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Seattle City Light: Benefits of EIM Participation
Final Report
May 31, 2016
Arne Olson, Partner
Nick Schlag, Managing Consultant
Jack Moore, Director
Ana Mileva, Senior Consultant
Conleigh Byers, Associate
2
Outline
About E3 & the Energy Imbalance Market (EIM)
Study scope & modeling framework
Modeling assumptions
• Base Case
• EIM Case
Benefits of EIM participation
Sensitivity analysis of EIM benefits
• Price volatility
• Hydro availability
• Limits on participation
Conclusions
Energy and Environmental Economics, Inc. (E3)
San Francisco-based consultancy with 40+ professionals
Rigorous analysis on a wide range of energy issues for utilities, regulators, gov’t agencies, power producers, technology companies, and investors
• Resource planning, asset valuation, cost of service, rate design, EE/DR/DG cost-effectiveness, value of solar, renewable procurement, renewable integration, transmission development, deep decarbonization pathways, market analysis
Our experience has placed us at the nexus of planning, policy and markets
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4
Energy Imbalance Market Overview
CAISO’s Energy Imbalance Market (EIM) established by CAISO and PacifiCorp to enable efficient subhourly trading of energy across a broader geographic footprint
• EIM entities in participating BAAs submit bids into 15- & 5-minute real-time market on a voluntary basis
• Market optimization runs for the whole footprint, determining optimal redispatch among participants
Since market inception in 2014, EIM footprint has expanded to include Nevada Energy (2015), and multiple additional entities have announced intentions of joining
CAISO estimates EIM has generated a total benefit of $65 million to participants over first 18 months of operations
5
EIM Value Proposition: What Can I Do That I Don’t Do Today?
EIM creates the option to buy or sell within the hour, with less notice, and at a lower volume and cost, and can use optimization to find beneficial match of buyers & sellers
Uses “left over” transmission that wasn’t expected to be needed hourly, but could be useful in real time
Centralized dispatch can identify optimized transactions that are too short term or otherwise would go unidentified in bilateral world without consolidated cost & bid information
Market framework allows generators to be compensated for value of flexibility in generation that may not be reflected in daily block sales
6
E3 Experience Studying EIM Benefits
E3 has developed a deep understanding of the nuances and intricacies of the dynamics of energy imbalance markets since completing an analysis of the benefits of a WECC-wide EIM in 2011
Following this initial assessment, E3 has completed benefits studies for each of the entities that have joined or announced intentions to join the EIM:
• PacifiCorp (2013)
• NV Energy (2013)
• Puget Sound Energy (2014)
• Arizona Public Service (2015)
• Portland General Electric (2015)
• Idaho Power Company (2016)
STUDY SCOPE & MODELING FRAMEWORK
8
Notquantified
Focus ofthis study
Benefits of EIM Participation
With its sizeable fleet of flexible hydroelectric resources, Seattle City Light is well-positioned to harvest a number of benefits from EIM participation:
• Additional revenues through arbitrage of subhourly markets
• Additional revenues through arbitrage between bilateral and EIM markets
• Additional revenues through sales of flexible ramping capacity
• Reduced need to carry flexibility reserves; reduced costs of managing forecast errors
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City Light is unique in comparison to existing EIM entities:
• Load primarily served by owned & contracted flexible hydro resources
• Surplus hydro generation sold to market to reduce retail rates
E3 created a dispatch model to estimate City Light’s net market revenues with and without EIM participation
• Captures City Light’s market behavior under different wholesale price streams
• Uses 5- and 15-minute price data from historical years
• Assumes market could accommodate all desired City Light transactions at the historical market price
Flexible modeling approach allows streamlined development of new scenarios and sensitivity analysis
Benefits Calculation
Framework for Benefits Assessment
Net Market Revenues (with SCL EIM Participation)
