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May 6, 2014 – Markets Committee

May 6, 2014 – Markets Committee. ISO New England Staff. System & market Operations, Market Development, Market Monitoring . Discussion of proposed changes focused on Dual Fuel Capability, Unused Oil Inventory, Demand Response and potentially LNG. Winter Reliability Program. Table of Contents.

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May 6, 2014 – Markets Committee

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  1. May 6, 2014 – Markets Committee ISO New England Staff System & market Operations, Market Development, Market Monitoring Discussion of proposed changes focused on Dual Fuel Capability, Unused Oil Inventory, Demand Response and potentially LNG Winter Reliability Program

  2. Table of Contents • Overview • Design • Permanent Dual Fuel Resource Changes • Dual Fuel Commissioning Program • Unused Oil Inventory Program • Winter Demand Response Program • Additional Design Consideration • Unused Contracted LNG Program

  3. Overview Pete Harris

  4. ISO is proposing a modified Winter Reliability Program to help maintain system reliability • Considerations weighing against another Winter Reliability Program: • FERC’s order clarifying generator obligations • Anticipated benefits of Offer Flexibility changes • Considerations weighing in favor of another Winter Reliability Program: • Increasing gas pipeline constraints • Retirements of non-gas generators (Vermont Yankee and Salem Harbor) that, together, are capable of producing 2.6 million MWh • Their capability exceeds the procurement of last year’s Winter Reliability Program • They produced 1.6 million MWh during winter 2013-14 • Difficulties replenishing oil supplies during winter 2013-14

  5. Proposal is focused on Dual Fuel Capability, Oil Resources, Demand Response and potentially LNG • The ISO is proposing changes focused on dual fuel resource participation in the markets: • Requirement to burn higher cost fuel when offered/cleared will no longer be required under competitive market conditions • ISO-initiated audit rules will be extended to apply to, and compensate for, dual fuel resource annual tests • Additional compensation will be provided to offset commissioning costs • Additional compensation will be provided for unused oil inventory • The ISO is proposing to provide additional compensation for: • Unused oil inventory of non-dual fuel resources • Demand response (similar to Winter 2013/14) • The ISO is evaluating the inclusion of LNG contracts • Analysis underway to mimic the ‘physical nature’ of unused oil inventories • There continue to be complicating factors that were discussed at length last year

  6. Permanent Dual Fuel Resource Changes Chris Parent & Bob Laurita

  7. Verification of higher cost fuel burn will no longer be required under competitive market conditions • Currently, participants with dual fuel resources have the flexibility to offer on the higher cost fuel without having to first demonstrate the lower cost fuel was not available • If a participant offers on the higher cost fuel, they must provide the IMM with evidence they burned the higher cost fuel • Failing to do so results in the mitigation (ex-post) of the participant’s offer to Reference Level on the lower cost fuel • Rule changes will be proposed to limit when participants are required to verify their resource burned the higher cost fuel • Under competitive market conditions verification will no longer be required of the fuel that is burned • IMM is still reviewing whether to maintain the rule requiring verification of higher cost fuel burned for resources not facing competition (e.g., resources needed for reliability)

  8. Permanent audit rules will be put in place for dual fuel resources • These permanent audit rules (which will be similar to the rules that were in effect for last winter) will enable the ISO to audit dual fuel resources prior to the winter to confirm the operational readiness of the facilities and obtain updated information about the maximum capability on the secondary fuel and time to switch fuels • The discussion on the dual fuel auditing rules is scheduled for the May 20 Reliability Committee meeting • These audit rules will require some conforming changes to the current NCPC rules to ensure the resource is compensated for operating on its secondary fuel • These provisions would only be in effect for October and November 2014, as the revised offer flexibility and NCPC rules effective in December 2014 will allow for compensation based upon the secondary fuel • The discussion on the modifications to the current NCPC rules is scheduled for the May 23 Markets Committee meeting • The cost allocation will go through the existing mechanism for allocating costs for ISO-initiated audits pursuant to Market Rule 1, Section III.F.3.2.19 (i.e., daily RTLO excluding DARD pumps)

  9. Dual Fuel Commissioning Program Chris Parent

  10. Offset testing costs associated with restoring or commissioning dual fuel capability • Program design is intended to offset testing costs associated with restoring or commissioning dual fuel capability • Resources that are eligible and elect to participate in the program will be compensated through real-time NCPC for any testing related costs • Resources that do not maintain their dual fuel capability per the terms of the program will be charged back a portion of the compensation

