December 19, 2013

1. December 19, 2013 Christopher Parent cparent@iso-ne.com | 413.540.4599 Analysis performed for the period of July 20 through November 30 Effects of Minimum Commitment Constraints to the Day-Ahead and Real-Time Markets

2. Background • The ISO presented a proposal to modify the cost allocation of Net Commitment Period Compensation (NCPC) associated with Local Second Contingency Protection Resources (LSCPR) • This proposal was accepted by NEPOOL at the December Participants Committee meeting • This proposal was filed with the Commission on December 9 • The driver for making the proposed change to NCPC cost allocation was the addition of the minimum commitment constraints in the day-ahead market (DAM) • Participants requested the ISO to perform additional analysis related to the impacts of the minimum commitment constraints which the ISO has included within this material

3. Analysis Approach • ISO performed a simulation of potential impacts to the day-ahead and real-time markets for the period of July 20 to November 30* holding all input assumptions constant except the new minimum commitment constraints • This analysis compared a simulated unit commitment of the DAM with and without the minimum commitment constraints to provide an estimate of: • Impacts to the DAM energy price • Reduction in the real-time surplus capacity • Frequency of real-time reserve pricing* • A summary of the frequency and size of historical LSCPR commitments is also included * Additional analysis was provided since the prior material was posted related to reserve pricing and an additional month of analysis for November

4. Minimum Commitment Constraints reduce DAM prices with no change in market behavior • The ISO ran simulated unit commitment cases, with and without minimum commitment constraints in the DAM, to analyze the impact to system energy price in the DAM. There was no analysis of local pricing impacts

5. Real-time surplus capacity is consistently reduced when these constraints bind in the DAM • Using the simulated DAM cases, the reduction in the real-time surplus capacity was determined by evaluating which units were committed without constraints, but were not committed with constraints (“excluded units”) • The EcoMax from the units that were displaced from the DAM as a result the minimum commitment constraints binding would not be available in real-time which leads to the reduction in real-time surplus capacity

6. Reductions in real-time surplus capacity may result in more frequent and higher real-time reserve prices • 14 hours in the study period could have had increased real-time system TMOR pricing for some or all intervals of the hour • Three of these hours could have had additional TMOR RCPF pricing for some or all intervals of the hour • The determination if an hour could have had system TMOR pricing was made by comparing the total operating reserve requirement against the total reserves available in real-time minus the reserve capability of the excluded units • Insufficient reserve capability implies redispatch would have been required to maintain reserves which would have resulted in pricing • The determination if an hour could have had TMOR RCPF pricing was made by comparing the load and total operating reserve requirement for the system against the total EcoMax available minus the EcoMax of the excluded units • Insufficient capability to meet the load and reserve requirements in real-time implies that there would have been RCPF pricing. Note: All analysis was performed hourly and ignores variations that may occur at a 5-minute basis within the hour. Evaluating impacts on a five-minute basis would likely result in additional hours being impacted.

7. LSCPR commitments have been increasing in size and frequency in recent years • Commitment statistics are measured as hourly values over which LSCPR commitments occurred

8. Commitments for LSCPR in the DAM reduce real-time surplus and improves real-time price formation • Analysis is consistent with expected outcomes; • Reduces unnecessary commitment that occurs in the “wrong” location in the DAM • Reduces real-time surplus capacity which will mitigate real-time energy and reserve price distortion • Increase frequency and magnitude of reserve pricing in real-time • Reduce the need to declare minimum generation warnings and events • The ISO expects that the markets will respond to more volatile real-time prices and participants would modify their behavior in response to modeling these constraints in the DAM which would result in the DAM price achieving a new equilibrium point (not necessarily lower than the current prices)