Net Market Revenues (without SCL EIM Participation)
Benefit of SCL EIM Participation
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Model Overview
E3 developed an optimization model to maximize City Light’s net revenue in wholesale markets subject to constraints of load service, generation capability, and transmission limits
City Light Loads
City Light Resources• SCL hydro fleet• BPA & other contracts
Wholesale Market• Mid C bilateral market• Proxy EIM pricing nodes
Dispatch Optimization
Model
SCL Net Revenue
Optimization dispatches resources across
multiple horizons, from hourly to 5-minute
intervals
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EIM CaseNet Revenue
Base CaseNet Revenue
Modeling Sequence
Simulation Framework
Model optimizes City Light dispatch in three sequential stages
Hourly Dispatch
Fifteen Minute Dispatch
Five Minute Dispatch
Mid C(HLH/LLH)
Mid C(HLH/LLH)
CAISO RT15(15 min)
CAISO RT5(5 min)
In subhourly stages, hydro resources can increase or decrease output from previous set points in order to sell or buy in CAISO EIM
No change in hourly dispatch between Base Case & EIM Case
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Detailed Data Requirements
Most data used to model City Light’s operations in EIM was provided directly by City Light
Category Item Source
Loads System load shapes
Hourly & five minute shapes
Provided by
City Light
Resources Hydro characteristics for each City Light hydro plant:
Min/max output (MW)
Hourly & five-minute dispatch (MW)
Provided by
City Light
Long-term contracts
Hourly shapes (MW)
Provided by
City Light
Wholesale
Market
Prices
Bilateral HLH/LLH Prices
Hub: Mid C
Provided by
City Light
(from ICE)
CAISO EIM Real Time Subhourly LMPs
Node: Chehalis_Node3
CAISO OASIS
(15-min & 5-
min)
Transmissi
on Rights
City Light owned/contracted rights to wholesale
market hubs
Hub: Mid C
Nodes: CAISO (via PSE)
Provided by
City Light
BASE CASE MODELING ASSUMPTIONS
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Base Case Summary
The purpose of the Base Case is to create a model that simulates City Light’s operations under 2015 conditions
• Hydro, load, bilateral market prices, etc.
Base Case serves as a baseline against which the value of EIM participation can be compared
Base CaseNet Revenue
Modeling Sequence
Hourly Dispatch
Fifteen Minute Dispatch
Five Minute Dispatch
Mid C(HLH/LLH)
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Daily Hydro Energy Budgets
Hydro resources constrained by daily historical energy budget, maximum output level
Used for 2015 historical scenario
Used for sensitivity analysis
Runoff occurs early (Feb-Mar)
Traditional runoff
Low output during traditional
runoff
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Dispatch Logic for Hydro Plants
Non-dispatchable resources are modeled as fixed hourly profiles
• Cedar River, South Fork Tolt, Gorge, Lucky Peak
Dispatchable resources are constrained by a daily energy budget and are dispatched on an hourly basis against Mid-C market prices
• Ross, Diablo, Boundary
Surplus hydro sold at Mid C market, subject to 650 MW limitation
• Mid C market modeled in HLH/LLH blocks
• Additional sales modeled at a $10/MWh discount to Mid C (reflects cost of purchasing short-term transmission)
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Historical system dispatch, Jan 6, 2015
Historical system dispatch, July 15, 2015
Simulated system dispatch, Jan 6, 2015
Simulated system dispatch, July 15, 2015
Snapshots of Hourly System Dispatch
Contracts
HydroLoad
Hydro dispatch pattern indicative of HLH/LLH trading
in bilateral Mid-C market
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Benchmarking Against Historical Hydro Dispatch
Hourly hydro dispatch (2015)
Duration curves of production
Estimated revenue from surplus hydro sales in 2015: $37 million
Optimization tends to use hydro more flexibly than it
operates in reality
EIM CASE MODELING ASSUMPTIONS
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EIM Case Summary
The EIM case is built off of the Base Case, but allows SCL to buy and sell from CAISO’s 15- and 5-minute markets to generate additional revenues
City Light’s hydro resource are redispatched on a subhourly time scale to enable transactions with CAISO
EIM CaseNet Revenue
Modeling Sequence
Hourly Dispatch
Fifteen Minute Dispatch
Five Minute Dispatch
Mid C(HLH/LLH)
CAISO RT15(15 min)
