Ontario Capacity Auction
Draft High Level Design
December 11, 2014
Contents
Introduction
Auction Parameter
Design Proposals
Eligibility and Performance
Design Proposals
Demand Curve
Design Proposals
Appendices
About this Document
Context
Design Principles
Capacity Product
Illustration of Auction Process
Length of Forward Period
Commitment Period
Locational Based Auctions (Zones)
Rebalancing Auctions
Market Power Mitigation
Commitment for New Resources
Cost Recovery
Auction Parameters Design Process
Resource Eligibility
Registration Requirements
Qualified Capacity
Resource Obligations
Non-Performance Penalties
Measurement and Verification
Eligibility and Performance Design Process
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41
43
Profile of Downward Sloping Demand Curve
45
Net Cost of New Entry
Target Capacity Requirement
Min/Max Capacity Limit
Max Auction Clearing Price
Demand Curve Design proposals
…
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Draft Proposal – For Discussion Purposes
2
About this Document
• This document provides a draft high level design for a made-in-Ontario
capacity auction.
• For each of the design elements introduced at the October 1, 2014 capacity
auction stakeholder engagement meeting, this document outlines:
– A high level proposal.
– Background and rationale for the proposal.
– Detailed design work to be addressed through future stakeholder engagement
meetings.
• Proposals have been developed with consideration for best practices in
other jurisdictions, Ontario-specific conditions, and stakeholder input.
• The IESO is seeking feedback on the draft design. Feedback will be
considered to complete the high level design in Q1 2015.
Draft Proposal – For Discussion Purposes
3
Context
• Through various forums, the IESO has heard stakeholder comments both
supporting, and illustrating concerns with, the development of a capacity
auction in Ontario.
• In general, the majority of stakeholder groups have expressed support for
continuing the design of a capacity auction.
• Nonetheless, the IESO acknowledges and appreciates that there remain
broad questions about the capacity auction that require further attention.
• It is also clear that as the details of capacity auction design are developed,
stakeholder positions will continue to evolve.
• The aim of a high-level design is to provide a shared understanding of the
auction mechanism and will facilitate future discussions on its development
for Ontario.
Draft Proposal – For Discussion Purposes
4
Design Principles
• For many of the proposals outlined in this document, there are clear tradeoffs between potential approaches.
• When evaluating options, the IESO has taken direction from the following
set of guiding principles for market development.
TRANSPARENCY
FAIRNESS
EFFICIENCY
COST
• Facilitate transparent and efficient market
signals
• Create equal opportunity for all technologies
and resource types to contribute to meeting
system needs
• Provide appropriate incentives and
minimize barriers for efficient participation
in the market
• Identify options to meet system needs at
lowest cost over the long run
Draft Proposal – For Discussion Purposes
5
Capacity Product
• The proposed high level design seeks to procure a single product through the
capacity auction. The product will be defined by resource obligations which
will be documented in the market rules.
• That product is the availability of resources to generate energy or reduce load
when called upon.
–
The capacity product is separate and distinct from other physical power products and
services (e.g. the provision of energy, ramping capability, and ancillary services).
• The capacity product and performance obligations will be consistent for all
cleared resources.
–
All resources will be subject to the same must-offer obligation and will have their
performance assessed and penalties applied based on their availability during peak
hours.
• All participants will have their capacity qualified so that 1 MW from each
resource represents an equivalent reliability value.
• The product will be purchased through an annual auction for six month summer
and winter commitment periods to meet locational requirements.
Draft Proposal – For Discussion Purposes
6
Illustration of Auction Process
3-4 Years
Pre-Auction
Period
Base
Auction
Forward
Period
Capacity resources
complete eligibility
requirements,
register for the
auction, and qualify
their capacity.
- Auction selects
cleared capacity
using the demand
curve.
- Auction is optimized
to meet locational
and seasonal
requirements at the
lowest cost.
Rebalancing Auctions
1 Year
Commitment
Period
Summer
Season
Winter
Season
(6 months)
(6 months)
- Capacity is delivered and payments are made in the commitment period.
- Cleared resources have obligations in both the forward and commitment
periods.
- Measurement and verification processes assess resources’ success in
meeting their obligations.
- Penalties are applied where appropriate.
Draft Proposal – For Discussion Purposes
7
Design Proposals:
Auction Parameters
Draft Proposal – For Discussion Purposes
8
Length of Forward Period
(1)
Proposal
The base auction will be held three to four years prior to the delivery period.
Background
•
•
A forecast of future need is required to set a capacity target for the auction.
The longer in advance of the delivery period that the forecast is made, the greater the
potential forecast error (see Appendix I.i).
–
•
A shorter forward period can discourage some new resources from participating.
–
–
•
This is an important consideration since forecast error impacts both the volume of capacity
procured and the price at which the auction clears. Greater forecast error results in less
efficient outcomes.
If the forward period is shorter than a resource’s development timeline, the resource will
need to complete a greater amount of development work prior to the auction.
This means making investments without any certainty of clearing in the auction and, in
some cases, it will prevent resources from participating.
However, a longer forward period can also restrict some resources’ ability to
participate.
–
For example, DR resources may be challenged to identify opportunities many years in
advance.
Draft Proposal – For Discussion Purposes
9
Length of Forward Period
(2)
Rationale
•
The most effective forward period will support sufficient competition in the auction
while minimizing future supply/demand uncertainty (including forecasting error)
•
A three to four year forward period will enable competition amongst a range of
resources including: existing resources, new DR, imports, uprates, and new
generation facilities.
–
–
–
•
In PJM and New England, a 3 year forward period has been shown to be sufficient for new
gas plants to secure financing, be developed, and be brought to commercial operation (see
Appendix I.ii).
