige sufficient capacity to come to
  market in 2008 via must-offers for energy and
  ancillary services in the real-time or day-ahead
  market) allows planned resources (that have
  passed their permitting stage but do not have
  iron in the ground) to participate and ensure
  their future in-service date
• Incumbent generation, planned generation,
  demand-side resources/programs, and maybe
  transmission upgrades/expansion could qualify as
  resource adequacy providers within this market
• IMO could set different locational requirements
  for resources
• Implementation of a demand curve would mitigate
  market power and could appropriately value
  resource adequacy (i.e. capacity)
• Preliminary results from NYISOs demand curve and
  ICAP procurement are encouraging

41
Issues for Draft Recommendations Going Forward

• The following additional issues have been noted
  as impediments to achieving long-term resource
  adequacy in Ontario. These must eventually be
  addressed
• Lack of competitive suppliers
• Barriers to investment (from Feasibility
  Assessment)

42
Long-Term Resource Adequacy Working Group Level
of Consensus

• Consensus regarding the draft recommendations
• Acceptance of the notion of a comprehensive and
  holistic approach is required. Specifically with
  respect to the recommendations the following have
  consensus
• Recommendation (1) Improvements to the
  IMO-Administered Markets (e.g. more efficient
  pricing, increased demand-response, increased
  competition amongst suppliers, etc.). Nodal
  pricing should be investigated but note that
  comprehensive nodal pricing analysis is still
  required prior to making any decisions whether it
  should be implemented.
• Recommendation (2) Acceptance of the concept of
  creation of LSEs as active market buyers for
  energy on behalf of default customers
• Recommendation (3) Ontario must meet at least
  the NERC one day in ten years reliability
  standard and should work with neighbouring
  jurisdictions and NERC to introduce a more
  economic approach to defining this reliability
  standard

43
Long-Term Resource Adequacy Working Group Level
of Consensus

• Non-consensus regarding the draft
  recommendations
• Recommendation (2) Exact nature of and design of
  LSEs and coordination with LDC and retailers
  still to be explored
• Recommendation (4) Not all members agree that an
  explicit mechanism is required. If it is
  required, most members would prefer a forward
  auction-based approach to procuring capacity
• Some members prefer contracting obligations
  placed directly on loads (e.g. LSEs)
• Some members would like other central procurement
  options to be assessed (e.g. RFP or auction for
  new capacity)

44
Stakeholdering the Strawman and Next Steps

• LTRAWG has scheduled biweekly meetings until the
  end of this year
• LTRAWG is assessing the need and scope for
  interim / transitional mechanisms that could be
  made operational in 2004
• LTRAWG is assessing issues of high level design
  that can make resource adequacy mechanisms
  workable
• e.g. is it sufficient to incent new investment
  over the long-term
• These recommendations, in conjunction with clear
  and stable policies, must create sufficient
  conditions for greater long-term contracting in
  order to support new investment