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Al McBride, Fei Zeng S Y S T E M P L A N N I N G

Forward Capacity Market Zonal Demand Curves

F E B R U A R Y 2 3 , 2 0 1 6 | W E S T B O R O U G H , M A

Reliability Committee

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FCM Zonal Demand Curves

Proposed Effective Date: FCA 11

• ISO is proposing new zonal demand curves for the FCA – Improve locational price signals in the FCM – Better reflect incremental reliability impact of capacity than existing

(fixed) zonal requirements – Derived using a methodology that satisfies three core design principles – Robust to zonal configuration changes – Comply with FERC Order requiring zonal curves for FCA 11

• This meeting: – Review the principles of ISO’s proposed Sloped Demand Curves – Illustrate the reliability impacts of ISO’s proposed demand curves – Introduce red-lined Tariff language

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Reliability Committee Schedule

Jan. 2016 Discussion of reliability outcomes and zonal capacity transfer capability assumptions under ISO proposal

Feb. 2016 Continued discussion; Tariff language

March 2016 Reliability Committee vote

April 15, 2016 FERC Filing

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Additional Materials and Tariff Redlines

• February 18, 2016 memo to RC on tariff redlines, “Sloped Demand Curves: Guide to Market Rule Changes”

• Tariff redlines: Reliability Committee will be requested to vote on the Section 12 revisions – Markets Committee votes on Section 13

• December 7, 2015 memo to MC on demand curve methodology – http://www.iso-ne.com/static-

assets/documents/2015/12/a09_iso_memo_12_07_15.pdf

• Relevant presentations from the November to February Markets Committee meetings

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APPROACH OVERVIEW Reliability foundation for deriving demand curves

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What Principles Should the FCM’s Sloped Demand Curves Aim to Satisfy?

1. Reliability. Meet the ISO’s reliability planning obligations

– System LOLE of 0.1 or less, on average (over the long-term) – An objective in previous design efforts

2. Sustainability. Over the long-term, the FCA’s average clearing price should be sufficient to attract entry when needed – Competitive new suppliers recover their fixed entry costs (Net CONE) – Both in the system and import-constrained zones – An objective in previous design efforts

3. Cost-Effectiveness. Procure capacity in zones cost-effectively

– Zonal curves should allocate capacity purchases among zones, given bid prices, to meet the system’s reliability requirements at least-cost

– Ensuring this objective is satisfied is more complex with zonal demand curves than in the system demand curve design

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Marginal Reliability Impact of Capacity

• ISO’s planning models can calculate expected energy not served (EENS) as a measure of the expected ‘lost load’ – Calculated on a MWh per year basis – EENS depends on capacity in system overall, and in each capacity zone

• Marginal reliability impact (MRI) is the decrease in EENS (expected ‘lost load’) with another 1 MW of capacity – Differs for system and each zone

• Methodology calculates the MRI at the system and zonal level for range of capacity values – May be greater in import-constrained zones where capacity can serve

system or zone

• MRI (after sign change) declines smoothly with capacity, as shown to the right

• ISO’s planning models can calculate this function

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Demand Curves Based on the Marginal Reliability Impact are (Slightly) Convex

• When the system is short, deficiencies can occur more frequently, so an additional MW of capacity significantly reduces EENS because – At low MW quantities, MRI value is high – As capacity is added, the MRI decreases quickly meaning the slope is

relatively steep

• When the system is long, deficiencies are infrequent, so an additional MW of capacity has a small impact on EENS – At high MW quantities, MRI value is low and relatively flat

• Consistent with these properties, demand curves based on the MRI function are downward sloping and convex

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• The methodology captures the difference in relative impact of additional capacity in different zones – Especially when the transfer

levels are close to or at the transfer capabilities

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Relative Impact (Substitution)

Rest-of-Pool

Import Constrained

Zone

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LOCAL SOURCING DEMAND CURVES

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Local Sourcing Demand Curve Approach

• ISO’s modeling assumption builds on the current methodology used to generate the Local Sourcing Requirement based on both the TSA and LRA values

– “For each import-constrained Capacity Zone, the Local Sourcing Requirement shall be the amount needed to satisfy the higher of: (i) the Local Resource Adequacy Requirement as determined pursuant to Section III.12.2.1.1; or (ii) the Transmission Security Analysis Requirement as determined pursuant to Section III.12.2.1.2.”