While Ontario has unique permitting and approval processes and timelines, gas plants have
been developed on similar timelines in the province.
Further, initial permitting and approvals processes can be completed in advance of the
auction. This type of eligibility requirement reduces the need for a longer forward period
and manages the risk for the system and for developers that a cleared resource might not
become available during the commitment period.
While a shorter forward period could help to reduce forecasting error, it would
provide a significant barrier to entry for new generation resources and would not
support sufficient competition.
Draft Proposal – For Discussion Purposes
10
Length of Forward Period
(3)
Detailed Design Work
•
Finalize the forward period.
Draft Proposal – For Discussion Purposes
11
Commitment Period
(1)
Proposal
The auction will be conducted once annually for two six month commitment periods
covering the winter and summer.
Background
•
Resource availability differs across seasons.
–
•
•
Peak demand also varies across seasons.
In jurisdictions with a large difference between summer and winter demand, running
a capacity auction that only accounts for availability and peak demand in a single
season may be adequate.
–
–
•
For example, thermal generators’ output capability changes based on ambient temperature.
The availability of DR that aggregates air conditioning also differs based on the weather.
This approach may help to limit the complexity of auction design.
However, the approach could also exclude economic resources from participating or, in an
effort to include those resources, result in multiple capacity products being created, thus
reintroducing complexity (see Appendix II.i).
In jurisdictions where resource adequacy needs cannot be met with certainty by
accounting for a single season, a seasonal component should be included in the
auction.
Draft Proposal – For Discussion Purposes
12
Commitment Period
(2)
Rationale
•
To provide a fair playing field for competition, the IESO believes that capacity
auction obligations should not differ between resources. All resources will be
required to be available throughout the commitment period (as discussed later in the
“Obligations” section).
•
With an annual commitment period, this approach could exclude cost-effective
capacity that is not available throughout the entire year.
–
–
•
For example, it could exclude DR that aggregates air conditioning load and summer imports
from a winter peaking jurisdiction.
To include seasonal resources, other jurisdictions have created separate products within an
annual auction. The IESO does not favour this approach since it would result in different
obligations for different resources, eroding the level playing field and increasing complexity.
Further, while Ontario has recently been a summer peaking jurisdiction, the gap
between summer and winter peaks is modest (see Appendix II.ii).
–
–
In 2014, for example, Ontario will be a winter peaking jurisdiction.
This indicates the need for a seasonal component in the capacity auction.
Draft Proposal – For Discussion Purposes
13
Commitment Period
(3)
Rationale (continued)
•
A single annual auction that optimizes the cost of meeting winter and summer
requirements (see Appendix II.iii) will provide cost-effective capacity to the province
while maintaining a fair playing field for participants and ensuring that resource
adequacy needs are met.
Detailed Design Work
•
Determine most appropriate timing (beginning and end months) for 6 month
summer and winter commitment periods.
Draft Proposal – For Discussion Purposes
14
Locational Based Auctions (Zones)
(1)
Proposal
The auction will consider the deliverability of capacity into and out of transmission
constrained zones across the province. The auction will optimize to satisfy both global
and zonal capacity requirements, and produce locational capacity prices.
Background
•
•
Ontario has internal transmission constraints that can limit the ability to transfer
power in and out of certain areas.
Export constrained zones have bottled generation that cannot flow out of the zone
due to inadequate transmission.
–
•
Import constrained zones have limited ability to flow energy into the zone to satisfy
load.
–
•
Only limited surplus capacity within these zones can be counted towards meeting capacity
needs in other zones.
This restricts the ability to count on capacity from neighbouring zones, and requires more
capacity to be physically located within the zone.
Zonal resource adequacy requirements must be determined while respecting
transmission limitations.
Draft Proposal – For Discussion Purposes
15
Locational Based Auctions (Zones)
(2)
Rationale
•
Ontario’s capacity auction is a mechanism for meeting resource adequacy
requirements. Resources that clear in the auction must be able to physically deliver
energy or reduce demand in a way that maintains reliability if called upon.
•
Zonal prices that reflect the relative value of capacity provide a strong signal for
efficient entry and exit of capacity into and out of the market.
–
–
Export constrained zones within excess supply could have relatively lower prices than
unconstrained areas of the province. Import constrained zones with deficient supply could
have relatively higher prices.
In zones where capacity prices are higher, there would be stronger incentive to invest in
maintenance of an existing facility or development of a new resource.
•
Further, a Minimum Capacity Cleared constraint in import constrained zones and a
Maximum Capacity Cleared constraint in export constrained zones will help ensure
capacity is developed where it is needed and help reduce the need for costly out–ofmarket Reliability-Must-Run (RMR) contracts.
•
Experience from other jurisdictions has demonstrated the importance of having a
robust locational process for creating and modelling zones in capacity auctions.
–
Earlier NE auctions conducted with unsufficient locational considerations cleared capacity
in areas where it was not needed most and led to a need for out-of-market contracting (see
Appendix III.i).
16
Draft Proposal – For Discussion Purposes
Locational Based Auctions (Zones)
(3)
Detailed Design Work
•
•
•
Identify import and export capacity transfer limits between internal zones.
Establish process for identifying and maintaining capacity zones.
Consider minimum sizes for zones in order to ensure sufficient competition and limit
opportunities for the exercise of market power.
Draft Proposal – For Discussion Purposes
17
Rebalancing Auctions
(1)
Proposal
Rebalancing auctions will be held annually between the base auction and delivery year.
No holdback will occur in the base auction to be satisfied in the rebalancing auctions.
Background
•
Rebalancing auctions provide a mechanism to adjust capacity commitments made in
the base auction.
–
–
–
•
If the forecast in the base auction is low and insufficient capacity is procured, rebalancing
auctions provide an opportunity to procure additional resources and fill any gap that exists.