CAISO RT5(5 min)
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Redispatching Flexible Units in EIM
Based on City Light input, the dispatchable hydro fleet (Ross, Diablo, Boundary) is assumed to be capable of providing 300 MW of flexibility
• Also constrained by minimum & maximum capacity
No ramping constraints are imposed on dispatchablehydro units
• Based on guidance from City Light
Model has perfect foresight of EIM prices within each day
• Allows nearly perfect arbitrage of EIM price volatility
Assumed Subhourly Flexibility
+300 MW(sales to EIM)
-300 MW(purchases from
EIM)
Upper limit
Lower limit
Hourly schedule
MW
Time
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Market Access Assumptions in EIM
E3 assumes City Light has sufficient internal transmission to deliver its own generation resources to loads
Access to external markets is limited by City Light’s transmission rights
• Trading at Mid-C modeled in HLH/LLH blocks
• EIM pricing based on Chehalis_Node3
Surplus in excess of City Light’s transmission to Mid C is sold at a discounted price ($10/MWh below Mid-C)
SCL
Mid C
CAISO EIM
(via PSE)
650 MW
650 MW
447 MW 500 MW
Available in Base Case & EIM Case
Available only in EIM Case
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2015 Price Duration Curves: Mid-C & EIM Markets
EIM (RT5)
EIM (RT15)
Mid C
Maximum prices in EIM markets reach
$1,000/MWh
Volatile pricing in EIM markets is a potential source of value, but future volatility is uncertain and
may change with increased participation and increased
renewable penetrations
Figure based on Chehalis node; however, similar patterns are evident throughout the footprint of CAISO’s EIM
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EIM Prices Show Significant Intraday Volatility
The volatility of the subhourly EIM markets distinguishes it from the bilateral markets in which City Light has historically participated
To measure intraday volatility, this study uses the metric of “daily standard deviation”: the standard deviation of a series of prices across each 24-hour day
Figure based on Chehalis node; however, similar patterns are evident throughout the footprint of CAISO’s EIM
EIM BENEFITS: HISTORICAL 2015 ANALYSIS
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Summary Results: Benefits Under 2015 Historical Prices
Estimated revenue from sales of surplus hydro to bilateral markets in 2015: $37 million
Estimated incremental revenues from EIM participation under 2015 market conditions: $23 million per year
Five Minute Market
Fifteen Minute Market
Mid-C Bilateral Market(no change between Base Case & EIM Case)
Model assumes full optimization of hydro
dispatch to take advantage of all
arbitrage opportunities with perfect foresight
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Fifteen-Minute System Dispatch
Fifteen-Minute EIM Net Sales
CAISO Fifteen Minute EIM Price
Hour-Ahead System Dispatch
Day-Ahead Sales (Purchases)
Day-Ahead Mid-C Price
15-min purchases
15-min sales
Hourly & Subhourly Operations in EIM: January 6, 2015 (Historical)
Day-ahead sales
In subhourlysimulations, hydro flexibility is used to arbitrage EIM prices (buy low, sell high)
Surplus hydro sold at Mid-C market in HLH/LLH blocks
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Fifteen-Minute System Dispatch
Fifteen-Minute EIM Net Sales
CAISO Fifteen Minute EIM Price
Hour-Ahead System Dispatch
Day-Ahead Sales (Purchases)
Day-Ahead Mid-C Price
15-min purchases
15-min sales
Hourly & Subhourly Operations in EIM: July 13, 2015 (Historical)
Day-ahead purchases
Hydro can be used for arbitrage at all times—
except when hydro resources are at Pmin
or PmaxPurchases from Mid-C market during low
water conditions
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Distribution of Market Revenue Throughout the Year
Daily revenue from sales (purchases) to bilateral market ($37 million)
Incremental daily revenue from arbitrage in EIM markets (+$23 million)
During runoff, sales of surplus hydro
generates revenue
When loads are high and hydro is low, City Light is a net buyer
Arbitrage in EIM market allows City Light to generate additional revenues throughout the year
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Historical Market Volatility Creates Revenue Opportunities
Volatility in EIM markets provides opportunities for City Light to capture revenues through arbitrage by using the flexibility of its hydro resources
