Estimation of the Market Equilibrium and Economically ......This presentation is based on a report the authors prepared for ERCOT. ... Comparison to 2014 Study Results ... Outage Rate

Copyright © 2018 The Brattle Group, Inc.

Estimation of the Market Equilibrium and Economically Optimal Reserve Margins FOR THE ERCOT REGION, 2018 UPDATE

PRESENTED TO SAWG PRESENTED BY Samuel A. Newell Rebecca Carroll Kevin Carden (Astrapé) October 19, 2018

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Disclaimer This presentation is based on a report the authors prepared for ERCOT. Neither this presentation nor the report were intended or should be read as either comprehensive or fully applicable to any specific opportunity in the ERCOT market. Interested parties are advised to seek independent expert advice, as all opportunities have idiosyncratic features that will be impacted by actual market conditions. Both this presentation and the report, which interested parties should read in full, are provided ‘as is.’ The Brattle Group, Astrapé Consulting, and ERCOT disclaim any and all express or implied representations or warranties of any kind relating to the accuracy, reliability, completeness, or currency of the data, conclusions, forecasts or any other information in this report. Interested parties are advised to independently verify such, as well as the suitability of the same for any particular purpose. Interested parties are solely responsibility for conclusions they draw from the review of the presentation and the report. To the fullest extent permitted by law, The Brattle Group, Astrapé Consulting, and ERCOT, along with their respective directors, officers, and employees, shall not be liable for any errors, omissions, defects, or misrepresentations in the information contained in these documents, whether intentional or unintentional, or for any loss or damage suffered by persons who use or rely on such information or any conclusions that could be drawn from them that turn out to be inaccurate (including by reason of negligence, negligent misstatement, or otherwise).

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Agenda

 Problem Statement and Approach

 Analytical Results – Market Equilibrium Reserve Margin – Economically Optimal Reserve Margin – Physical Reliability Metrics – Comparison to 2014 Study Results

  Sensitivities

 Appendix – Model Validation – Key Assumptions


Problem Statement What are the MERM and EORM in ERCOT?

Market Equilibrium Reserve Margin Concept Economically Optimal Reserve Margin Concept

Estimating the MERM and EORM inform whether ERCOT’s market will support sufficient reserve margins from an economic perspective (the modeling also informs reliability implications)


Modeling Approach

  Simulation Period: 2022 (8760 hours)   Simulations per Reserve Margin: 9,500

– 50 outage draws – 38 weather years – 5 non-weather load forecast errors

  Topology – ERCOT, Mexico, SPP, and Entergy footprints – Connected through existing DC-Ties

  Installed Capacity – Baseline capacity consistent with ERCOT’s

2018 LTRA submissions – Higher and Lower Reserve Margins

modeled by adding and subtracting generic CC/CT capacity from baseline

Baseline ERCOT Installed Capacity by Resource Type

Nuclear

Wind

Solar

Hydro

Coal

Gas

Biomass

Source: 2018 Report, Figure 2 Note: “2018 Report” references Newell et. al., Estimation of the Market Equilibrium and Economically Optimal Reserve Margins for the ERCOT Region—2018 Update, Final Draft. See http://www.ercot.com/content/wcm/lists/143980/10.12.2018_ERCOT_MERM_Report_Final_Draft.pdf


Agenda



  Sensitivities



10.25%

$0

$50

$100

$150

$200

$250

$300

6% 8% 10% 12% 14% 16%

$/kW

-yr

Reserve Margin (% ICAP)

Cost of New Entry

Market Equilibrium Reserve Margin

Marginal Unit Net Energy Revenue


Source: 2018 Report, Figure ES-1 and Figure 5

ERCOT Projected 2022 Market Equilibrium Reserve Margin


Year-to-Year Volatility in Annual Average Price and Revenue

Source: 2018 Report, Figure 6 Note: Marginal Unit Net Energy Revenue represents the net revenue from a mix of added CCs and CTs (77:23 ratio)