If the forecast in the base auction was high and excess capacity was procured, capacity
resources can be cost-effectively released from their obligation.
If a resource that cleared in the base auction wishes to buy out of its position (e.g. to avoid
penalties if it no longer believes it will be available for the commitment period) it can submit
a demand bid to replace its commitment.
Some jurisdictions elect to hold-back some capacity in the base auction to be satisfied
in rebalancing auctions.
–
This may be done to increase opportunities for short-term resources (like DR) and/or to
protect against over-procurement if demand forecasts are high
Draft Proposal – For Discussion Purposes
18
Rebalancing Auctions
(2)
Rationale
•
Some mechanism is required to adjust for the changing supply and demand
conditions that are inherent to a forward capacity auction.
•
Annual rebalancing auctions are used in PJM and NE. They provide a proven
approach to adjusting for forecast error and enabling resources to be released from
their capacity obligations where economic.
•
The IESO believes that a holdback provision does not meet the principles of fairness
or efficiency.
–
–
•
It would unfairly restrict competition for a small portion of the capacity target (i.e. only
shorter term resources could compete to supply holdback MW).
It would distort the clearing price in the base auction (i.e. by reducing demand, clearing
prices could be suppressed)
Further, the IESO should not have a bias, upward or downward, in its demand
forecast. If a bias were observed it should be corrected in the forecast itself.
Detailed Design Work
•
Determine the number of, and timing for, rebalancing auctions.
Draft Proposal – For Discussion Purposes
19
Market Power Mitigation(1)
Proposal
Gaming and market power mitigation measures will be required where auction design
alone is insufficient to eliminate opportunities to exercise seller-side or buyer-side
market power. To the extent possible, auction design should try to minimize the need
for out-of-market mitigation.
Background
•
Supply-side mitigation measures exist in U.S. markets to prevent the physical and
economic withholding of capacity to increase prices, these include:
–
–
–
•
Mandatory participation in auction for all existing generation resources.
Screening for market concentration to determine whether mitigation measures (i.e. offer
caps) need to be imposed.
Conducting administrative review of high-priced capacity offers to ensure they reasonably
reflect net going-forward costs.
Buy-side mitigation is intended to prevent the suppression of auction prices through
the subsidized entry of new resources through an out-of-market contract.
–
Offer price floors can be applied to include a new resource at Net CONE in the auction.
Such a resource would not be treated as a price taker.
Draft Proposal – For Discussion Purposes
20
Market Power Mitigation(2)
Background (continued)
•
The capacity auction would be monitored in a manner consistent with other IESO
administered markets.
–
The IESO’s Market Assessment and Compliance Division (MACD) would monitor the
operation of the capacity auction.
–
The Market Surveillance Panel would monitor, investigate, and report on activities and
behaviour within the market.
Rationale
•
Capacity auctions can be at risk to the exercise of market power because:
–
–
–
•
A steep demand curve can result in a large change in clearing prices from a small change in
offered quantity.
Many suppliers are often pivotal. Capacity resources are often lumpy in size.
There can be concentrations of ownership, especially in smaller zones.
Out-of-market contracts should be prevented from distorting cleared auction prices
for other resources.
Draft Proposal – For Discussion Purposes
21
Market Power Mitigation(3)
Detailed Design Work
•
Evaluate the potential for the exercise of market power as detailed design is
developed (i.e. based on potential demand curves, size of capacity zones, etc.).
•
If market power issues exist, develop process for triggering mitigation mechanisms.
•
Define appropriate mitigation mechanisms (e.g. offer caps, default offer caps, offer
floors/minimums, etc.).
Draft Proposal – For Discussion Purposes
22
Commitment for New Resources(1)
Proposal
Multi year commitment options will be considered to enable new resources that clear in
the auction to have the opportunity to lock-in their clearing price for more than one
year, subject to some conditions.
Background
•
The uncertainty of future revenues beyond the commitment period (i.e. 6 months or
one year) can limit some resources’ access to cost effective financing.
–
–
•
This concern is of particular concern to new resources with significant capital costs.
This challenge can increase the price at which new resources offer or, in some cases, prevent
them from offering at all.
However, longer-term commitments also have a number of drawbacks.
–
–
For example, they limit the flexibility of the auction to respond to changing demand
conditions, they lock-out future resources that may be able to provide cost-competitive
capacity, and they can distort price signals.
Long-term commitments can undermine the cost-efficiency of the auction.
Draft Proposal – For Discussion Purposes
23
Commitment for New Resources(2)
Rationale
•
The design should seek to enable those resources that require a lock-in period to
participate in the auction process while mitigating the negative effects of long-term
commitments.
–
•
The most appropriate mechanism for achieving this goal will be discussed with
stakeholders during detailed design work.
–
–
•
The goal will be to ensure new resources can compete without creating a bias towards them.
One option could be a lock-in that is only offered when insufficient other capacity is
available to meet the minimum auction requirement; this balances the need for resource
adequacy with the goal of flexibility.
This approach could offer a single lock-in term defined by the IESO or could allow resources
to compete based on their own preferred durations.
Including multi-year commitment options would add to the complexity of the
auction design and this must be weighed against the potential benefits. Some of the
complexities to be considered would include:
–
–
Impact on auction clearing prices.
Impact on other design elements.
Draft Proposal – For Discussion Purposes
24
Commitment for New Resources(3)
Detailed Design Work
• Understand the benefits, complexities and considerations in incorporating multi-year
commitment into the auction design.
• Determine the appropriate mechanism to allow for multi-year commitment.