• MRI calculations will use a capacity transfer capability of:

(N-1 limit) – max(TSA-LRA,0)

– Starts with N-1 limit, but includes adjustment based on the positive difference between TSA and LRA

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Example: SENE Capacity Transfer Capability

FCA 10 Input Parameters:

• N-1-1 Import Limit = 4,600 MW

• N-1 Import Limit = 5,700 MW

• Local Resource Adequacy (LRA) = 9,584 MW

• Transmission Security Adequacy (TSA) = 10,028 MW

Revised capacity transfer capability assumption for SENE zonal MRI calculations is:

5,700 MW – max(10,028 TSA - 9,584 LRA, 0) = 5,256 MW

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DERIVING CURVES FOR EXPORT-CONSTRAINED ZONES Same methodology as that used in import-constrained zones produces congestion-based demand curves in export-constrained zones

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Export-Constrained Zones Derived Using Same Methodology As Import-Constrained Zones

• Curves in all constrained zones are based on the marginal reliability impact of shifting a MW of capacity from the rest-of-system zone into the zone

• Shift of capacity into import-constrained zones improves system reliability (reduces EENS) – Resulting curve in import-constrained zone therefore pays a positive

congestion price to capacity in the zone

• Shift of capacity into export-constrained zone decreases system reliability (increases EENS) – Resulting curve in export-constrained zones must therefore pay a

negative congestion price to capacity in the zone

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Export-Constrained MRI Curve is Downward Sloping and Negative

• MRI function is zero for low MW quantities as capacity in export-constrained zone provides equal reliability value to that in rest-of-system

• At higher MW quantities, MRI function slopes downward because marginal reliability impact of capacity in the zone decreases

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Notes: Indicative MCL = 8,830 MW for NNE in FCA 10. * November 16, 2015 Planning Advisory Committee: http://www.iso-ne.com/static-assets/documents/2015/11/a2_fcm_zonal_development_3_review_of_determinations_for_fca_10.pdf

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RELIABILITY REVIEWS

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Reliability Reviews

• ISO Tariff Section III.13.2.5.2.5 currently states the following: – The capacity shall be deemed needed for reliability reasons if the

absence of the capacity would result in the violation of any NERC or NPCC criteria, or ISO New England System Rules. De-list bids shall only be rejected pursuant to this Section III.13.2.5.2.5 for the sole purpose of addressing a local reliability issue, and shall not be rejected solely on the basis that acceptance of the de-list bid may result in the procurement of less capacity than the Installed Capacity Requirement (net of HQICCs) or the Local Sourcing Requirement for a Capacity Zone.

• No changes are proposed to this section of the Tariff as part of the Capacity Zone Demand Curve design – It will remain the case that a de-list request shall only be rejected for

the purpose of addressing a local reliability issue, not adequacy

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RELIABILITY RESULTS FOR THE SENE ZONE IF THE SYSTEM IS LONG (MORE THAN ICR)

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Information addressing stakeholder request, showing LOLE curves when the system capacity is at ICR plus 3000 MW.

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Quantitative Reliability Results on Indicative SENE Demand Curve

• The following slide shows the indicative SENE sloped demand curve and the system LOLE curves at: – Net Installed Capacity Requirement (NICR) – brown curves (presented

at January RC) – NICR + 3,000 MW – orange curves (new results) – These results use FCA 10 inputs

• The graph shows the ranges of capacity levels in the SENE zone that can be substituted with the capacity in the rest-of-pool zone while still meeting the system LOLE target of 0.1 days/year

• Overall, when the system is long in capacity (more than NICR), capacity in the SENE zone may be less than LSR (within the ranges shown), and the overall system LOLE remains at or better than the target reliability criterion

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Quantitative Reliability Results on Indicative SENE Demand Curve (cont.)