  11. Resources that have not recently operated on their secondary fuel are eligible to participate • Any resource that burns natural gas as its primary fuel and has not demonstrated their ability to operate on its secondary fuel since December 1, 2011 is eligible to participate in this program • Participants with resources that would like to participate need to submit a formal request prior to December 1, 2014 • The ISO will work with a participant to establish a plan to commission (or restore) their dual fuel capability • The ISO will accept the request if the agreed upon plan resulted in the resource being scheduled to be restored or commissioned before February 1, 2015

  12. Eligible resources that elect to participate in the program must maintain their dual fuel capability • Resources that request this compensation are expected to maintain the dual fuel capability through May 31, 2018 • After a resource has established its dual fuel capability, the resource will be required to demonstrate their capability each year through a dual fuel resource audit prior to December 1 • The ISO will schedule this audit consistent with how other ISO-initiated audits are scheduled

  13. Resources will be compensated for testing costs required to commission the dual fuel capability • Resources will be compensated for any testing costs that they incur through the real-time NCPC settlement pursuant to Market Rule 1, Appendix F • For the period prior the Energy Market Offer Flexibility changes being implemented, the NCPC adjustment proposed under the permanent dual fuel resource auditing will apply • The amount of testing costs are capped for each resource • Once the resource has exceeded the cost recovery limit, all testing associated with commissioning or restoring the dual fuel capability will be ineligible for any additional real-time NCPC • NCPC costs related to this program are allocated to daily RTLO excluding DARD pumps

  14. Resources that do not initially demonstrate their capability will not be compensated • Resources that do not successfully establish duel fuel capability after their commissioning testing is complete through a dual fuel resource audit by December 1, 2015 will not be compensated for their commissioning testing costs

  15. Resources that do not maintain their capability will be charged back a portion of their payments • Resources that do not maintain their dual fuel capability for the obligation period (through May 31, 2018) as demonstrated each year between June and November through a dual fuel resource audit are charged for the compensation associated with the remaining period for which they are obligated • If the resource was unable to operate because of an outage or annual maintenance no compensation would be charged back; however, the resource would be expected to demonstrate within 30 days of becoming available • Resources that successfully demonstrate would be able to “recover” funds for the remainder of the period for which they are obligated

  16. Unused Oil Inventory Program Chris Parent & Steve Weaver

  17. Offset risk of unused fuel oil inventory at the end of the winter period • Program design is intended to offset risk of having unused fuel oil inventory at the end of the winter period • Resources that are eligible and elect to participate in the program will be compensated for any unused fuel oil up to the initial inventory level based upon a fixed rate • Resources that are fully unavailable for any hours during the winter period will have their payments reduced

  18. Resources that are able to operate on oil must meet specific criteria to participate in the program • A resource must be dispatchable and use oil as its primary fuel OR • A resource must be dispatchable, use natural gas as its primary fuel and oil as its secondary fuel that: • has successfully demonstrated their dual fuel capability through a dual fuel resource audit prior to December 1; OR • has their dual fuel capability commissioned prior to January 1 (pursuant to the Dual Fuel Commissioning Program)

  19. Eligible resources that elect to participate in the program must meet minimum inventory requirements • Resources are obligated to hold a minimum usable inventory as of December 1 at least equal to the lesser of: • Set number of days’ supply at full load operation or • Percentage of usable fuel storage capacity on-site or dedicated tank at adjacent location • Any fuel oil burned since November 15 will be considered as in inventory when evaluating if a resource met the minimum inventory obligation • All units at a station with a shared fuel supply are required to participate if one unit elects to participate

  20. Resources that do not meet the minimum criteria have until January 1 to meet the program obligations • Resources that do not meet the minimum inventory requirement to participate in the program on December 1 have until January 1 to meet these requirements • Any fuel oil burned since November 15 will be considered as in inventory • Any oil used in testing (or commissioning) on or after November 15 must be replenished by the later of January 1 or 15 days after the commissioning date of the dual fuel resource • Resources that do not meet these criteria will not be allowed to participate in the program