Draft Proposal – For Discussion Purposes
25
Cost Recovery(1)
Proposal
The cost of capacity procured through the capacity auction will be recovered through
market uplift. Market participants withdrawing in Ontario will be charged capacity
costs on a monthly basis, based on their consumption during the five hours of greatest
demand in the previous year.
Background
•
•
Through the capacity auction construct, the IESO will procure capacity on behalf of
consumers and allocate the associated costs to individual customers.
In other jurisdictions with capacity markets, capacity costs are recovered based on
customers’ peak load contribution (see Appendix IV.i).
–
Capacity costs are primarily associated with peak load. This approach aligns cost recovery
with cost causation.
• In Ontario, total monthly capacity payments would be allocated across all market
participants withdrawing in Ontario based on their peak demand factors in the
previous year.
–
Peak demand factors would be calculated based on the same methodology used to establish
the “high five” under the Global Adjustment regulation.
Draft Proposal – For Discussion Purposes
26
Cost Recovery(2)
Rationale
•
Recovering capacity costs from all relevant market participants, regardless of their
size, will produce a more efficient outcome than would limiting the approach to a
subset of MPs.
–
–
Work done by Navigant Consulting, as part of SE-106 Global Adjustment Review, found
that a demand charge reflecting avoidable costs can improve short- and long-term efficiency.
Based upon Navigant’s quantitative analysis, applying a demand-based charge for the
recovery of capacity related costs to all market participants would result in the most efficient
outcome (see Appendix IV.ii).
•
Using the same peak demand factor already used for Global Adjustment minimizes
the potential for competing signals to loads to reduce their consumption.
•
Exporters will not be required to pay capacity charges because exports are not
considered when establishing the target capacity required to meet resource adequacy
requirements in Ontario.
–
No incremental capacity costs are incurred to support export transactions.
Detailed Design Work
• Define base-period for establishing peak demand factor
Draft Proposal – For Discussion Purposes
27
Auction Parameters Design Process
• Auction Parameter design elements define the framework for a made-inOntario capacity auction and cannot be determined in isolation
• Elements must complement each other to meet the objectives of the capacity
auction. Examples of elements that are closely related include:
• Length of Forward Period will influence the requirements a resource must
meet to be considered eligible to participate in an auction
• Combination of Base auction and Rebalancing Auctions must ensure the
IESO can meet a LOLE of no more than 0.1 day per year
• Market Power Mitigation measures will be considered where the auction
design is determined to be insufficient in mitigating potential exercises of
market power
Draft Proposal – For Discussion Purposes
28
Design Proposals:
Eligibility And Performance
Draft Proposal – For Discussion Purposes
29
Resource Eligibility(1)
Proposal
To be eligible to participate in the auction, resources must be able to demonstrate a
reasonable likelihood they will be able to meet their obligations in the commitment
period. The auction will allow for the participation of resources that are not already
under contract or regulation for the delivery period.
Background
•
Eligibility criteria provide assurance that resources will be able to meet their
obligations during the commitment period.
•
Eligibility is a binary assessment; an eligible resource can offer into the auction,
whereas an ineligible resource cannot.
•
Eligibility requirements could include, but are not limited to:
–
Consideration of the proposed permitting, construction, and commissioning timelines for
the development of a new or up-rated generation facility; customer marketing plans for
aggregated demand response; market participant creditworthiness; and ability to offer into
the energy market as a registered facility.
Draft Proposal – For Discussion Purposes
30
Resource Eligibility(2)
Rationale
•
The capacity auction is a mechanism to secure incremental capacity to meet Ontario’s
resource adequacy requirements.
•
As such:
–
Eligible resources must be able to demonstrate that they are offering incremental
capacity into the auction (i.e. capacity not under contract or regulation).
• To clarify, a contracted resource that can demonstrate it is able to offer incremental
capacity (e.g. through an uprate) could offer that capacity in the auction.
–
Eligible resources must also be able to provide reasonable assurance that they can be
counted on to meet their obligations during the commitment period.
Detailed Design Work
• Define eligibility criteria.
Draft Proposal – For Discussion Purposes
31
Registration Requirements
Proposal
Any organization wishing to participate in the auction will need to be an authorized
capacity auction participant. Additional registration requirements will be established
to demonstrate that auction participants have met eligibility requirements.
Rationale
•
Capacity auction authorization will provide a means for organizations to:
–
–
–
•
Provide contact information for the capacity auction.
Receive capacity auction system access.
Receive capacity auction training information.
Other registration requirements will follow from the definition of eligibility. They
will provide a means to demonstrate that eligibility requirements have been met.
Detailed Design Work
•
Define documentation required to demonstrate eligibility.
Draft Proposal – For Discussion Purposes
32
Qualified Capacity(1)
Proposal
All capacity participating in the auction will be qualified as Unforced Capacity
(UCAP), such that the reliability value from 1 MW of UCAP is an equivalent product
across all resources. UCAP values will be established for both seasons.
Background
•
In the context of a capacity auction, a UCAP rating represents the amount of capacity
that a resource can be expected to provide, on average, during peak hours of the
commitment period.
•
There are different approaches to calculating UCAP for different resource types. For
example:
–
–
•
For a thermal plant, UCAP is calculated as: installed capacity x (1-forced outage rate).
For intermittent generation, UCAP could be calculated based on historical capacity factor by
fuel type over seasonal peak hours.
Assessing the amount of installed capacity that can be expected to be available
during peak hours is essential to maintaining system adequacy.
–
This approach is consistent with the IESO’s current resource adequacy assessment processes
which calculate UCAP for all resources.
Draft Proposal – For Discussion Purposes
33
Qualified Capacity(2)
Rationale
•
It is necessary to assign a UCAP value to each resource competing in the auction in
order to assess whether the auction’s target capacity has been met and to ensure that
resource adequacy is maintained.
