DR Auction Market Design Presentation

DR Auction Webinar

December 12, 2014

Introduction

• In the Minister of Energy’s March 2014 letter, the IESO was encouraged to design and implement a Demand Response Auction to transition existing DR2 and DR3 resources into the IESO-administered markets

• IESO has met with stakeholders over four stakeholder engagement meetings; seeking feedback on design elements

• DR Auction Market Design proposal was developed with consideration for stakeholder feedback and Ontario’s needs

• The objective for the DR Auction is to provide a cost-effective, competitive platform for the selection of DR resources to provide capacity availability

– Will replace the existing practice of multi-year contracting for demand response

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Overview

• This presentation provides an overview of the draft Market Design for a Demand Response Auction that will be posted December 19 for feedback

• The structure of this presentation will be to highlight the IESO’s proposals for each design element within the DR Market Design and discuss the rationale behind the respective proposal

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Contents

Eligibility

Market Participant Authorization

Capacity Qualification

Registration Requirements

Auction Parameters

Length of Forward Period

Commitment Period

Demand Curve

Target Capacity Requirement

Reference Price

Maximum Auction Clearing Price

Min/Max Cleared Capacity Limits

Auction Mechanics

Performance

Resource Obligation

Measurement & Verification

Non-Performance Penalties and Set-offs

Settlements

Prudential Support

Cost Recovery

Payments 4

Eligibility – Participant Authorization

Proposal:

Participants will become authorized as Demand Response Auction Participants in order to submit offers into the DR Auction.

– Bound by IESO Market Rules

– Subsequent authorization in physical market if DR Auction Participant is successful in the Auction

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Eligibility – Capacity Qualification

Proposal:

Use Qualified Capacity (QCAP) calculation to qualify DR capacity value.

– DR Auction targets demand-side MW that have an incremental impact on system needs

– Based on historical consumption behaviour over peak periods and technical capability of the resource

– QCAP value will be treated equally in DR Auction regardless of manner resource delivers into energy market

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Eligibility – Registration Requirements

Proposal:

A participant will register their resources upon clearing the DR Auction.

– Capacity Based Demand Response (CBDR) resources will submit application with required information

– Wholesale Consumers will adhere to existing process to registering dispatchable resources

• May need to begin this process earlier

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Auction Parameters – Forward Period

Proposal:

The length of the forward period is proposed to be five months.

– Balance between greater business certainty and increased opportunities for new entrants

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Auction Parameters – Commitment Period

Proposal:

Seasonal commitment period. – Will provide greater flexibility for resources to offer into an

auction in manner most consistent with capability

– Two seasons will be defined as: • Summer – May 1 to October 31

• Winter – November 1 to April 30

– Auction for both seasons will be held at the same time

– Two separate clearing prices

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Auction Parameters – Demand Curve

Proposal:

MW will be procured in the Auction through the use of a downward-sloping demand curve.

– Compared to a fixed requirement curve, downward-sloping curve reduces price volatility, provides enhanced signal changes and mitigates influence of market power

– Key reference points include: • Target MW

• Price (expressed in $/MW-day)

• Maximum auction clearing price

• Maximum and minimum MW quantities

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Auction Parameters – Target Capacity

Proposal:

IESO will maintain ~500 MW of wholesale demand response.

– Target MW requirement for each auction determined by IESO based on quantity of DR expiring from CBDR and DR pilot program to maintain 500 MW target

– If additional needs identified through IESO forecasting and reliability studies then the target capacity will reflect this update

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Auction Parameters - Zones

Proposal:

Geographic zones will be defined by locational limitations or on specific regional needs arising from planning studies.

– Zones may clear at different prices if limitations or needs are present

– MW limitations and specific needs will be communicated through pre-auction report

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Auction Parameters – Reference Price

Proposal:

The reference price should represent the net cost of new entry of a DR resource.

– Historical contract cost for Ontario DR resources will be considered

– Other considerations include: • Type of DR resource incentivized to enter the market and expected

operating characteristics

• Benefit of avoided cost of consumption

• Energy market revenues from ancillary services

– Process to determine reference price will be developed

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Auction Parameters – Max Auction Price

Proposal:

The Maximum Auction Clearing Price will be set at a fixed multiple of the Reference Price.

– May be instances where forecast cost of new DR resource is inconsistent with marketplace so Maximum Auction Clearing Price serves to address this variability

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Auction Parameters – Auction Mechanics

Proposal:

DR Auction will be cleared in a single pass with all cleared offers receiving the same clearing price unless there are locational constraints.

– Currently investigating: • Offer laminations

• Seasonal and annual offer optimization

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Performance – Resource Obligation

Proposal:

DR resources with a DR auction obligation must participate in the energy market over the Availability Window.

– Must-Bid Requirement in Day-Ahead Commitment Process and real-time energy market

– Availability Window to be determined in detailed design

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Performance – Measurement & Verification

Proposals:

Compliance with the Must-Bid Requirement will be measured at the end of the Commitment Period.

Dispatchable Load’s compliance with dispatch measured against current level of consumption.

CBDR’s compliance with dispatch measured against historical baseline.

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Performance – Penalties and Set-offs

Proposals:

Availability clawback will be evaluated against the Must-Bid Requirement.

Availability clawback based on Availability Payment multiplied by a penalty factor.

– Penalty factors are pre-set and may increase when IESO operating under or anticipating emergency conditions

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Performance – Penalties and Set-offs

Proposals:

There will be two types of charges associated with non-compliance to dispatch: settlement and sanctions.

– Settlement charge based on availability payment

– Sanction administered by Market Assessment Compliance Division (MACD); can range from financial penalties to termination from the market

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Performance – Penalties and Set-offs

Proposals:

Administrative set-offs would be charged to participants not meeting their administrative data submission requirements.

– Could be based on availability payment or flat charge

– Will be determined in detailed design

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Settlements – Prudential Support

Proposals:

During pre-auction period, a deposit is required to offer into DR Auction as a DR Auction Participant.

– Purpose is to establish creditworthiness of participant similar to deposit for IESO’s Transmission Rights Market

During Commitment Period, participants required to post prudential support.

– Will be established in accordance with IESO’s Prudential Framework

– Reviewed every three years by IESO’s Treasury department for effectiveness

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Settlements – Cost Recovery

Proposal:

Cost recovery for the DR Auction is proposed to be allocated to consumers as a monthly uplift charge based on demand at system peak.

– Funds collected as a result of penalty charges for non-compliance may be aggregated and put towards the reduction of future monthly uplift costs

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Settlements - Payments

Proposal:

DR Auction Availability Payments will be paid on a monthly basis.

Availability Payment clawback be charged at the end of the Commitment Period. Penalties/off-sets may be charged earlier if they can be identified.

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Feedback

• Please send feedback to Stakeholder.Engagement@ieso.ca

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