MCPE and Offer Cap/Floor Consistency, etc.

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MCPE and Offer Cap/Floor Consistency, etc.

• Dan L. Jones
• Vice President
• Director, ERCOT IMM
• Potomac Economics
• ERCOT TAC/WMS Meeting
• Austin, Texas
• June 13, 2008

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Background

• The objective in establishing the values for CSC
  shadow price caps (SPCs) has been to produce MCPE
  outcomes that remain within the bounds of the
  applicable offer cap
• The initial SPCs were set at 2,500/MW when the
  offer caps were 1,000/MWh.
• The strongest zonal shift factor difference is
  approx. 0.40.
• It is no coincidence that 0.40 x 2,500 1,000
• In 2007, the offer caps were raised to
  1,500/MWh. Although we recognized the
  disconnect between the increased offer caps and
  the new offer caps, no change to the SPCs was
  proposed in 2007.
• In 2008, the offer caps were raised to
  2,250/MWh.
• In January 2008, increased SPCs were proposed to
  realign the SPCs with the offer caps that were
  soon to be well in excess of the 1,000/MWh offer
  cap that formed the basis for the original SPCs.

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5,600/MW SPCs

• The SPCs of 5,600/MW were proposed to align with
  the new 2,250/MWh offer caps effective March 1,
  2008
• Again, it is no coincidence that 0.40 x 5,600
  2,240.
• Although the offer caps have increased to 2,250,
  the offer floor in the ERCOT Protocols remains at
  (1,000)/MWh.
• Because of the new asymmetry in the offer caps
  and floors, it was observed that, although the
  new SPCs would result in maximum MCPEs generally
  within the bounds of the offer caps under all
  conditions experienced to date in the ERCOT
  market (more on this later), the new SPCs could
  result in MCPEs much lower than the offer floor
  (e.g., lt (2,000)/MWh.
• An MCPE floor of (1,000)/MWh was proposed to
  address this circumstance, but the WMS declined
  to endorse this recommendation

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MCPEs Well in Excess of the Offer Caps

• In May 2008, there were a handful of intervals in
  which two zonal constraints were simultaneously
  binding, one or more of which was unresolved.
• To my knowledge, such conditions have never
  before existed in the ERCOT wholesale market.
• Under these circumstances, the existing shadow
  price caps can result in MCPEs in the range of
  4,500/MWh
• Under more severe circumstances not yet
  experienced, some zonal MCPEs could exceed
  6,000/MWh.
• While such circumstances were known to
  mathematically possible, they were not
  contemplated based on experience.
• Observing these extraordinary outcomes that are
  inconsistent with the original objective of
  producing MCPEs that remain within the bounds of
  the offer caps, we began analyzing solutions over
  a week ago to address these circumstances.

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Proposed Solution

• Reduce the SPCs from 5,600 to 5,000/MW
• The 0.40 zonal shift factor difference can be
  somewhat stronger in some months for some
  constraints.
• Increasing gas prices have significantly
  increased the non-congestion component of all
  zonal MCPEs.
• Both of these factors can lead to MCPEs greater
  than the offer caps even when only one zonal
  constraint is binding and unresolvable with the
  5,600/MW SPC.
• Impose an MCPE cap of 2,250/MW and a MCPE floor
  of (1,000)
• The caps and floors will only potentially come in
  to play when there is zonal congestion, and only
  when the MCPE would have otherwise exceeded
  2,250/MWh or been less than (1,000)/MWh.
• The cap will most likely only be applied when
  there are two or more simultaneously binding
  constraints, one or more of which is
  unresolvable.
• The floor may be applied when only one binding
  constraint exists.
• These changes will not cause any resource to be
  dispatched at a price lower than its offer price.
• Any time that an MCPE is subject to a cap or
  floor, ERCOT will be required to adjust the
  shadow prices to align with the adjusted MCPEs.

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N-S Constraint Nodal Simulation

1. This is only a simulation of unresolvable
   congestion under nodal SCED. Actual results will
   vary.
2. It is fairly difficult to create a constraint
   that nodal dispatch cannot resolve.
3. Prices are high across the South and Houston
   Zones, but the 2,000 prices are limited to a
   very small region.

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2002-2008 Peaker Net Margin
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2008 Zonal Peaker Net Margin
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Results Comparison
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5,000/MW CSC Shadow Price Cap
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2,500/MW CSC Shadow Price Cap