•
This approach (i.e. equalizing the capacity value of 1 MW of installed capacity across
resource types) supports fair competition amongst all resource types to provide a
consistent product.
•
Since UCAP ratings generally rely on historical performance data, the approach also
provides an incentive to maximize performance during peak hours in order to
receive a favourable UCAP rating in future auctions.
•
UCAP values will need to be assessed for both the summer and winter season in
order to ensure sufficient capacity is available throughout the year.
Detailed Design Work
•
Define detailed approach for qualifying each resource type.
Draft Proposal – For Discussion Purposes
34
Resource Obligations(1)
Proposal
Cleared resources will be required to meet applicable development milestones before the
commitment period to provide reasonable assurance of delivery. Cleared resources will
also have performance obligations during the commitment period, including a mustoffer provision into the energy market.
Background
•
Cleared capacity resources will be obligated to offer their availability in all hours of
the commitment period.
–
–
–
•
Resources must offer in day-ahead and real-time (subject to technical limitations).
Performance will be evaluated based on availability during on-peak hours only.
Firm fuel backing these offers will not be required, however a lack of fuel availability will
not provide relief from the obligation to offer (and could result in non-performance penalties
as described later in this document and/or reduced UCAP for subsequent auctions).
Pre-commitment period milestones could include steps similar to OPA project
development schedules, the IESO Market Entry process, Hydro One Transmission
Connection process, etc..
Draft Proposal – For Discussion Purposes
35
Resource Obligations(2)
Rationale
•
Cleared resources should maximize availability in all hours, as they are being paid to
provide capacity throughout the commitment period.
–
–
–
•
The decision whether to procure firm fuel to support resource availability is an
economic decision up to the individual resource.
–
–
•
Realistically, all resources cannot be expected to be available 24-7.
There is lower reliability value during off-peak hours though some capacity is still needed.
Requiring offers in all hours discourages physical withholding.
Requiring firm service could unnecessarily increase cost without improving reliability value.
The incentive to be “firm” will be determined by a combination of non-performance
penalties and energy market price incentives.
Milestones in the pre-commitment period will satisfy the IESO need for a reasonable
expectation that capacity obligations in the commitment period will be met.
Draft Proposal – For Discussion Purposes
36
Resource Obligations(3)
Detailed Design Work
•
•
•
Define on-peak hours.
Define conditions under which resources are exempted from their obligations (and
associated penalties).
Define pre-commitment period milestones.
Draft Proposal – For Discussion Purposes
37
Performance Penalties(1)
Proposal
Penalties will be assessed to resources for failing to meet obligations in the forward and
commitment periods. Penalties for non-performance will range from claw back of
capacity payments to more significant penalties for non-performance during critical
system events.
Background
•
Performance will be evaluated based on capacity resources’ availability during peak
hours in the commitment period.
–
–
–
•
UCAP performance is average availability in peak hours over the commitment period.
If cleared resource does not meet this average availability over the commitment period, it
will be subject to claw back of capacity payment plus a penalty.
Over-performing resources could receive additional compensation with payouts limited to
the amount clawed back from under-performing resources and not to exceed clearing price
Failing to meet obligations during critical system events will incur higher nonperformance penalties.
Draft Proposal – For Discussion Purposes
38
Performance Penalties(2)
Background (continued)
•
Non-delivery penalties would apply before the commitment period for resources that
fail to meet obligation milestones.
–
–
•
Resources with a capacity obligation have opportunities to buy out of their obligation though
the rebalancing auctions and avoid these penalties.
Non-delivery penalties would exceed the cleared capacity price, as IESO would have less
time and alternative options to replace the capacity.
Penalties will be assessed based on information gathered through the measurement
and verification process.
Rationale
•
•
•
Non-performance penalties are necessary to ensure a reasonable likelihood of capacity
availability to meet reliability standards.
The risk of exposure to penalties will be priced into capacity offers. Penalties should
not be excessively large to impose unnecessary costs, but should be high enough not
to be flouted.
The reliability value of capacity is much higher during critical system events (i.e.
energy emergency alert (EEA), high risk operating state, etc.) and the impact of nonperformance to system is much greater. Penalties should reflect this reality.
Draft Proposal – For Discussion Purposes
39
Performance Penalties(3)
Detailed Design Work
• Determine size of claw back penalties for under-performance relative to cleared
UCAP.
• Define critical system events.
• Establish size of penalties for non-performance during critical system events.
• Define conditions triggering relief from penalties during critical system events.
Draft Proposal – For Discussion Purposes
40
Measurement and Verification(1)
Proposal
In the forward period, cleared resources will provide documentation to verify predelivery milestones are being met. In the commitment period, availability will be
measured based on offer data. Availability will be verified through compliance with
dispatch instructions, random testing, and submission of additional data as required.
Background
•
M&V processes provide a mechanism for assessing resources’ success in meeting
their capacity obligations and establishing what penalties may be applicable.
–
This applies to obligations in both the forward and commitment periods.
•
For some resource types, existing processes can provide the data (e.g. offer and
dispatch data) required to measure and verify availability in the commitment period.
•
Other resources may require additional consideration. For example:
–
–
•
For infrequently dispatched resources, testing may be required to verify availability.
Some DR resources may need to provide additional meter data after being dispatched.
The capacity auction will build on approaches to M&V established through the DR
Auction.
Draft Proposal – For Discussion Purposes
41
Measurement and Verification(2)
Rationale
•
The provision of documentation in the forward period will provide certainty that
milestones are being met and that resources can continue to be expected to be
available in the commitment period.
•
Using offer data to measure availability builds on established and well-understood
processes.
•
Similarly, using compliance with dispatch instructions to verify availability will
leverage existing processes.