Fifteen Minute Market(2015 Historical)
Five Minute Market(2015 Historical)
Increasing volatility
In
creasin
g r
even
ue
Each dot represents one day of
2015
Jan 6
July 15
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Summary of Analysis
The flexibility of City Light’s hydro fleet provides it with a significant opportunity to take advantage of market conditions in the EIM
• Market volatility is the main driver of City Light’s revenue, as flexible hydro resources can be dispatched to arbitrage market prices as a storage resource
• Most EIM participants, whose generation resources are primarily less-flexible thermal resources, cannot take advantage of price volatility in this respect
• Benefits to City Light under historical pricing patterns are significant when compared with revenue from historical system surplus sales
Sensitivity analysis is conducted to test the effect of several assumptions on the results based on 2015 market & hydro conditions:
• Volatility of EIM prices
• Hydrological conditions
• Potential constraints on volume of City Light EIM participation
EIM BENEFITS: IMPACT OF VOLATILITY
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Relationship Between Volatility and Revenue
Volatility in EIM markets is identified as a key driver of City Light’s revenues as an EIM participant
Key questions to inform sensitivity analysis are:
1. Is there any reason to suggest that current levels of volatility observed in EIM are anomalous?
• What can be learned from the historical record of CAISO subhourly market prices?
2. How will volatility change in the future?
• How will expansion of EIM participation and changes in resource portfolios impact volatility in market?
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Intraday volatility has been a characteristic of CAISO’s subhourly market since its inception
Historical 5-min pricing (Tesla)
Historical 5-min pricing (Chehalis)
Historical Volatility in CAISO Markets
2010
2011
2012
2013
2014
2015
2015
Historical pricing data indicates that volatility observed in NW in 2015 was typical of CAISO markets, perhaps even understated
35
NVE’s Joining the EIM Has Not Impacted Volatility Noticeably
NVE commenced financially binding EIM operations on December 1, 2015
• While median daily standard deviation varies by month, NVE joining the EIM has not dampened volatility noticeably
NVE joins EIM
36
Future Volatility in the EIM
Future developments will have competing influences on the volatility
• Addition of more EIM participants is expected to reduce volatility ()
• Addition of intermittent renewable generation to meet policy goals will lead to increases in volatility ()
Unclear which of these fundamental changes will prove stronger than the other—future volatility in EIM market is an uncertainty
37
High Renewable Goals Will Increase EIM Volatility
Growing penetrations of renewables will increase net load forecast error and subhourly variability, increasing system need for operational flexibility
Curtailment of renewables in real-time dispatch will result in intervals with zero/negative market prices
Both impacts will lead to increases in volatility as states pursue higher RPS goals
Renewable curtailment has already been observed in large quantities in subhourly markets—and will
continue to rise Source: CAISO Market Performance & Planning Forum
40-50 GWhcurtailment per month
38
Overview of Volatility Sensitivities
Multiple sensitivities provide insight into relationship between pricing volatility & EIM benefits:
1. Internal CAISO pricing: substitute pricing at Tesla node on CAISO system for Chehalis; provides insight into how much of 2015 benefit was driven by unique conditions at Chehalis
2. Clipped pricing: 2015 prices at Chehalis bounded at $0 and $100/MWh; provides information on how dependent revenue is on tail events
3. Dampened volatility: 2015 prices at Chehalis with volatility reduced by 40% to reflect potential reductions with expanded EIM participation
39
Volatility Sensitivity #1: EIM Prices Based on CAISO Node
Pricing record at Chehalis reflects only a single year of activity with a single non-CAISO participant (PacifiCorp)
As a second reference, E3 quantified City Light revenues in EIM assuming sales & purchases at Tesla—a central part of the CAISO system with a much longer record of pricing data available
