MEP Update to Market Advisory Council

1
Market Evolution Program
Steve Mullins/Jason Chee-Aloy/Leonard
Kula Document ID MAC-04-07
2
Locational Marginal Pricing

• Preliminary analysis indicates that underlying
  pricing issues need to be dealt with before any
  recommendation can be made

Environmental Information Tracking

• Comment period on draft regulation closed May 5
• RFP for system issued and closed June 5

3
Wholesale/Retail Integration

• Discussion paper issued May 15
• Seeking input by June 23
• Provides a list of activities under consideration
  e.g. pilot projects on load aggregation
• As part of its investigation into market
  integration
• What other activities should the IMO support?
• What other marketplace/technological developments
  should the IMO monitor?
• Does your organization have any proposals that
  relate to the identified activities?

4
Multi-Interval Optimization

• Dispatch solution for the next 5 minute interval
  that optimizes based on a defined set of criteria
  over a given period of time
• Multi-Interval Optimization Working Group (MIOWG)
• 11 members
• Have met a number of times to determine
• Objectives
• Design Requirements

5
Multi-Interval Optimization

• March IMO Board recommendation to proceed with
  IMO proposed solution
• Primarily as a result of concerns with estimates
  for the calculation time with the ABB solution
• MIO Working Group has determined design
  requirements which ABB are assessing
• ABB now have a MIO engine that can be used to
  baseline calculation times for the ABB proposed
  solution

6
Multi-Interval Optimization

• Next Steps
• Assess ABB calculation time results
• Assess impact on schedule and budget to implement
  ABB solution
• Make recommendation to continue with IMO solution
  or adopt ABB proposed solution

7
Consultation/Information
http//www.theimo.com/imoweb/consult/marketDev.asp
Working Groups
IMO
Stakeholders
8
Long Term Resource Adequacy

• Jason Chee-Aloy

9
Overview

• Stakeholder process
• Objectives
• Evaluation Criteria
• Paths and Options
• Feasibility Assessment Conclusions
• Feasibility Assessment Recommendations

10
Stakeholder Process

• Long Term Resource Adequacy Working Group
  (LTRAWG) was formed
• Over 20 members
• 8 meetings have been held since March 7
• LTRAWG has agreed on objectives, evaluation
  criteria, options/paths, conclusions and
  recommendations contained in feasibility
  assessment
• LECG (consulting firm) has provided expert advice
• Other stakeholdering efforts have included the
  MOSC, RASC, MEP webcasts and workshops

11
Objectives

• Review and recommend appropriate mechanisms to
  define requirements, allocate obligations and
  implement market-based allocation of demand and
  supply resources to address Ontario's long-term
  resource adequacy needs
• Recognize that appropriate mechanisms may extend
  beyond the IMOs wholesale market jurisdiction
  and require policy or regulatory support from
  others
• Utilize existing demand, supply and transmission
  resources efficiently

12
Objectives

• Through market-based signals, facilitate
  efficient development of new generation sources,
  demand-response mechanisms and the mitigation of
  transmission limitations
• Seamlessly integrate with other IMO-administered
  markets
• Mitigate seams conflicts with neighbouring
  jurisdictions while recognizing FERC and other US
  initiatives

13
Main Evaluation Criteria

• Assure Physical Adequacy of the Power System
• Efficient Allocation of Obligations and Costs
• Accommodate Market Entry
• Address Gaming and Market Power
• Supports Development and Refinement of
  Competitive Electricity Markets
• Implementation that is Sustainable and Flexible

14
Paths and Options

• Path A Complete the initial design and
  structures without an explicit Resource Adequacy
  Requirement (RAR)
• Option 1 - Do not introduce any RAR and rely on
  results of improved energy and ancillary service
  markets alone
• Path B Create Load Serving Entities (LSE) and
  assign a RAR to these entities
• Option 2 - LSEs required to contract forward
  capacity requirements
• Option 4 - LSEs required to secure forward
  capacity requirements and IMO administers a
  resource adequacy auction market

15
Paths and Options

• Path C Allow a central agency to procure
  adequate resources and allocate the resource
  acquisition costs to loads
• Option 3 - Government agency required to contract
  forward capacity
• Option 5 - IMO required to secure forward
  capacity on behalf of LSEs and IMO administers a
  resource adequacy auction market
• Option 6 - IMO Required to secure forward
  capacity on behalf of LSEs and IMO administers a
  resource adequacy call-option auction market