•
Where required, random testing and the provision of additional data will ensure that
capacity resources have performed consistent with their obligations.
Detailed Design Work
• Define documentation required during the forward period.
• Define testing procedures.
• Define additional data requirements that may apply.
Draft Proposal – For Discussion Purposes
42
Eligibility and Performance
Design Process
• Eligibility and Performance design elements focus on how capacity
resources interact with a capacity auction. These elements should be
designed to work in a co-ordinated way to ensure the objectives of the
capacity auction are met.
• Eligibility and Performance elements that should not be considered
independently include:
• Encouraging resource performance can be accomplished though a
combination of specified Resource Obligations and Performance Penalties.
Additionally, Measurement and Verification processes must be designed
to ensure obligations are satisfied and performance penalties can be
accurately assessed.
• Registration Requirements are contingent on the Resource Eligibility criteria
and the length of the forward period
Draft Proposal – For Discussion Purposes
43
Design Proposals:
Demand Curve
Draft Proposal – For Discussion Purposes
44
Profile of Downward Sloping
Demand Curve(1)
Proposal
The auction will use a downward sloping demand curve, with a straight line. A kink to
the demand curve could be introduced in the future, but is not required for the initial
auction.
Background
•
The downward slope of the curve means that the auction could clear more or less
than the target capacity, depending on the cost of supply relative to the net cost of
new entry (net CONE) (see Appendix V.i).
•
A downward sloping demand curve can have a straight slope or it can have different
slopes for the curve above and below the target capacity.
•
The rationale for having a different slope would be to reflect a higher marginal value
of capacity when below the reliability target, compared to a lower marginal value
when above the target (see Appendix V.ii).
Draft Proposal – For Discussion Purposes
45
Profile of Downward Sloping
Demand Curve(2)
Rationale
•
•
Experience in other jurisdictions has clearly demonstrated the shortcomings of using
a vertical demand curve. A vertical curve results in:
–
High price volatility from even small changes in offered supply. ISO-NE’s next auction will
implement a downward sloping curve (see Appendix V.iii)
–
Increased ability for participants to exercise market power. This has led to a need for
administrative rules to prevent abuse of market power (see Appendix V.iv).
There is merit to considering a kinked curve. However, without quantitative study it
would not be possible to establish the relative reliability value of an incremental MW
above and below the target capacity.
–
This is not an essential element that would need to be developed for the initial auction. The
idea can be further explored in the future.
Detailed Design Work
• Address other parameters required to establish the demand curve.
Draft Proposal – For Discussion Purposes
46
Net Cost of New Entry(1)
Proposal
The auction will require an independent study to be undertaken regularly to establish
the Net Cost of New Entry used in setting the downward sloping demand curve. This
study would inform the selection of a reference unit, estimation of the annual capital,
fixed operating and maintenance costs, and future net energy market revenues used to
calculate Net CONE. A methodology to update CONE between studies will also be
developed.
Background
•
Net CONE reflects the payment that a new resource would need to receive through
the capacity auction in its first year to be economic, given reasonable assumptions
about first year energy and ancillary services margins and future revenues.
–
•
Net CONE can change over time and by location.
Accurate Net CONE estimates are critical to the efficient performance of the capacity
auction.
–
–
Net CONE, in conjunction with target capacity, is used to anchor the demand curve.
As such, it impacts clearing prices and quantities.
Draft Proposal – For Discussion Purposes
47
Net Cost of New Entry(2)
Rationale
•
Other jurisdictions have engaged independent consultants to perform bottom-up
engineering cost estimates for peaking gas plants to inform the setting of Net CONE
(see Appendix VI.i).
•
•
•
Employing impartial experts to establish Net CONE can help support accurate
outcomes that are widely accepted.
Net CONE studies will need to be updated on a regular basis to reflect current costs,
technology trends, and estimates of energy and ancillary services margins.
Since Net CONE studies will not be conducted every year, a process for updating Net
CONE estimates between studies will also be needed.
Detailed Design Work
• Define methodology for establishing reference technology (i.e. what is the new
resource being considered), cost estimates, and net energy and ancillary services
revenue estimates.
• Establish processes for updating Net CONE study and updating Net CONE between
studies.
• Define processes for identifying the need for, and setting, locational Net CONE.
Draft Proposal – For Discussion Purposes
48
Target Capacity Requirement
(1)
Proposal
The target capacity will be set to satisfy a total system loss of load expectation (LOLE) of
no more than 0.1 days per year.
Background
•
The target capacity requirement in the capacity auction will be the difference
between the total capacity required to meet Ontario’s resource adequacy requirement
and the capacity that is under contract or regulation during the commitment period.
•
The total capacity needed to satisfy the reliability requirement is a function of
forecast peak demand, the physical characteristics of the system and its exposure to
contingent events.
•
In order to accommodate for uncertainty, a reserve margin above the forecast peak is
required.
–
This reserve margin is not defined arbitrarily; the size of the minimum reserve margin
needed for reliability will vary from system to system depending on the physical
characteristics of the grid and its assets.
Draft Proposal – For Discussion Purposes
49
Target Capacity Requirement
(2)
Rationale
•
To maintain the reliability of our electricity system, Ontario has an established
resource adequacy requirement that applies regardless of the mechanism used to
procure capacity.
•
Specifically, Ontario is to have sufficient available resources such that the total
system loss of load expectation is no more than 0.1 day per year.
•
This standard must also be satisfied as part of Ontario’s participation within the
Northeast Power Coordinating Council (see Appendix VII.i).
Detailed Design Work
•
The IESO will undertake the work required to apply our annual system requirement
to the seasonal and locational elements of the capacity auction.
•
While the methodology for modelling reliability standards is generally determined
by the IESO, improved transparency on the process will be discussed with
stakeholders in the detailed design phase.