NOTE: prices at Tesla include California’s carbon cost and thus are not directly comparable to expected EIM prices on City Light’s system
Chehalis
Tesla
40
Revenue Impact of CAISO Internal Pricing
EIM revenues based on Tesla pricing are comparable to revenues based on Chehalis node ($26 million per year)
Five Minute Market
Fifteen Minute Market
Mid-C Bilateral Market(no change between Base Case & EIM Case)
Note that this sensitivity would
overstate City Light revenues due to inclusion of CO2
allowance costs at Tesla node
41
Volatility Sensitivity #2: Clipped Prices in EIM
Extreme pricing events could be a significant source of revenue but are rare and unpredictable
Especially during these periods, assumption that City Light is a price taker in the market may not be valid
Examining benefits based on a price stream bounded at $0 and $100/MWh provides some insight into relative importance of extreme events for City Light’s benefits
2015 15-min pricing at Chehalis
42
Revenue Impact of Clipped Prices Sensitivity
Removing outlier prices reduces EIM revenues; however, revenue is still significant ($19 million per year)
• Much of EIM benefit stems from moderate intraday volatility
Five Minute Market
Fifteen Minute Market
Mid-C Bilateral Market(no change between Base Case & EIM Case)
43
Volatility Sensitivity #3: Dampened Volatility
All else equal, continued expansion of the EIM footprint could lead to a reduction in volatility of prices in EIM markets
While this effect is highly uncertain, it is a key driver of the benefits to City Light
To measure the impact of reductions in pricing volatility in the EIM on City Light’s benefits, E3 examined a sensitivity in which volatility in the EIM markets is reduced by 40%
• Representative of potential impact of footprint expansion
• Ignores potential increases in volatility due to buildout of renewable resources
44
Revenue Impact of Dampened Volatility
Reductions in market volatility result in lower revenues ($15 million per year)
• Magnitude of impact roughly proportional to reduction (40%)
Five Minute Market
Fifteen Minute Market
Mid-C Bilateral Market(no change between Base Case & EIM Case)
45
Summary of Volatility Sensitivities
Key result of volatility sensitivities: reductions in volatility result in fewer opportunities for energy arbitrage, less revenue
Five Minute Market
Fifteen Minute Market
Mid-C Bilateral Market(no change between Base Case & EIM Case)
Total benefit:
$23$26
$19$15
EIM BENEFITS: IMPACT OF HYDRO AVAILABILITY
47
Sensitivity: 2013 Hydro Conditions
Hydro conditions in 2015 were anomalous—seasonal profile does not match typical expectation
Pairing 2013 hydro conditions with 2015 market prices provides some insight into the benefits of EIM participation under more typical hydro conditions
• Any correlation between daily hydro budgets and prices or loads is lost by pairing multiple years, but this analysis is at least indicative
48
Revenue Impact of Hydro Sensitivity
Hydro conditions have direct impact on revenue in day-ahead markets but lesser impact on EIM revenues ($23 million per year)
• EIM revenues derived from flexibility, not energy
Five Minute Market
Fifteen Minute Market
Mid-C Bilateral Market(increases under hydro sensitivity due to change in hydro conditions)
EIM BENEFITS: IMPACT OF EIM TRADING VOLUMES
50
Volume of Transactions in EIM Market
For City Light to make use of the full flexibility of its hydro resources (+/- 300 MW), EIM must have sufficient depth to absorb this quantity—either through:
• “Uninstructed imbalances”
• Economic dispatch of generators elsewhere in EIM footprint
Quantifying the depth of the EIM market is challenging, but some useful indicators are available
While expansion of CAISO EIM may tend to suppress volatility (), it also increases the depth of the market ()
• By allowing City Light to trade with new counterparties, EIM expansion will increase likelihood that City Light can fully monetize the value of its flexibility
51
Historical Exchanges Among Balancing Authorities
Transfers among balancing authorities is not a direct proxy for the total depth of market, ignoring economic trades through EIM within each BA
Nonetheless, transfers highlight large volumes of power flowing through EIM market
Source: CAISO Market Performance & Planning Forum
Dec 1, 2015 Apr 9, 2016
+ 900 MW
- 900 MW
52