Net Energy Revenues for New Capacity Distribution of Spot Energy Prices

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%

Annu

al A

vera

ge E

nerg

y Pr

ice

($/M

Wh)


Median

5th Percentile

75th Percentile

90th Percentile

95th Percentile

Average

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%

Annu

al A

vera

ge E

nerg

y M

argi

n ($

/kW

-yr)


Median

5th Percentile

75th Percentile

90th Percentile

95th Percentile

Average


$25,700

$25,900

$26,100

$26,300

$26,500

$26,700

$26,9004% 5% 6% 7% 8% 9% 10

%

11%

12%

13%

14%

15%

16%

17%

18%

Tota

l Sys

tem

Cos

ts ($

M/y

ear)

ERCOT Reserve Margin

Firm Load SheddingRegulation ShortagesNon-Spinning Reserve ShortagesSpinning Reserve ShortagesPrice-Responsive DemandTDSP Load ManagementNon-Controllable LRs30-Minute ERS10-Minute ERSEmergency GenerationExternal System Costs (Above Baseline)Production Costs (Above Baseline)Marginal CC Capital Costs

Economically Optimal Reserve Margin

Source: 2018 Report, Figure 8

Economically Optimal Reserve Margin at 9.0%

Total System Costs across Planning Reserve Margins


Physical Reliability Metrics


Reliability Metrics that Vary with Reserve Margins (a) LOLE (b) LOLH (c) Normalized EUE

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

6% 8% 10% 12% 14% 16%

LOLE

(Eve

nts/

Yr)

Reserve Margin (%)

0.5 LOLE

Base Case Market Equilibrium

0

1

2

3

4

5

6

7

8

9

6% 8% 10% 12% 14% 16%

LOLH

(Hou

rs/Y

r)

Reserve Margin (%)

Base Case MarketEquilibrium

1.5 LOLH

0.0000%

0.0005%

0.0010%

0.0015%

0.0020%

0.0025%

0.0030%

0.0035%

0.0040%

0.0045%

6% 8% 10% 12% 14% 16%

Nor

mal

ized

EUE

(%)

Reserve Margin (%)

Base Case Market Equilibrium

0.0006% Normalized EUE


Emergency Event Frequencies


0

1

2

3

4

5

6

7

8

9

10

6% 8% 10% 12% 14%

Even

t Fre

quen

cy (e

vent

s/yr

)


Market Equilibirum Reserve Margin

30-min ERS

LRs

TDSP

Emergency Generation

10-min ERS

Load Shed

0.1 LOLE

Average Annual Frequency of Emergency Events


10.25%

0.6%0.5%

0.75%

1.0%

0.3%

11.5%0.9%

1.0%

0%

2%

4%

6%

8%

10%

12%

14%

2014 MERMBase

ReserveMargin

Accounting

Lower Costof

New Entry

Increasein

Renewables

LowerGas

Prices

Change inWeather Year

Weighting

Lower ForcedOutage Rate

Other 2018 MERMBase

Mar

ket E

quili

briu

m R

eser

ve M

argi

n

Comparison to 2014 EORM Study Results

Drivers of the MERM Change from 2016 to 2022 Model



Agenda



  Sensitivities



Variable Base Case Assumption Sensitivity Range

Renewables Penetration 9.6 GW new renewables -10.7 GW/+29.6 GW of renewables*

High Gas Price Henry Hub: $3.26 Henry Hub: $6.25

Gross CONE CT: $89/kW-year CC: $95/kW-year -10% / +25%

VOLL $9,000/MWh $5,000 to $30,000/MWh

Weighting of Historical Weather Years

Equal probability (2.5%) on last 38 years

(1) 10% most last 10 years (2) Probabilities based on Pareto distribution fit

to weather years based on number of consecutive days with weather over 100 degrees