Draft Proposal – For Discussion Purposes
50
Min/Max Capacity Limit
(1)
Proposal
The auction will not clear below a minimum quantity under which a decrease in
reliability is deemed to be unacceptable at the time of the auction. The auction will not
clear in excess of a maximum quantity that will be determined by the profile of the
downward sloping demand curve
Background
•
The minimum capacity limit represents the lowest amount of capacity that the IESO is
willing to accept in a capacity auction with confidence that the capacity target will still
be met.
–
Where cleared capacity is less than the target capacity requirement, the difference would be
expected to be fulfilled through forecasting adjustments or the entry of new, shorter term
resources in the rebalancing auctions.
•
If the auction were to clear below the minimum quantity, the IESO would clear the
economic resources at the maximum clearing price and an out-of-market procurement
would be triggered to ensure resource adequacy requirements are be met.
•
The demand curve would be designed so that the backstop procurement is only
utilized under very exceptional system conditions.
Draft Proposal – For Discussion Purposes
51
Min/Max Capacity Limit
(2)
Background (continued)
•
For a downward sloping demand curve with a straight slope, the maximum capacity
limit is defined by the other parameters of the curve and is set at the point where the
curve reaches $0/MW-day.
Rationale
•
•
The capacity auction must be designed to be consistent with Ontario’s reliability
requirements.
As such, a minimum capacity limit is an inherent part of a downward sloping
demand curve.
–
•
It would be unacceptable to clear the auction at a low quantity at which it would be unlikely
that Ontario would achieve its resource adequacy requirement.
By setting the minimum quantity at a level at which there is a very strong expectation
that the target capacity would still be met, Ontario can realise the benefits associated
with a downward sloping demand curve (reduced price volatility and opportunities
for abuse of market power) while respecting its reliability requirements.
Detailed Design Work
•
•
Define backstop mechanism.
IESO to define minimum capacity limit.
Draft Proposal – For Discussion Purposes
52
Maximum Auction Clearing Price(1)
Proposal
The Maximum Auction Clearing Price will be set at a multiple of Net Cost of New
Entry and/or Gross Cost of New Entry. This should represent an upper bound of the
estimated Net Cost of New Entry.
Background
•
Maximum Auction Clearing Price is the highest price that cleared capacity in the
auction would be paid.
•
The price represents the upper bound of the Net CONE of the project most likely to be
developed (i.e. the reference project used in setting Net CONE).
–
–
Reflects the fact that Net CONE estimates are subject to judgment and assumptions.
Allows for projects whose net costs are higher than net CONE to offer into the auction.
•
If the price is set too low it will increase the likelihood that insufficient resources may
clear in the auction.
•
If the price is too high, it will increase price volatility and the potential for the exercise
of market power.
Draft Proposal – For Discussion Purposes
53
Maximum Auction Clearing Price(2)
Background (continued)
•
Maximum price in other jurisdictions:
–
–
PJM: the maximum of gross CONE or 1.5 times net CONE
ISO-NE: 1.6 x net CONE
Rationale
•
Because the maximum auction clearing price is so closely connected to the process for
setting Net CONE, using a multiple of CONE to establish the max price is a logical
approach.
•
A cap at the upper bound of Net CONE will be high enough to consistently allow
sufficient new capacity to clear the auction while avoiding undue price volatility and
opportunities for market power abuse.
Detailed Design Work
•
Define methodology to establish Maximum Auction Clearing Price
Draft Proposal – For Discussion Purposes
54
Demand Curve Design Process
•
$/MW-day
Target Capacity
Requirement
•
Max
Price
•
Net
CONE
Demand Curve design elements are
used to create the demand curve that
is used to clear capacity auctions
The anticipated performance of any
one demand curve should align with
the objectives of capacity auction,
including the reliability objective of
meeting a LOLE of 0.1 days per year.
A change to one element will have to
be assessed against the long-term
performance of the demand curve.
–
MW
Min Capacity
Limit
1 in 10
LOLE
Max Capacity
Limit
For example a higher maximum price
would increase the steepness of the
demand curve, lower the maximum
capacity limit and impact the overall
performance of the demand curve in
meeting the reliability objectives.
Draft Proposal – For Discussion Purposes
55
Appendices
Draft Proposal – For Discussion Purposes
56
Appendix I – Length of Forward Period
Appendix I.i
ISO-NE Load Forecast Uncertainty 1, 3, and 5 Years Forward
Source: Brattle Group Presentation, Capacity Demand Curve in ISO-NE:: 2nd Set of Responses to
Stakeholder Questions (February 11, 2014), Slide 11.
Draft Proposal – For Discussion Purposes
57
Appendix I – Length of Forward Period
Appendix I.ii
Excerpt from FERC Staff Report, Centralized Capacity Market Design Elements, AD13-7-000
“For example, the three year forward period adopted by PJM and ISO-NE is based on the average
lead-time for a new gas-fired combustion turbine or a gas-fired combined cycle generator, and is
viewed as providing sufficient time for those resources to arrange for financing and complete
construction.”
Draft Proposal – For Discussion Purposes
58
Appendix II – Commitment Period
Appendix II.i
PJM Example of Multiple Capacity Products
Currently, there are three types of capacity products in PJM: Annual products (generation, annual DR,
Energy Efficiency), Extended Summer DR, and Limited DR.
A description of each capacity product is available in the Reliability Assurance Agreement among Load
Serving Entities in the PJM Region (09/10/2014)
Appendix II.ii
Ontario Summer and Winter System Peaks
“Continued growth in embedded solar and wind generation capacity is putting downward pressure
on peak electricity demands on the bulk system and in conjunction with conservation and demand
management initiatives, the IESO anticipates a narrower gap between winter and summer peaks than
in recent previous years.”
