December 10-11, 2013 | Nepool Markets Committee

1. December 10-11, 2013 | Nepool Markets Committee Matthew Brewster market development mbrewster@iso-ne.com |413.540.4547 Improving market incentives for flexible resources when responding to dispatch Subhourly Real-Time Market Settlements

2. Subhourly settlement will help improve the market incentives for flexible resources • Resource performance and flexibility in response to dispatch is an important factor in maintaining system reliability • Hourly real-time market settlements use averages of quantities and prices for the hour • Subhourly compensation that better aligns performance with pricing intervals will improve response to current conditions • Implementing subhourly settlement requires additional data and adapting market designs for subhourly intervals

3. Resource performance and flexibility in response to ISO dispatch improves system reliability • The Strategic Planning Initiative (SPI) initiated in 2011 cited resource performance and flexibility as a key risk to the continued reliable and efficient operation of the New England electric system • Subhourly real-time settlement was identified as one of the potential solutions in the SPI discussions to help improve incentives for resources responding to ISO dispatch

4. Hourly settlements use averages of quantities and prices occurring within the hour • The real-time markets are for Energy, Reserve, and Regulation • Resource dispatch (quantity) is determined subhourly (e.g., 5 minute) • Market prices are established every 5 minutes • However, the settlements are performed using market prices and quantities averaged* over hourly intervals • For example: Settlement uses the hourly quantity and price *Energy quantity is determined using megawatt-hour (MWh) per hour meters; “average” is used for convenience of discussion.

5. Subhourly credits that better align performance and pricing can help improve dispatch response • As prices rise (or fall) flexible resources (those capable of changing output quickly) will have a stronger market signal to respond immediately • Compensation will be established by coincident market prices • The improvement of incentives will be most pronounced at times when the system is stressed • For 15 minutes immediately following a contingency event, RT energy LMPs are at the highest prices observed in the market (on average) • Payment for energy provided post-contingency is affected (lowered) by LMP prices in intervals adjacent to this period

6. A post-contingency dispatch example to illustrate market incentive (hourly and subhourly settlement) Hourly settlement: fast-start dispatched on following the contingency • Generator marginal energy offer: $80/MWh • Credit (hour) = $4,000 = ($80/MWh LMP x 50 MWh) • Marginal cost (hour) = $4,000 = ($80/MWh energy offer x 50 MWh) • Net position for this dispatch (hourly settlement) = $0 Contingency event at 00:20 This demonstration uses 15 minute intervals to simplify the presentation Fast-Start on at 00:30

7. Post-contingency dispatch example (cont.) Subhourly settlement: fast-start dispatched on following the contingency • Generator marginal energy offer: $80/MWh • Interval 3 (00:30-:45) • Credit = $3,000 = ($120/MWh LMP x 100 MW x ¼ hour) • Marginal Cost = $2,000 = ($80/MWh energy offer * 100 MW x ¼ hour) • Interval 4 (00:45-:60) • Credit = $2,500 = ($100/MWh * 100MW x ¼ hour) • Marginal Cost = $2,000 = ($80/MWh energy offer x 100MW x ¼ hour) • Net position for this dispatch (subhourly settlement) = $1,500 Contingency event at 00:20 Fast-Start on at 00:30

8. The post-contingency example illustrates subhourly settlement improves incentives and efficiency • Subhourly settlement better compensates this resource for the market value of the energy at the time it was provided • The energy payment reflect the efficiency gain of $1,500 the resource offered to the system • An average of the LMPs in the hour created price risk for periods when the resource was offline economically • This example supports a broader observation that, in general, subhourly settlement will result in higher compensation for flexible resources

9. Focus of this project is to implement subhourly settlement for dispatchable resources • Resources capable of responding to economic dispatch in real-time present the greatest opportunity for reliability and efficiency improvements • i.e., generators and pumped storage load (DARD) • Coordinated Transaction Scheduling (CTS) already requires subhourly settlement for external transactions • Price Responsive Demand under full integration • ISO will continue evaluating the value of subhourly settlement for asset-related demand and load assets

10. Subhourly meter reading values are not currently available to the ISO • Meter readings of energy output/consumption for dispatchable resources are not currently available to ISO • Existing infrastructure for reporting meter data to ISO (and ISO systems) are configured for hourly values • ISO does have instantaneous metering (telemetering) for resources participating in the markets, but these data are not settlement-quality

11. Current market designs will not be changed, but must be adapted for subhourly intervals • Market changes will predominately require adapting existing design principles so they apply at subhourly intervals • Modifications are required for: • Real-Time Energy, Reserve, and Regulation markets • Net Commitment Period Compensation (NCPC) • Forward Reserve market • Forward Capacity market

12. Summary and schedule • Subhourly settlement will help improve market incentives for flexible resources • Performance and flexibility are important for system reliability • Aligning performance and pricing can help improve dispatch response • Implementation requires data and adapting market designs • Anticipated stakeholder schedule