Transmission May Limit City Light’s Access to EIM Market
City Light’s main connection to the EIM market is via Puget Sound, whose connection to the rest of the EIM is approximately 300 MW
Source: California ISO
53
Sensitivity: Limited City Light Participation
The simple model used to simulate City Light’s participation in EIM does not directly consider how much of City Light’s flexibility can be absorbed by the market
• Limitations of market depth
• Limitations of transmission capability
While these factors are not directly modeled in this study, the model can be used to illustrate how City Light’s revenues would change if these or other factors do limit its ability to participate
To examine this relationship, E3 modeled a scenario in which City Light’s hydro resources can provide only +/-150 MW of flexibility within the hour
54
Revenue Impact of Limited Participation
Relationship between volume of participation and revenues is nearly linear; benefits reduced by approximately half ($13 million per year)
Five Minute Market
Fifteen Minute Market
Mid-C Bilateral Market(no change between Base Case & EIM Case)
EIM BENEFITS: LOW BENEFIT SENSITIVITY
56
Sensitivity: Combining Dampened Volatility & Limited Participation
To provide a lower bound estimate on the benefits captured by City Light through EIM participation, E3 combined the impacts of the “Dampened Volatility” and “Limited Participation” sensitivities
Impacts of these two sensitivities are nearly entirely independent, and are hence multiplicative:
• A 40% reduction in volatility reduces net EIM revenues by approximately 35%
• A 50% reduction in the limit on EIM participation (+/- 300 to +/- 150 MW) reduces net EIM revenues by 45%
Benefits with both limited participation and dampened volatility: $8 million per year
CONCLUSIONS
58
Summary of Analysis
Market-based modeling identifies significant of potential additional revenues from EIM participation: $8-23 million per year
Intraday price volatility in EIM markets is the key driver of magnitude of City Light’s benefits
• Volatility is and has been a characteristic of CAISO’s subhourly markets
• Volatility will be impacted by future changes in resource portfolio () and EIM footprint expansion (), but will not be eliminated entirely
Sensitivity RT15 Revenue
RT5Revenue
Total EIM Revenue
2015 Base Case $14 $9 $23
Pricing Sensitivities
Internal CAISO Pricing* $17 $9 $26
Clipped Prices $13 $6 $19
Dampened Volatility $9 $6 $15
Average Hydro Sensitivity $14 $9 $23
Limited Participation Sensitivity $8 $5 $13
Dampened Volatility, Limited Participation** $5 $3 $8
* Not included in final range because of impact of California carbon adder on revenue estimate** Combines impact of “Dampened Volatility” and “ Limited Participation” sensitivities
59
Conclusions
Participation in EIM provides City Light with an opportunity to monetize the value of its untapped hydro flexibility
While benefit is evident, this study’s large potential range reflects uncertainty of the size of future market opportunities in CAISO’s EIM
Actual realized benefits through EIM arbitrage may be lower than upper bound due to a number of factors:
• Modeling assumes perfect foresight of EIM pricing; in reality, without perfect foresight, City Light will not be able to arbitrage prices perfectly
• Modeling allows City Light to capture all potential arbitrage revenues; in reality, bidding strategies may lead to foregone opportunities
• Modeling assumes City Light has no impact on market prices; in reality, the addition of a large flexible hydro resource could dampen volatility—especially during periods of extreme pricing
Beyond EIM revenue quantified in this study, City Light is in position to capture additional benefits through EIM
• Improved understanding of market dynamics may allow City Light to generate additional revenues through arbitrage across multiple days or between markets
• Additional revenues through sale of flexible capacity to satisfy flexible ramping capacity requirements
Thank You!
Energy and Environmental Economics, Inc. (E3)
101 Montgomery Street, Suite 1600
San Francisco, CA 94104
Tel 415-391-5100
Web http://www.ethree.com
Arne Olson, Partner ([email protected])
Nick Schlag, Managing Consultant ([email protected])
Jack Moore, Director ([email protected])
Ana Mileva, Senior Consultant ([email protected])
Conleigh Byers, Associate ([email protected])