Source: IESO 18-month Outlook from September 2014 to February 2016 (page ii)
Draft Proposal – For Discussion Purposes
59
Appendix II – Commitment Period
Appendix II.iii
Description of Auction Mechanism
An annual Ontario auction would optimize the cost of meeting resource adequacy requirements in
both the summer and winter commitment periods simultaneously. Resources would be able to offer a
winter-only offer price, a summer-only price and an annual offer price. For greater clarity, these
would be contingent supply offers, in that a single resource could not clear both as a winter-only and
an annual resource. Quantities offered in these three commitment periods need not be the same and
resources are not required to offer in both seasons.
Draft Proposal – For Discussion Purposes
60
Appendix III – Commitment Period
Appendix III.i
Issues with Location of Capacity in New England
See FTI Consulting’s Evaluation of the New York Capacity Market (March 2013):
http://www.nyiso.com/public/webdocs/markets_operations/documents/Studies_and_Reports/Studies/
Market_Studies/Final_New_York_Capacity_Report_3-13-2013.pdf (pgs. 166-171)
Draft Proposal – For Discussion Purposes
61
Appendix IV – Cost Recovery
Appendix IV.i
Allocating Costs in Other Jurisdictions
•
•
•
In PJM, Peak Load Contribution (PLC) based on average of five coincident peak days over JuneSeptember of prior year (Market Manual 19, Section 4.4)
In NYISO, PLC based on one coincident peak in last calendar year (ICAP Manual Section 3.3-3.6)
In ISO-New England, PLC based on one coincident peak two calendar years prior to delivery year
(Market Rule 1, Section III.13.7.3.1)
Appendix IV.ii
Efficient Cost Allocation
• “A demand charge that reflects avoidable costs can improve short- and long-term efficiency”
(Section 7, Key Finding #2, pg 61)
• Based upon Navigant’s quantitative analysis, applying a demand-based charge for the
recovery of capacity related costs to all market participants would result in the most efficient
outcome.
http://www.ieso.ca/documents/consult/se106/se106-20140128-Global_Adjustment_Review_Report.pdf
Draft Proposal – For Discussion Purposes
62
Appendix V – Profile of Demand Curve
Appendix V.i
Downward Sloping Demand Curve
The downward slope of the curve means that the auction could clear more or less than the target
capacity, depending on the cost of supply relative to the net cost of new entry (net CONE). For
example, if more than the target quantity of capacity is offered at a price lower than net CONE, the
auction would clear above the target quantity (see Figure V.i.A). If less than the target capacity is
offered at a price lower than or equal to net CONE, the auction would clear below the target quantity
(see Figure V.i.B).
Auction
clears
lessless
than
Auction
clears
than target
capacity
targetcapacity
Auction
more
Auctionclears
clears
more
than
target
capacity
than capacity target
Supply
Price
Price
Supply
Net Cost of New Entry
Demand
Target Capacity
Quantity
Figure V.i.A
Net Cost of New Entry
Demand
Target Capacity
Quantity
Figure V.i.B
Draft Proposal – For Discussion Purposes
63
Appendix V – Profile of Demand Curve
Appendix V.ii
Illustration of Kinked Downward Sloping Demand Curve
Steeper slope below
target capacity
Price
Flatter slope above
target capacity
Net Cost of New Entry
Target Capacity
Quantity
Draft Proposal – For Discussion Purposes
64
Appendix V – Profile of Demand Curve
Appendix V.iii
New England Moving to Sloped Demand Curve
FERC Order ER14-1639-000, ``Order Accepting Tariff Revisions`` for ISO-NE, May 30, 2014
http://www.ferc.gov/CalendarFiles/20140530161324-ER14-1639-000.pdf
Appendix V.iv
Horizontal Demand Curve and Out-of-Market Mitigation Measures
ISO-NE pointed to the Inadequate Supply provision, Insufficient Competition provision and the
Capacity Carry Forward rule as examples of administrative pricing that would be avoided with a
downward sloping curve
http://www.ferc.gov/CalendarFiles/20140530161324-ER14-1639-000.pdf
Draft Proposal – For Discussion Purposes
65
Appendix VI – Net CONE
Appendix VI.i
Example of Study Estimating Net CONE in PJM
See the Brattle Group Cost of New Entry Estimates for Combustion Turbine and Combined Cycle Plants in
PJM With June 1, 2018 Online Date
http://www.brattle.com/system/publications/pdfs/000/005/010/original/Cost_of_New_Entry_Estimate
s_for_Combustion_Turbine_and_Combined_Cycle_Plants_in_PJM.pdf?1400252453
Draft Proposal – For Discussion Purposes
66
Appendix VII – Target Capacity
Appendix VII.i
Excerpt from NPCC Reliability Reference Directory # 1
5.2 Resource Adequacy – Design Criteria
The probability (or risk) of disconnecting firm load due to resource deficiencies shall be, on average,
not more than one day in ten years as determined by studies conducted for each Resource Planning
and Planning Coordinator Area. Compliance with this criterion shall be evaluated probabilistically,
such that the loss of load expectation (LOLE) of disconnecting firm load due to resource deficiencies
shall be, on average, no more than 0.1 day per year. This evaluation shall make due allowance for
demand uncertainty, scheduled outages and deratings, forced outages and deratings, assistance over
interconnections with neighboring Planning Coordinator Areas, transmission transfer capabilities,
and capacity and/or load relief from available operating procedures.
https://www.npcc.org/Standards/Directories/Directory%201%20%20Design%20and%20Operation%20of%20the%20Bulk%20Power%20System%20%20Clean%20April
%2020%202012%20GJD.pdf
Draft Proposal – For Discussion Purposes
67