Indicative SENE Demand Curve from Jan 2016 MC presentation (Using FCA 10 Inputs)

New Results

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RESOURCE ADEQUACY EVALUATION OF ADDITIONAL SCENARIOS WITH DEMAND CURVES

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Additional evaluation results to those presented at January RC meeting

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Resource Adequacy Evaluation of Modeled Outcomes (using FCA10 Inputs)

• Following tables provide a Resource Adequacy assessment of various system and zonal MW outcomes – Under ISO proposed zonal and system curves (Slide 25) – Under ‘hybrid’ approach retaining existing system curve (Slide 26)

• Model MW values in the tables use the specific supply model outcomes discussed at prior Market Committee meetings (see http://www.iso-ne.com/committees/markets/markets-committee)

• NPCC Resource Adequacy Design Criterion applied – System-wide LOLE <= 0.1 days/year

• Adequate if resources more than ICR – N-1 limits used to reflect transmission limitation

• Adequate if resources more than LRA in import-constrained zones • Deliverable if resources less than MCL in export-constrained zones

New Summary

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Resource Adequacy Evaluation of Modeled Outcomes under ISO Proposed Demand Curves

• For resource adequacy, the proposed curves perform well over a range of models/scenarios – In most scenarios, it meets or exceeds the reliability targets (green text) – In model scenarios that simulate steep supply curves and annual capacity

fluctuations, procures close to target levels on average (red text)

• Modeled outcomes based on Feb 2016 MC presentation using FCA10 inputs

SENE: LRA=9584 MW NNE: MCL=8830 MW System: ICR=34151 MW Supply Model MW Procured

Adequacy Evaluation MW Procured

Reliability Evaluation MW Procured

Reliability Evaluation

Model 1 10840 √ 8440 √ 34151 0

Model 2a 10840 √ 8440 √ 34712 561

Model 2b 10840 √ 8440 √ 34314 163

Model 2c 10840 √ 8440 √ 34012 -139

Model 2d 9950 √ 8440 √ 34151 0

Model 3 11069 (σ =468) √(on avg.) 8805 (σ =218) √(on avg.) 34554 (σ =255) 403 (on avg.)

Model 4a 10840 √ 8440 √ 34151 0

Model 4b 10840 √ 8440 √ 34151 0

Model 5a 9816 √ 8440 √ 34389 238

Model 6a 10807 (σ =164) √(on avg.) N/A N/A 34127 (σ =75) -24 (on avg.)

Model 6b 10809 (σ =151) √(on avg.) N/A N/A 34113 (σ =119) -38 (on avg.)

Model 6c 10800 (σ =245) √(on avg.) N/A N/A 34078 (σ =167) -73 (on avg.)

New Results

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Resource Adequacy Evaluation of Modeled Outcomes under the “Hybrid Model”

• Modeled outcomes based on Feb 2016 MC presentation using FCA10 inputs

SENE: LRA=9584 MW NNE: MCL=8830 MW System: ICR=34151 MW Supply Model MW Procured

Adequacy Evaluation MW Procured

Reliability Evaluation MW Procured

Reliability Evaluation

Model 1 10840 √ N/A N/A 34567 416

Model 2a 10840 √ N/A N/A 34712 561

Model 2b 10840 √ N/A N/A 34857 706

Model 2c 10840 √ N/A N/A 34294 143

Model 2d 9950 √ N/A N/A 34567 416

Model 3 11096 (σ =478) √(on avg.) N/A N/A 34985 (σ =382) 834 (on avg.)

Model 4a 10840 √ N/A N/A 34567 416

Model 4b 10840 √ N/A N/A 34567 416

Model 5a 9765 √ N/A N/A 34567 416

Model 6a 10894 (σ =183) √(on avg.) N/A N/A 34347 (σ =137) √(on avg.)

Model 6b 10867 (σ =182) √(on avg.) N/A N/A 34266 (σ =226) √(on avg.)

Model 6c 10864 (σ =267) √(on avg.) N/A N/A 34241 (σ =295) √(on avg.)

