Market Design for Winter Energy Security in New England

1. Market Design for Winter Energy Security in New England Discussion of options Presented to • NEPOOL Markets Committee Presented By • Sam Newell • David Luke Oates • January 9, 2019

2. Summary • ISO-NE’s MDAM/EIRC proposal has merit (with modifications), but it is complicated and it may only slightly reduce OOM actions • A simpler approach could enhance existing markets by: • Allowing more opportunity cost bidding to self-posture • Based on private views, similar to MDAM/EIRC, but with less forward price discovery and more market mitigation challenges • Modified MDAM/EIRC could be considered as a future improvement • Triggering RCPFs earlier and/or procure energy-secure contingency reserves several days forward to increase incentives • Introducing a resource-neutral pre-winter procurement of preparedness

3. Problem Statement Recap • New England has winter energy security challenges • Dependence on natural gas that can be unavailable in cold snaps • Vulnerability illustrated by posturing, the OFSA, RMR filing • Recent experience and the OFSA suggest this is addressable if: • Existing non-gas-dependent resources remain available, • Gas resources procure sufficient fuel, and manage inventories • The current market design effort aims to meet these needs at low cost, consistent with the region’s market/regulatory framework • Define needs • Express needs to the market, so all solutions can compete • Avoid OOM actions

4. Scope • Getting spot right should support efficient operations and translate backwards into adequate, efficient forward decisions • But centralized forward markets may help coordinate imperfect info and can incorporate higher planning standards • Years Ahead • Investment, FCM (potential focus) • Months Ahead • LNG procurement (potential focus) • Days Ahead • Inventory management(ISO’s focus) • Day Ahead • DAM • Real Time • PFP • RTM w/E&AS offers + RCPFs (could allow more op costs)

5. ISO-NE’s MDAM/EIRC Proposal • Seems fit-to-purpose, addressing several days of needs and recognizing the value of inventory when inventory constraint is binding (w.r.t., the following days’ energy demand + buffer). • But does it accomplish enough, and is it worth 6 years to put in place? • Suppliers may offer future energy at cost if they believe market is liquid enough that prices reflect risk-adjusted expected future spot (disciplined by market participants’ collective views). • Enables fuel-limited resources clearing for future sales to posture out of current energy. • Enables locking in future sales (e.g., with higher cost expedited delivery options).

6. A Mandatory Alternative? • The ISO could more directly procure what operators want, through a forward procurement of all energy and contingency reserves needed for the next several days of a predicted cold snap; but this may be heavy handed.

7. A Simpler, More Expedited Approach • Leverage existing spot signals, but with more opportunity cost bidding • Boost incentives for inventory through earlier triggering of RCPFs, perhaps a multi-day-ahead procurement of an energy-secure contingency reserve • Secure enough capability months ahead through competitive pre-winter forward procurement • This could be done well before 2025 • Could add MDAM/EIRC as a later enhancement

8. Review of Existing Mechanisms • Start by understanding inadequacies of the current design. • Suppliers should provide supply against expectations of a several-thousand-dollar price (incl. energy w/RCPFs + PFP) in the event of operating reserve shortages. • This signal does not seem to be enough for the ISO, as evidenced by its RMR actions and by its Chapter 2b and Chapter 3 proposals. • Why not, if PFP and other signals were once advertised as the solution? • Is there something special about winter energy security challenges, such that reliability can be expected to be worse than 1-in-10? • Yes, per RMR analysis; vulnerability also illustrated by OFSA. • Or do operators aim to avoid all OP4, not just OP7, implying a higher reliability target? • Or are price signals inadequate if participants believe OOM actions will prevent shortages? • Or does ISO-NE want forward assurance that spot signals may not provide? • In addition to potentially inadequate incentives (or not enough visibility/assurance) for energy security, posturing to manage inventories (and translate future scarcity backwards) is not working in-market • Difficulties w/opportunity cost bidding.

9. Enhancements to Existing Mechanisms • Fully enable use of opportunity cost bidding (most important). • Could self-posture in-market and properly translate anticipated scarcity to current prices (incents current imports, gas use, DR). • Effect would be similar to MDAM/EIRC, based on market participants’ views of future energy prices, but with less forward price discovery and less opportunity to lock in future sales. • How can market mitigation issues be reasonably resolved? • Enhance incentives by increasing prices of RCPFs and PFP? • Likely unnecessary, as combined signal is already quite high, up to $10,000/MWh (up to $2k energy + $3,050 RCPF + $5,455 PFP). • Higher prices would increase risk to suppliers selling forward. • Enhance incentives by adjusting thresholds for triggering RCPFs and PFP? • High pricing would occur earlier and more often.

10. Potential Addition of Fuel-Secure Contingency Reserves • Comparable to above incentives, actually increase the demand for reserves, in a way that gives the operator more energy-secure resources to deploy if needed: procure fuel-secure contingency reserves for the next several days, to be held out of current/future energy market unless needed. • Simpler and more modest than ISO proposal because just contingency reserves, not MDAM + inventory for future energy & buffer. • Procure 1-2 GW for each of the next 10 days of a cold snap, where each MWh has to be backed by a unique MWh of inventory. • Offers to be submitted by suppliers based on their costs and estimated opportunity costs. Those that clear are postured from DA/RT energy. • As with other operating reserves, if a resource is called for energy, it gets paid for energy and buys out of its reserve position. • Like other operating reserves, shortages lead to RCPFs. • This is basically the “Option 3” we presented last time.

11. Potential Pre-Winter Positioning • Consider a competitive, multi-month-forward procurement of winter preparedness: • Timing: Procurement aligned with LNG contracting timeframes, demonstrating to ISO operators that they have sufficient total capability to meet winter needs. • Quantity demanded: Would cover generation need (both MW and MWh) from non-pipeline-gas-dependent resources, over the course of a hypothetical cold snap. • Resource participation: Both “stock” and “flow” resources that do not rely on pipeline gas could participate. Resources could offer MWh consistent with their inventory (including refueling) available during the defined cold snap. • Nature of obligation: Cleared resources must offer into the energy market, subject to committed fuel availability. • Settlement: No re-settlement against DA or RT energy products, since these are time-specific and do not correspond to general seasonal preparedness. • This is a high-level concept, and several design elements would need to be developed, including exactly how to address the MW shape of cold snap demand, define the obligation, account for inventory drawdowns and refueling, mitigate the market, etc.

12. Presented By • Sam Newell Principal, Boston +1.617.864.7900 Sam.Newell@brattle.com • David Luke Oates Associate, Boston +1.617.862.1951 DavidLuke.Oates@brattle.com 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.