16
Issues

• All paths have various sub-options as potential
  solutions
• Although no mechanism is widely accepted as
  effectively addressing long term resource
  adequacy, most jurisdictions have implemented or
  are developing an explicit Resource Adequacy
  Requirement (RAR)
• Where the IMO does not have sole jurisdiction,
  significant constraints and barriers exist to
  implementing some of the identified options
• Compared to suppliers, most buyers do not have
  the ability to participate in wholesale spot
  markets and enter into bilateral contracts

17
Issues

• FERC has modified their position (White Paper,
  April 2003) from their Standard Market Design SMD
  NOPR (July 2002)
• No longer impose an explicit Resource Adequacy
  Requirement (RAR)
• Final rule will not change state authority over
  RARs and regional transmission planning or
  include a minimum level of resource adequacy

18
Conclusions

• Unclear whether any Path or Option can overcome
  existing barriers to investment or be effective
• Barriers to investment
• Lack of consistent electricity policies
• Independence of regulatory entities
• Market power on behalf of a dominant supplier
• Lack of liquid contracting market
• Lack of appropriate investment incentives
  resulting from inefficient market signals
• Effectiveness cannot be assured as several
  essential market design elements of the intended
  market framework are missing or have been
  compromised (e.g. inability or disincentives of
  buyers to enter into bilateral contracts)
• Policy issues need to be resolved, which require
  decisions that impact the market design framework

19
Feasibility Assessment

• Seven recommendations result from the feasibility
  assessment
• The first five recommendations relate to policy
  issues
• Some of which cannot be made solely by the IMO
  and its stakeholders
• The process for making these policy decisions is
  a strategic point to be resolved outside of the
  LTRAWG
• The last two recommendations address the timing
  of the development and implementation of an
  option to address long-term resource adequacy

20
Feasibility Assessment

• Policy-related recommendations
• Barriers to investment must be addressed to
  better ensure market entry to address long-term
  resource adequacy
• The market buyer must be defined (in
  particular, for small default electricity
  consumers)
• Improvements to the current IMO-administered
  market design should be implemented, irrespective
  of the option to address long-term resource
  adequacy
• Given the decision of who the market buyer is,
  the ability and magnitude of spot prices to clear
  under shortage or near-shortage conditions must
  be addressed
• The appropriate level of reliability must be
  decided

21
Feasibility Assessment

• Decision Timeframe Recommendations
• Policy issues should be addressed and an option
  recommended by the end of the year in order to
• Address potential inadequate future supply
• Allow sufficient lead-time required to develop
  new resources
• Provide potential investors with required signals
• If policy issues are not addressed, a recommended
  option is required sooner
• i.e. if the barriers to investment, market
  buyer definition and the magnitude of spot
  prices under shortage conditions are not
  addressed

22
Day Ahead Market

• Leonard Kula

23
Day Ahead Market

• Recap - activities since Feb 18 MAC
• Day Ahead Market high level design
• Proposed features
• Benefits
• Development process

24
Activities Since Feb 18 MAC

• DAM material
• Objectives and key principles (Mar 6)
• updated to reflect comments (June 9)
• Feasibility Study (Mar 31)
• recommended to IMO Board (Mar 28) that the IMO
  proceed with stakeholdering and high-level design
  for a FERC standard market design-style DAM
• High-level DAM design (May 30)

25
Activities Since Feb 18 MAC

• Day Ahead Market Working Group (DAM WG)
• open to all stakeholders
• formed after Feb 18 MAC
• 28 members representing loads, generators,
  distributors, marketers and other stakeholders
• have met 13 times to discuss DAM
• objectives
• feasibility study and DAM alternatives
• features and impact upon participant classes
• design strawman and issues

26
Activities Since Feb 18 MAC

• Broader participant stakeholder activities
• DAM material posted to IMO web enabling comments
  and discussion from all market participants
• DAM WG acts as a sounding board
• DAM high-level design workshops
• 4 sessions - May 30 and June 3
• 2 sessions - supplier perspective
• 2 sessions - consumer perspective
• helped stakeholders understand Day Ahead Market
  initiative
• additional opportunity for stakeholders to
  provide comments

27
Day Ahead Market

• Recap - activities since Feb 18 MAC
• Day Ahead Market high level design
• Proposed features
• Benefits
• Development process