New Slide

• For resource adequacy, the “hybrid” of existing system and new zonal curves perform well over a range of models/scenarios – In all scenarios examined, it exceeds the reliability targets (green text) – Hybrid model procures more than required capacity levels on average

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Market Rule Design Changes for Marginal Reliability Impact Value

Language Reference

Explanation

Definitions Introduce Marginal Reliability Impact as defined term

III.12.1 Eliminate description of capacity requirement for the system demand curve

III.12.1.1 New section outlining calculation of MRI values for the system, used to calculate System Wide Capacity Demand Curve values

III.12.2.1.3 New section outlining calculation of MRI values for import-constrained zones

III.12.2.2.1 New section outlining calculation of MRI values for export-constrained zones

III.12.3 Update information filed before FCA to include Capacity Zone Demand Curves

III.12.7, III.12.8, III.12.9

Replace ‘capacity requirement values for the System-Wide Capacity Demand Curve’ with ‘Marginal Reliability Impact values’

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PROPOSED CHANGES TO ISO TARIFF SECTION I - GENERAL TERMS AND CONDITIONS

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Additions in Tariff Section I - General Terms and Conditions

Tariff Section I.2.2. - Definitions:

“Capacity Zone Demand Curves are the demand curves used in the Forward Capacity Market for a Capacity Zone as specified in Sections III.13.2.2.2 and III.13.2.2.3.

Marginal Reliability Impact is the change, with respect to an increment of capacity supply, in expected unserved energy due to resource deficiency, as measured in hours per year.”

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PROPOSED CHANGES TO ISO TARIFF SECTION III - MARKET RULE 1

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Eliminate Description of Capacity Requirement for the System-Wide Demand Curve

Deleted the last paragraph in “Section III.12.1 Installed Capacity Requirement.”:

The ISO shall determine, by applying the same modeling assumptions and methodology used in determining the Installed Capacity Requirement, the capacity requirement value for each LOLE probability specified in Section III.13.2.2 for the System-Wide Capacity Demand Curve.

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Calculation of System-Wide MRI Values (New Section)

“III.12.1.1 System-Wide Marginal Reliability Impact Values.

Prior to each Forward Capacity Auction, the ISO shall determine the system-wide Marginal Reliability Impact of incremental capacity at various capacity levels for the New England Control Area. For purposes of calculating these Marginal Reliability Impact values, the ISO shall apply the same modeling assumptions and methodology used in determining the Installed Capacity Requirement.”

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Calculation of MRI Values for Import-Constrained Capacity Zones (New Section)

“III.12.2.1.3 Marginal Reliability Impact Values for Import-Constrained Capacity Zones.

Prior to each Forward Capacity Auction, the ISO shall determine the Marginal Reliability Impact of incremental capacity, at various capacity levels, for each import-constrained Capacity Zone. For purposes of calculating these Marginal Reliability Impact values, the ISO shall apply the same modeling assumptions and methodology used to determine the Local Resource Adequacy Requirement pursuant to Section III.12.2.1.1, except that the capacity transfer capability between the Capacity Zone under study and the rest of the New England Control Area determined pursuant to Section III.12.2.1.1(b) shall be reduced by the greater of: (i) the Transmission Security Analysis Requirement minus the Local Resource Adequacy Requirement, and; (ii) zero.”

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Calculation of MRI Values for Export-Constrained Capacity Zones (New Section)

“III.12.2.2.1 Marginal Reliability Impact Values for Export-Constrained Capacity Zones.

Prior to each Forward Capacity Auction, the ISO shall determine the Marginal Reliability Impact of incremental capacity, at various capacity levels, for each export-constrained Capacity Zone. For purposes of calculating these Marginal Reliability Impact values, the ISO shall apply the same modeling assumptions and methodology used to determine the export-constrained Capacity Zone’s Maximum Capacity Limit.”

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Update Information Filed before FCA to Include Capacity Zone Demand Curves

Section III.12.3 Consultation and Filing of Capacity Requirement

Replaced “and capacity requirement values for the” with “and Capacity Zone Demand Curves” in 3 locations.

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Changes Relating to the System-Wide Capacity Demand Curve

Section III.12.7 Reserve Modeling Assumptions.

Section III.12.8 Load Modeling Assumptions.

Section III.12.9 Tie Benefits.

Replace ‘capacity requirement values for the System-Wide Capacity Demand Curve’ with ‘Marginal Reliability Impact values” through out these sections.

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Al McBride a m c b r i d e @ i s o - n e . c o m