April 16, 2015 | NEPOOL markets committee Ben Ewing & Jon Lowell Market development Price Formation When Fast Start Resources Are Committed and Dispatched Fast Start Pricing – Impact Analysis
Goals of the Fast Start Pricing Design • Improve price formation by reflecting the cost of fast-start deployments through transparent market price signals. • Improve performance incentives for all resources during tight system conditions when reliability risk is heightened. • Address External Market Monitor’s recommendations • Address shortcomings of the current Fast Start Pricing methodology • Shortcoming #1 - Fast Start assets are generally unable to set price after the first dispatch interval, even though committed and dispatched economically • Shortcoming #2 - Relaxing EcoMin values in the dispatch solution distorts the system energy balance
Additional Information Available • These documents have been re-posted for the April MC meeting: • Memo: “Fast-Start Pricing Improvements – Revised Edition” • Detailed explanation of Fast Start Pricing examples • Powerpoint: “Fast Start Pricing” presentation at the March MC meeting • Includes examples from the memo and discussion of Fast Start Pricing design principles
Study methodology - Summary • 11 month study period (Jan 1, 2014 – Dec 2, 2014) • Re-run dispatch and pricing software using FS pricing logic • Simulate intervals when one or more eligible FS units were committed. • ~15,000 RT dispatch cases meet this criteria, of ~58,000 total cases in the study period (25% of all cases). • 5-min. simulated prices aggregated into hourly LMPs and RMCPs • Use simulated prices to compare actual market outcomes with simulated market outcomes under proposed FS pricing logic • RT energy and reserves, Lost Opportunity Cost, NCPC.
Study methodology – Context and Caveats • This is a retrospective simulation study methodology. • It estimates what would have happened in the 2014 study period with the proposed new rules. • Analysis employs the actual load, energy offers, unit commitment, and other system conditions that occurred during the study period. • These are assumed unaffected by the new FS pricing logic. • Future years’ system conditions may differ from the observed conditions during 2014.
Real-time Market Impact Summary • Notes: • Annualized values • Includes adjustment for Forward Reserve Obligation Charge, eliminating real-time • payment to resources already compensated in the Forward Reserve Market. • 3. Excludes approximately 17% of cases for which LOC could not be estimated, • and therefore may underestimate LOC (intervals where Fast Start EcoMins are relaxed under the current methodology)
Hourly LMP is unchanged in 70% of hours No change in 70% of hours Impact ranges from 1 cent / MWh to $5 / MWh in 20% of hours
FS pricing lowers RT NCPC payments, on net NCPC impacts are estimated by applying rules in effect as of Hourly Offers implementation to the historical study period. • Notes: • Annualized values • Excludes approximately 17% of cases for which LOC could not be estimated, • and therefore may underestimate LOC. • 3. Includes $3.6M of LOC payments as revenue offsetting a portion of total NCPC.
Longer term impacts on DAM and FCM • Over time, an increase in RT LMPs will affect DAM and FCM prices. • DAM. An increase in average annual RT LMPs should be expected to increase average annual DA LMPs by a similar amount. • 4.8% of the 2014 annual DA market value is approximately $400M. • FCM. An increase in suppliers’ DA market energy revenue should reduce FCM prices, by increasing suppliers’ infra-marginal energy revenue • This lowers FCA net going-forward costs and net CONE • This effect holds, to different magnitudes, whether new or existing sets FCA price • We cannot say with certainty how much one effect will offset the other, as different resources tend to set price in the FCM and DAM. • FS pricing will move money from the FCM into the energy markets, where it strengthens the RT performance incentives for all suppliers (when FS units operate)
Real-Time Energy Market Impact • Averages are across all hours in the study period
RT energy market Impact – monthly breakdown Largest price impacts seen in Jan – Mar due to tight operating conditions. For further info on these conditions see the May 2014 PC materials, beginning on slide 128. *Note: December data includes only two days (12/1/2014 – 12/2/2014)
RT energy market Impact – monthly breakdown Largest price impacts seen in Jan – Mar due to tight operating conditions *Note: December data includes only two days (12/1/2014 – 12/2/2014)
Average zonal LMP increases from FS Pricing Minimal price separation across zones, except during tight operating conditions in Jan 2014. *Note: December data includes only two days (12/1/2014 – 12/2/2014)
63% of hours affected by FS pricing are on-peak Notes: *December data includes only two days (12/1/2014 – 12/2/2014) On-peak hours defined as non-holiday weekdays, hours ending 08-23
Real-Time Reserve Market Impacts • Averages are across all hours in the study period, including those when RMCP = $0. • RMCPs shown are for Rest-of-System.
How much more frequently would Hub LMP exceed PER Strike Price? With RCPFs which were in effect during simulation period: (TMOR = $500, TMNSR = $850) With higher RCPFs which are currently in effect (TMOR = $1000, TMNSR = $1500): • FS pricing increases the estimated number of hours in which Hub LMP > PER Strike Price by 3-4 hours over the study period. *Notes: Averages are across only those hours in which Hub LMP > PER Strike Price Slide modified on 4/14/2015 from original posting
Anticipated Schedule • February MC meeting – conceptual overview • March MC meeting • Lost Opportunity Cost discussion • Detailed Examples • April MC meeting • Historical simulation of fast start pricing design impacts • Tariff language review • May MC meeting – request MC vote • June PC meeting – request PC vote • FERC filing – summer 2015 • Implementation - sometime in 2016