Capacity Demand Curve in ISO-NE Responses to Feb. 27 th Questions and Comments
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Copyright © 2014 The Brattle Group, Inc.
PREPARED FOR
PREPARED BY
Capacity Demand Curve in ISO-NEResponses to Feb. 27 th Questions and Comments
ISO New England
Samuel A. NewellKathleen SpeesBen Housman
March 6 th , 2014
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Contents
▀ Stakeholder Demand Curves− Comparison of Curves− Performance Summary Table
▀ Responses to Stakeholder Questions and Comments− Customer Cost Impacts− Responses to Wilson Energy Economics Presentation
▀ Appendix: Updated Curves from MA AGO and NU
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Stakeholder Demand CurvesComparison of Curves
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Stakeholder Demand CurvesPerformance Summary Table
Average Standard Deviation
Frequency at Cap
Average LOLE
Average Reserve Margin
Reserve Margin
Standard Deviation
Frequency Below NICR
Frequency Below
Minimum Acceptable
AverageAverage of
Bottom 20%
Average ofTop20%
($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil) ($mil) ($mil)
Stakeholder Curves
NESCOE Curve $8.3 $2.4 5.6% 0.129 12.2% 2.5% 43.1% 14.5% $3,283 $1,973 $4,542
National Grid Curve (tuned to 1-in-10 LOLE) $8.3 $4.0 4.9% 0.100 13.1% 2.2% 26.6% 5.9% $3,298 $1,781 $5,870
NU Curve (Cap at 1.6x Net CONE) $8.3 $2.5 5.6% 0.095 13.6% 2.5% 26.7% 6.6% $3,327 $2,055 $4,798
NU Curve (Cap at 1.5x Net CONE, right shifted toe) $8.3 $2.3 6.6% 0.100 13.4% 2.6% 30.8% 8.2% $3,319 $2,162 $4,595
Mass. Attorney General 's Office Curve $8.3 $2.5 6.3% 0.100 13.4% 2.5% 29.7% 7.8% $3,316 $2,080 $4,807
MA DPU Curve $8.3 $2.4 14.6% 0.140 11.8% 2.6% 47.9% 16.9% $3,272 $2,043 $4,552
MA DPU Curve (tuned to 1-in-10 LOLE) $8.3 $2.0 6.8% 0.100 13.5% 2.8% 31.2% 7.9% $3,321 $2,310 $4,413
NRG Curve w/ Cap at 2x Net CONE $8.3 $4.5 13.4% 0.060 15.4% 2.1% 7.5% 0.7% $3,379 $1,735 $6,490
NRG Curve w/ Cap at 1.5x Net CONE $8.3 $3.2 24.6% 0.060 15.7% 2.3% 8.7% 1.1% $3,389 $1,747 $5,063
NextERA (Cap at 1.5x Gross CONE) $8.3 $3.9 4.2% 0.095 13.3% 2.1% 25.8% 5.1% $3,313 $1,765 $5,908
Candidate Demand Curves
Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309 $1,795 $5,703
ISO Recommended Curve (w/ Net CONE = $8.3) $8.3 $3.3 13.8% 0.100 13.2% 2.3% 28.2% 7.0% $3,320 $1,830 $5,297
Price Reliability Price * Quantity
Notes:Average prices do not account for potential reductions in the cost of capital supported by more gradual demand curves; Net CONE is assumed constant.The reported Price * Quantity is the system price multiplied by the system total quantity and does not reflect zonal price differentials.