28
DAM High Level Design

• DAM performs two functions
• 1) Market - allows participants to buy and sell
  energy and sell operating reserve lock-in prices
  day ahead
• bid/offer based auction with clearing price
• optimization function maximizes gain from trade
• outcome
• quantity of energy sold equals quantity bought -
  satisfy bid load
• financial commitment
• drives real-time market toward becoming a
  balancing market
• 2) Process - commits additional resources to meet
  forecast load

29
Day Ahead Market

• Recap - activities since Feb 18 MAC
• Day Ahead Market high level design
• Proposed features
• Benefits
• Development process

30
Proposed Features

• Participation
• participants with physical resources
• price and quantity locked-in day ahead - drives
  operational certainty in real-time
• importers and exporters
• facilitate inter-regional trading with Ontario
  neighbours
• virtual buyers and sellers
• open to all DAM participants
• buy/sell in DAM - quantities automatically
  sold/bought in real-time (through the settlement
  process)
• consistent with neighbouring markets

31
Proposed Features

• Three-part offers/bids
• allows participants to separate fixed and
  variable components of energy offer/bid
• energy offer/bid can more closely represent
  incremental cost of supply/benefit of consumption
• does not apply to virtual offers/bids
• submit physical characteristics of resources
  (start time, minimum run times, etc.)
• resources will be scheduled in a more realistic
  fashion that respects their capabilities

32
Proposed Features

• Multi-pass calculation engine
• outcomes
• financially binding quantities of energy
  bought/sold
• uniform energy price and uniform reserve prices
• schedule of committed resources
• advisory schedules
• optimized solution...
• over 24-hour period of the day ahead
• amongst three-part bid components
• simultaneously optimize energy and operating
  reserve markets

33
Proposed Features

• Unit Commitment
• process that commits resources day ahead for
  reliability purposes to meet forecast demand
• no prices are set
• output is a set of committed resources
• virtual bids/offers not used
• bid production cost guarantee
• keeps resources whole to their commitment costs -
  drives resources to show-up in real-time

34
Day Ahead Market

• Recap - activities since Feb 18 MAC
• Day Ahead Market high level design
• Proposed features
• Benefits
• Development process

35
Benefits

• Enhances trading opportunities for market
  participants and forward price certainty for
  market participants
• participants can buy/sell energy and sell
  operating reserve and lock-in prices day-ahead
• transparent day-ahead price should foster other
  forward market products that could be indexed to
  the IMO DAM prices
• virtual buyers and sellers increase liquidity,
  mitigate market power and facilitate arbitrage
  between DAM and RTM prices
• Improves overall efficiency of the Ontario
  electricity market
• allows for direct participation of loads in
  IMO-administered markets additional opportunity
  for demand side responses
• optimized schedule that takes advantage of
  day-ahead time-frame

36
Benefits

• Provides relief to some of the problems evident
  in current market design and operation
• Intertie transactions implemented and priced
  day-ahead
• moves transactions from RTM to DAM
• reduces uncertainty associated with intertie
  trading
• should reduce IOG in RTM
• Improved commitment process for all resources
  (generators and loads)
• allows the IMO to commit additional resources to
  meet forecast demand
• uses three-part bids and optimized approach ?
  increases efficiency
• reduces bidding and commitment risk
• helps the IMO assure reliable operations in
  real-time

37
Benefits

• Provides relief to some of the problems evident
  in current market design and operation
• Lock-in price and quantity day-ahead ? drives
  operational certainty for loads and generators
• dispatchable facilities - participants can
  offer/bid into RTM to be dispatched to DAM
  quantities (can also choose to be price
  sensitive)
• non-dispatchable facilities - day-ahead price
  certainty can drive RTM supply/consumption
  activities
• DAM volatility should be less than RTM volatility
• participants can hedge against real-time
  volatility

38
Day Ahead Market

• Recap - activities since Feb 18 MAC
• Day Ahead Market high level design
• Proposed features
• Benefits
• Development process

39
Development Process

• Cost to develop and implement
• 30 M, -10 / 30
• Implementation date
• late 04 / early 05
• By next MAC (Oct 8)
• DAM design strawman - develop increasingly
  greater levels of detail
• DAM system requirements - start of development
• Market Rules - begin to draft and stakeholder
  rules

40
Development Process

• Continued commitment to extensively involve
  stakeholders in the development process
• DAM WG actively involved to identify issues and
  discuss options to address them
• Top 4 issues
• demand-side participation
• supply-side participation (MPMA)
• consistency of DAM and RTM pricing methodology
• interchange scheduling
• all DAM WG material posted to Consultation page
  on IMO web-site all stakeholders invited to
  comment