  21. Resources will be compensated based upon unused oil inventory • The Program Payment is calculated as: Eligibility Quantity x Program Rate the Eligibility Quantity will be the lesser of: • Inventory (adjusted for recent burn) on December 1 or • Inventory on March 1 • Resources participating in the program that are unable to meet the December 1 inventory requirements must meet these by January 1 to participate; however, the Eligibility Quantity will still be determined using the inventory that was in place on December 1 (adjusted for recent burn) • Program payments are allocated to RTLO (excluding DARD pumps) for the winter period (December 1 through February 28)

  22. Resources are compensated based upon the lesser of the inventory on December 1 or March 1

  23. Resources that are unavailable during the winter will have their payments reduced • The Availability Charge is calculated as: Program Payment x (100% - Availability Metric) • The Availability Metric is calculated as: (Hours resource was available for operation in period) / (Period hours from December 1 through February 28) • Availability Charges are allocated back to RTLO (excluding DARD pumps) for the winter period (December 1 through February 28)

  24. Unused Oil Program Rate Development Chris Parent & Paul Hibbard

  25. Unused Oil Inventory Rate Considerations • The rate to be paid under the Unused Oil Inventory Program should address costs and risks participants may face by increasing fuel oil purchases by December 1 • Rate analysis will thus consider multiple factors that potentially affect the cost of having unused fuel oil inventory at the end of the winter period including: • Carrying costs • Price risk • Liquidity risk (risk of excess supplies beyond quantities likely to be used in near-term) • Expected availability charge

  26. Winter Demand Response Reliability Program Doug Smith

  27. Demand response component is similar to the 2013/14 Winter Reliability Program • Designed for assets that are capable of reducing load between 0500 and 2300 on any day for up to 180 hours for winter period • Assets may or may not be assigned to an FCM resource • Committed MW must be incremental to any CSO if there is an FCM audit or dispatch coincident to a winter program dispatch • Performance based compensation • Monthly program payment • Energy payments

  28. Additional similarities to 2013/14 Winter DR Program • Must be a Real-Time Demand Response (RTDR) Asset • Manual program dispatch may be at zonal or asset level if there are transmission constraints • Monthly payment based on committed MW • No payment made if performance is below 75% of commitment • Auditing requirement if no simultaneous FCM dispatch

  29. A number of changes are being proposed from the 2013/14 Winter DR Program • Monthly payment rate will be set administratively to align with other aspects of the program design • Proposed changes to the dispatch commitment and flexibility will be made based both operational needs and participant feedback • Elimination of energy penalty for underperformance to align with other aspects of the program design • Limit participation to no more than 100 assets

  30. Unused CONTRACTED LNG Program Chris Parent & Paul Hibbard

  31. ISO is evaluating providing compensation for unused contracted LNG similar to the Unused Oil Inventory Program • Contracts would be expected to follow a “take-or-pay” construct • These contracts provide a similar product involving purchased inventory, and potential unused inventory costs • Other models (e.g., call options) are less comparable from physical inventory and financial structure perspectives • Contracts would need to have firm transportation arrangements to a specific resource that could support delivery during peak winter load conditions • Contract duration would need to be from December 1 through February 28 • Compensation would be based upon any unused volumes associated with the contract • Availability penalties similar to what is proposed for the Unused Oil Inventory Program would be applied

  32. Proposal Summary & Schedule Chris Parent

  33. Proposal Summary • The ISO is proposing changes focused on dual fuel resource participation in the markets: • Requirement to burn higher cost fuel when offered/cleared will no longer be required under competitive market conditions • ISO-initiated audit rules will be extended to apply to, and compensate for, dual fuel resource annual tests • Additional compensation will be provided to offset commissioning costs • Additional compensation will be provided for unused oil inventory • The ISO is proposing to provide additional compensation for: • Unused oil inventory of non-dual fuel resources • Demand response (similar to Winter 2013/14) • The ISO is evaluating the inclusion of LNG contracts • Analysis underway to mimic the ‘physical nature’ of unused oil inventories • There continue to be complicating factors that were discussed at length last year

  34. Remaining Schedule • Dual Fuel Resource Audits • May 20 RC: Discussion • June 18 RC: Vote • May 23 MC: Discussion • June 3 MC: Discussion • June 10-11 MC: Vote • Ex-post mitigation of dual fuel resources • May 23 MC: Discussion • June 3 MC: Discussion • June 10-11 MC: Vote • Winter Reliability Program • May 23 MC: Discussion • June 3 MC: Discussion • June 10-11 MC: Vote

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