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Responses to Stakeholder Questions and CommentsCustomer Cost Impacts of Net CONE Error
▀ Administrative Net CONE will affect not only reliability but also customer costs by changing the procured quantity (however, this will not change long-run average price, which will be set by the true Net CONE)
▀ With ISO-NE’s recommended curve, over-estimating Net CONE by 25% would increase customer costs by $32mil/yr; underestimating Net CONE by 25% would reduce costs by $53mil/yr
▀ Flatter curves are more susceptible to errors in net CONE, having greater customer cost increases with over-estimated Net CONE and lower reliability with under-estimated Net CONE
Customer Cost Increase
Customer Cost Decrease
True Net CONE
Administrative Net CONE is Too High Administrative Net CONE is Too Low
UnitsISO
Recommended Curve
SteeperCurve
FlatterCurve
ISO Recommended
Curve
SteeperCurve
FlatterCurve
Administrative Net CONE ($/kW-m) $13.85 $13.85 $13.85 $8.31 $8.31 $8.31
True Net CONE ($/kW-m) $11.08 $11.08 $11.08 $11.08 $11.08 $11.08
Procured Quantity (MW) 33,290 33,312 33,362 33,290 33,312 33,362
Excess (Deficit) Procured Quantity (MW) 239 136 524 (398) (226) (874)
Customer Cost with Accurate Net CONE ($mil/yr) $4,426 $4,429 $4,436 $4,426 $4,429 $4,436
Customer Cost with Over/Under-Estimated Net CONE ($mil/yr) $4,458 $4,447 $4,506 $4,374 $4,399 $4,320
Customer Cost Increase/Decrease ($mil/yr) $32 $18 $70 ($53) ($30) ($116)
Note: Both the flatter and steeper curves are simple, straight-lined curves without a kink to create a slope around NICR that is either flatter or steeper than the recommended curve
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Responses to Stakeholders Response to Wilson Critique
▀ Wilson proposes three modeling changes:1. Reduce assumed shock sizes to 70% (small impact)2. Introduce more supply elasticity (small impact)3. Assume more supply will be procured on a short-term
basis in the reconfiguration auctions (larger impact)
▀ Impacts on LOLE (see right):− Directionally, all three changes would reduce assumed
uncertainties and estimated LOLE (allowing for a left- or down-shifted demand curve)
− Wilson implements these modeling changes in a simplified Monte Carlo analysis that further reduces estimated LOLE
▀ Response:− Revisions 1 and 2 are within a reasonable uncertainty
range, however we opt not to make these changes which are not as tightly grounded in historical evidence as our current approach (see following slide)
− Revision 3 is a speculative change that posits a strong market response that has not been previously observed and does not consider the offsetting impact of load forecast error; we therefore strongly caution against this approach (see following slides)
Modeling Approach
LOLE LOLE Increase
(Decrease)1. Brattle Model 0.100 --
2. Wilson Model Brattle Assumptions
0.090 (0.010)Compared to [1]
3. Wilson ModelR1: 70% shock sizeR2: More supply elasticity
0.086 (0.004)Compared to [2]
4. Wilson ModelR3: Add short-term supply
0.083 (0.007)Compared to [2]
5. Wilson ModelR1: 70% shock sizeR2: More supply elasticityR3: Add short-term supply
0.084 (0.006)Compared to [2]
Estimated LOLE with Initial Candidate Curve
Source: Wilson, slide 12.
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Responses to StakeholdersWilson Revision 1: 70% Shock Sizes ▀ Wilson argued that our supply-demand independence assumption would overstate
shocks, and that future shocks would likely be lower▀ To more fully evaluate this argument, we compared net shocks (supply minus demand)
in All FCAs and compared that to the net shocks in our Monte Carlo modeling ▀ Comparison shows that our approach does not overstate shocks
Supply (Below Cap) minus NICR in Actual FCAs Modeled Distribution of Net Supply Shocks (supply shock – NICR shock)
Note:Total offer quantity sourced from ISO-NE’s website (see FCA Auction Results) while offer quantity below cap was provided directly by ISO-NE. Demand quantity based on NICR for each FCA.
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Responses to StakeholdersWilson Revision 3: Add Short-Term Supply
▀ We view the addition of short-term supply as speculative:− Relies on logical arguments, but no historical evidence that additional, previously unoffered short term
supply will consistently materialize in a short market− A more comprehensive review of PJM data show supply consistently contracting by 6,000 – 9,000 MW