(3) Probabilities equal to 2014 EORM base case

Forward Period and Load Forecast Uncertainty 3 years 0 years to 2 years

Sensitivity to Key Uncertainties

Source: 2018 Report, Table 4 & Table 5 Note: * -20.3 GW/ + 20 GW from the Base Case assumption


Summary of Sensitivity Results

Sensitivity of the MERM to Study Assumptions


-1

-1

-0.25

-1

1

0.5

1.5

0.25

-1.5 -1 -0.5 0 0.5 1 1.5 2

Gas Price

Renewable Penetration

Forward Years

Weather Year Weighting

CONE

MERM (%)

Curve Fit Probabilities

-10% CONE+25% CONE

0 Year 3 Year

10 Most Recent Years

+20 GW Renewables

2014 Study Weighting

2014 EORM Study

8.75% 9.25% 9.75% 10.25% 10.75% 11.25 11.75% 12.25%

0.75

+$3/MMBtu


Agenda



  Sensitivities



Model Validation (1 of 2)

Modeled vs. Actual Combined-Cycle Net Energy Revenues

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

2011 2012 2013 2014 2015 2016 2017

$/kW

-yr

ModeledHistorical



Model Validation (2 of 2)

Average Modeled vs. Historical Expected Net Energy Revenues by Reserve Margin


$0

$50

$100

$150

$200

$250

$300

6% 8% 10% 12% 14% 16% 18% 20% 22%

$/kW

-yr

Reserve Margin (%)

Modeled Average CC Net Energy Revenues

2018

2014

2013

2015

2016

2012

2017

Historical Expected Net Energy Revenues at

Planning Reserve Margins


Reference Technology Assumptions

Higher reserve margin cases add reference technology that represents a mix of H-Class combined cycles and combustion turbines consistent with recent additions and announced new builds (77:23)

Reference Technology Cost and Summer Performance Characteristics

Simple Cycle Combined Cycle

Plant ConfigurationTurbine GE 7HA.02 GE 7HA.02Configuration 1 x 0 2 x 1

Heat Rate (HHV)Base Load (Btu/kWh) 9,274 6,312Max Load w/ Duct Firing (Btu/kWh) n/a 6,553

Installed CapacityBase Load (MW) 352 1,023Max Load (MW) n/a 1,152

Gross CONE ($/kW-yr) $89 $95

Source: 2018 Report, Table 2


10.25%9.25%

$0

$50

$100

$150

$200

$250

$300

6% 8% 10% 12% 14% 16%

$/kW

-yr


10.5%

Marginal Unit Net Energy Revenue

Base CONE


Low CONE: -10%

High CONE: +25%

MERM Sensitivity to Cost of New Entry

CONE Sensitivity Results



Samuel A. Newell Principal, Boston MA

+1.617.234.5725

[email protected]

Rebecca Carroll Associate, Boston MA

+1.617.234.5605

[email protected]

Kevin Carden Director, Astrapé Consulting

+1.205.988.4404

[email protected]

Dr. Newell is the co-leader of the firm’s electricity practice, with 20 years of experience in electricity wholesale markets, the transmission system, and RTO/ISO rules. He supports clients throughout North America in matters involving wholesale market design, generation asset valuation, transmission development, integrated resource planning, and demand response programs.

Rebecca Carroll has nearly ten years of experience in energy economics and electricity market modeling. She has supported a broad range of clients on system planning, market rules development, retail gas and electric choice, power plant and transmission line valuations, regulatory hearings, and arbitration proceedings.

Mr. Carden has over 18 years of experience in production cost simulations for risk analysis and reliability planning for power supply options, coupled with diverse utility management experience. Under Kevin's leadership, Astrapé Consulting has provided consulting services to utilities nationwide.

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Estimation of the Market Equilibrium and Economically ......This presentation is based on a report the authors prepared for ERCOT. ... Comparison to 2014 Study Results ... Outage Rate