Market Pricing Issues Integrated Proposal

1. Market Pricing Issues Integrated Proposal John MacKenzie and Darren Finkbeiner Market Operations Standing Committee of the IMO

2. Goals of Consultation • MOSC review and feedback on proposed integrated approach • Identification of issues (incl. implementation) that need to be addressed as we move forward Market Operations Standing Committee of the IMO

3. Background Market Pricing Issues • Disconnect between Pre-dispatch prices and Real-time prices • Counter-intuitive prices in times of shortage • Size, content and variability of uplift Market Operations Standing Committee of the IMO

4. Background Significant Contributing Factors • Sensitivity to changes from forecast to Real-time • Manual use of ‘out of market’ sources of operating reserve • Pre-dispatch and Real-time price determinations Market Operations Standing Committee of the IMO

5. Background The contributing factors also; • distort the economic signals of the market, which detracts from efficient operation of IMO markets • minimize ability of Market Participants to respond to price causing the IMO to use ‘out of market’ control actions, which jeopardizes reliability of IMO grid Market Operations Standing Committee of the IMO

6. The Integrated Approach • Initiatives that address the pricing issues are to be implemented in four stages • Each stage is comprised of one or more initiatives • End state objective: Provide understandable market prices, efficient operation of IMO-administered Markets and reliable operation of IMO-controlled Grid. Market Operations Standing Committee of the IMO

7. Initiative Characteristics • Each initiative will improve one or more of the following: • Pricing Issues  Understandable/Rational Pricing • Market Efficiency • Reliability Market Operations Standing Committee of the IMO

8. Stage One • Includes Initiatives that are already underway: • Removal of the 4/2 hour Restrictions • Enhanced Market Information • Hour Ahead Dispatchable Load (HADL) • These initiatives will assist in: • Addressing Pricing Issues • Improving market transparency and efficiency • Reducing failed intertie transactions • Improving competition on the interties • Improving transparency in demand forecast • Improving reliability through increased price responsiveness (provide non-dispatchable loads with market mechanism to respond to price) Market Operations Standing Committee of the IMO

9. Stage Two • Includes Initiatives currently under development: • Reduction of Failed Intertie Transactions • Bring Available Spare Generation On-line in shoulder periods • These initiatives will assist in: • Addressing Pricing Issues • Providing the shock absorber required in the market to reduce use of out of market OR • Realizing expected benefits from new supply • Improving reliability Market Operations Standing Committee of the IMO

10. Additional Benefits of Stage Two • Necessary to reduce frequency of use of ‘out of market’ sources of operating reserve • more efficient price signals • minimize impact of offering ‘out of market’ sources into the market • Make market/system more robust, reliable and efficient in addressing changes between pre-dispatch and real-time Market Operations Standing Committee of the IMO

11. Reducing Failed Intertie Transactions • Current frequency and magnitude of failures is not acceptable • High priority for the IMO, NYISO and MISO • Stakeholder discussions are taking place to develop enhanced processes and systems to reduce frequency and magnitude of failed transactions between the IMO and other jurisdictions Market Operations Standing Committee of the IMO

12. Spare Generation On-Line • Goal to get available spare generation on-line in shoulder periods • Guarantee recovery of start-up, speed no load and minimum generation costs, and minimum run-time • Voluntary - consistent with rest of market commitments • Guarantee of these costs and having spare generation on-line is comparable and consistent with neighbouring markets/jurisdictions • Program is a natural progression towards a Day Ahead Market (Market Evolution Program) Market Operations Standing Committee of the IMO

13. Stage Three • Increase in market supply of ~2000 MW • Average HOEP could be lower by ~ $9, if market conditions remain the same (increased exports would moderate this impact) • Reduce the maximum requirement for imports to about 2500 MW resulting in more competition on the interties • Increases frequency and breadth of “shoulder periods” which increases frequency with which the market could benefit from having spare generation on-line Market Operations Standing Committee of the IMO

14. Stage Four • Offer ‘out of market’ sources of Operating Reserve into the market in a transparent manner • This initiative will assist in: • Addressing Pricing Issues • Improving market transparency • Improving reliability through improved rational price signals • Enhancing market credibility • Initiative could have upward pressure on average HOEP with upper bound of ~$2, if market conditions remain the same (mitigated by impact of other initiatives) Market Operations Standing Committee of the IMO

15. ‘Out of Market’ Operating Reserve • Prices set to a level that would lead to the use of ‘out of market’ sources at roughly the same frequency as they were used during the first year of the market. • Publish pricing strategy and review periodically and modify as required to keep use at an acceptable level. • Energy offer price set at $2000 to minimize impact on energy market prices Market Operations Standing Committee of the IMO

16. ‘Out of Market’ Resource Offers and Prices Market Operations Standing Committee of the IMO

17. Net Impacts of All Initiatives • Reduce frequency of need for ‘out of market’ control actions • Improve market efficiency, transparency • Improve reliability of IMO-controlled grid • Improve price signals • Downward pressure on HOEP and Operating Reserve prices • Downward pressure on uplift Market Operations Standing Committee of the IMO

18. Requirements and Schedule for Implementation • Reduction in failed transactions (June) • Increased supply of at least 1600 MW (June/July) • Bring Available Spare Generation On-line (mid-summer) • Offer ‘out of market’ sources of Operating Reserve in the market at specific prices (mid-summer) Market Operations Standing Committee of the IMO

19. Other Considerations • Market Evolution Program Initiatives • Day-Ahead Market • Multi Interval Optimization • Changes in MP behaviour in response to initiatives Market Operations Standing Committee of the IMO

20. Discussion Question What are the risks or issues in proceeding with the integrated proposal as presented today? Market Operations Standing Committee of the IMO

21. Next Steps • June 5th - Update IMO Board on integrated proposal and stakeholder feedback to date • June 11th - report to the MAC • June 18th - Special MOSC to consult on procedure and rule changes resulting from proposal • ongoing consultation with the Technical Panel Market Operations Standing Committee of the IMO