between the base auction and last incremental auction (see below), although these results are only reflective of long-market conditions
− Does not consider the offsetting impact of load forecast error− Biggest modeling impact is to eliminate the most problematic low-reliability extremes from results
Year Auction Price Price Participant Offers Participant Cleared Participant Unleared Offer IncreaseSell Offers Buy Bids Sell Offers Buy Bids Net Sell Offers Buy Bids Above BRA
($/MW-d)($/kW-m) (MW) (MW) (MW) (MW) (MW) (MW) (MW) (MW)
2012/13 BRA $16 $0.50 145,373 n/a 136,144 n/a 136,144 9,230 n/a n/a1st IA $16 $0.50 7,086 9,339 1,689 1,749 (60) 5,397 7,590 (2,144)2nd IA $13 $0.40 6,448 11,560 838 3,215 (2,377) 5,610 8,345 (2,842)3rd IA $3 $0.08 5,569 7,459 2,404 4,383 (1,979) 3,166 3,076 (6,098)
2013/14 BRA $28 $0.84 160,898 n/a 152,743 n/a 152,743 8,155 n/a n/a1st IA $20 $0.61 7,471 16,446 2,387 4,882 (2,495) 5,084 11,564 (684)2nd IA $7 $0.21 6,073 16,386 1,997 5,599 (3,602) 4,076 10,787 (4,577)3rd IA $4 $0.12 5,526 6,372 2,703 3,168 (465) 2,823 3,203 (8,726)
2014/15 BRA $126 $3.83 160,486 n/a 149,975 n/a 149,975 10,511 n/a n/a1st IA $6 $0.17 11,126 13,231 4,240 6,850 (2,610) 6,887 6,381 6152nd IA $25 $0.76 6,039 11,133 2,910 4,476 (1,567) 3,129 6,657 (7,082)
2015/16 BRA $136 $4.14 178,588 n/a 164,561 n/a 164,561 14,027 n/a n/a1st IA $43 $1.31 6,773 21,305 4,172 5,987 (1,816) 2,602 15,317 (7,253)
2016/17 BRA $59 $1.81 184,380 n/a 169,160 n/a 169,160 15,220 n/a n/a
PJM RTO System Wide Clearing Price and QuantityAnnual Resource Prices, Quantities in UCAP MW
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Appendix
▀ Mass AGO Updated Curve▀ Northeast Utilities Updated Curve▀ NextEra Updated Curve
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Updated Stakeholder Curves Mass AGO Updated Curve
Curve ParametersCap Kink Foot
Prices% of Net CONE 1.60x 1.15x 0.00x$/kW-m (w/ Net CONE = $8.3) $13.3 $9.6 $0.0
Corresponding Quantities in FCA7Reserve Margin 9.0% 12.1% 21.5%% of NICR -2.8% 0.0% 8.3%MW 32,053 32,968 35,711
Price * Quantity
Average Standard Deviation
Frequency at Cap
Average LOLE
Average RM
RM St. Dev.
Freq. Below NICR
Frequency Below Min. Acceptable
Average
($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil/year)
Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309
Vertical at NICR $8.3 $5.7 28.3% 0.124 11.6% 1.2% 28.3% 6.3% $3,283
Mass. Attorney General's Offi ce Curve $8.3 $2.2 0.4% 0.107 13.1% 2.6% 33.7% 9.0% $3,310
Mass. Attorney General's Offi ce Updated Curve $8.3 $2.5 6.3% 0.100 13.4% 2.5% 29.7% 7.8% $3,316
Price Reliability
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Updated Stakeholder CurvesNortheast Utilities Updated Curve
Curve ParametersCap Foot
Prices% of Net CONE 1.5x 0.0x$/kW-m (w/ Net CONE = $8.3) $12.5 $0.0
Corresponding Quantities in FCA7Reliability Index (1-in-x) 1-in-5 > 1-in 100Reserve Margin 9.0% 22.4%% of NICR -2.8% 9.2%MW 32,053 35,985
Price * Quantity
Average Standard Deviation
Frequency at Cap
Average LOLE
Average RM
RM St. Dev.
Freq. Below NICR
Frequency Below Min. Acceptable
Average
($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil/year)
Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309
Vertical at NICR $8.3 $5.7 28.3% 0.124 11.6% 1.2% 28.3% 6.3% $3,283
Northeast Utilities Curve $8.3 $2.4 7.6% 0.107 13.1% 2.6% 33.7% 9.1% $3,309
Northeast Utilities Updated Curve - 1.6x Cap $8.3 $2.5 5.6% 0.095 13.6% 2.5% 26.7% 6.6% $3,327
Northeast Utilities Updated Curve - 1.5x Cap (Right Shifted Toe) $8.3 $2.3 6.6% 0.100 13.4% 2.6% 30.8% 8.2% $3,319
Price Reliability
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Updated Stakeholder CurvesNextEra Updated Curve
Curve ParametersCap Kink 1 Foot
Prices% of Net CONE 2.1x 0.7x 0.0x$/kW-m (w/ Net CONE = $8.3) $17.8 $5.8 $0.0
Corresponding Quantities in FCA7Reliabi lity Index (1-in-x) 1-in-5 1-in-15 1-in-100Reserve Margin 9.0% 14.1% 21.5%% of NICR -2.8% 1.8% 8.3%MW 32,053 33,545 35,711
Price * Quantity
Average Standard Deviation
Frequency at Cap
Average LOLE
Average RM
RM St. Dev.
Freq. Below NICR
Frequency Below Min. Acceptable
Average
($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil/year)
Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309
Vertical at NICR $8.3 $5.7 28.3% 0.124 11.6% 1.2% 28.3% 6.3% $3,283
NextEra Curve w/ Cap at 1.5x Gross CONE $8.3 $3.9 4.2% 0.095 13.3% 2.1% 25.8% 5.1% $3,313
Price Reliability
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