demand curve shape - aeso€¦ · draft materials for discussion 1| brattle.com agenda overview...

Copyright © 2017 The Brattle Group, Inc.

Kathleen Spees David Luke Oates

Judy Chang Peter Cahill

Johannes Pfeifenberger Elliott Metzler

Demand Curve Shape

Adequacy & Demand Curve Work Group

N ov e mber 2 9 , 2 0 1 7

Dra f t M a ter ia l s f o r D i sc uss io n

P RE PARED FOR

P RE PARED BY

Candidate Curves and Performance

Draft Materials for Discussion

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Agenda

▀ Overview

▀ Candidate Curves

▀ Robustness Testing

▀ Takeaways and Next Steps


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Overview

▀ This presentation responds to comments received during the 11/1 working group meeting. Based on this feedback we worked with AESO staff to develop three candidate curves for consideration by the working group

▀ We tested these curves for robustness based on the demand curve principles established by the working group, specifically:

− Performance in terms of reliability, price volatility, risk of excess capacity above the reliability requirement, and exposure to the exercise of market power

− Robustness to uncertainties in Net CONE

▀ AESO and Brattle view all of the three curves as workable for Alberta’s market, but they reflect different tradeoffs in each dimension of performance

▀ We hope to receive remaining comments or issues on the candidate curves from the working group today

▀ These candidate curves will be revisited once working assumptions are further confirmed (reliability requirement, Net CONE) in 2018


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Agenda

▀ Overview





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Candidate Curves

Performance of Three Candidate Curves

% of Reliability Requirement Reserve Margin (% UCAP) UCAP MW ICAP MW

Target: 100 MWh/year EUE

Minimum Acceptable:

800 MWh/year EUE

Candidate Curve Results

▀ The work group made several recommendations including moving toward a steeper curve compared to preliminary analyses

▀ Brattle and AESO staff developed three candidate curves in line with work group input for consideration

▀ All curves meet the reliability standard, but have other performance tradeoffs

Cap at 1.75× Net CONE



Cap at 1.5× Net CONE (Prior Base)


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Candidate Curves

Summary of Performance Tradeoffs

  The AESO and Brattle view these three candidate curves as being in the workable range of well-performing curves, but selecting one requires balancing tradeoffs

Steeper Curves Higher cap, lower foot quantity

Flatter Curves Lower cap, higher foot quantity

Advantages: • More robust to a wide range

of market conditions • Less reliability risk from

underestimated Net CONE • Less risk of excess capacity

above the reliability requirement

Advantages: • Lower price volatility • Less exposure to exercise of

market power & need for strict mitigation

1.6× Net CONE Price Cap

1.9× Net CONE Price Cap

Recommended Range


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2.0× Net CONE

1.5× Net CONE

Candidate Curves

Recommended Range of Parameters


Target: 100 MWh/year EUE Minimum Acceptable: 800 MWh/year EUE




Cap at 1.5× Net CONE (Prior Base)

Foot Position: Wider foot reduces price volatility, but increases risk of excess capacity above the reliability requirement in long market conditions Convexity: More convexity

(prior curves) required a wider foot to maintain reliability. A steeper and linear curve allows for bringing in the foot

Price Cap: Higher price cap increases price volatility, but decreases excess capacity above the reliability requirement Minimum on Cap: Reduces susceptibility to capacity below the reliability requirement

Candidate Curves

Price Cap

Range of Parameters Considered

1.0× Gross CONE

0× Gross CONE Min Price Cap

1.88× Reliability Requirement

1.07× Reliability

Requirement Foot Position

More Convexity (Prior Curves)

Linear Convexity


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Agenda

▀ Overview





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Robustness Testing

Performance with High and Low Net CONE

Low Net CONE Sensitivity

High Net CONE Sensitivity All curves continue to perform well with high Net CONE, but volatility increases most with a higher price cap

Curves with a minimum cap prevent collapse with Low CONE, mitigating reliability erosion

Excess above reliability requirement reduced with lower minimum cap & steeper curves


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Robustness Testing

Performance with Error in Net CONE Estimate

Administrative Net CONE Underestimated by 20% Sensitivity

Administrative Net CONE Overestimated by 20%

Steeper curves mitigate excess above reliability requirement if Net CONE is overestimated

Minimum on price cap mitigates potential for poor reliability w/o significant excess capacity risk


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Robustness Testing

Exposure to Exercise of Market Power





Curve High-Price Region Low-Price Region

Cap at 1.6× Net CONE $70/MW-day $46/MW-day



Price Impact of Withholding 350 MW Before Accounting for the Mitigating Effect of Supply-Side Competition

Target: 100 MWh/year EUE

Minimum Acceptable:

800 MWh/year EUE

High Price Region

Low Price Region

▀ Flatter curves with lower price caps have the advantage of mitigating the incentive and ability to exercise market power

▀ Alberta’s relatively small and concentrated supply stack suggests a flatter curve may be preferable, but this will be taken up more comprehensively in the market mechanics group

Note: Price impacts shown here are based solely on the demand curve and therefore represent the maximum impacts. The shape of the supply curve could mitigate these impacts.


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Agenda

▀ Overview





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Takeaways from Analysis to Date

  The demand curve tests and stakeholder discussions conducted since October 10th have led to several takeaways about the drivers of capacity market performance:

Performance Driver Takeaway

Demand Curve Steepness

• Steeper curves are more robust to a wide range of market conditions, have less reliability risk from underestimated Net CONE, and less risk of excess capacity above the reliability requirement

• Flatter curves have lower price volatility and less exposure to exercise of market power & need for strict mitigation

• A curve based on the marginal reliability value is too steep to achieve reliability

Price Cap • Higher price caps can allow for steeper curves (with associated pros and cons) • With the recommended range of curves, reliability performance is maintained in

instances of high Net CONE or overestimation of administrative Net CONE • Without a minimum on the price cap, reliability will erode in instances of low Net

CONE or underestimation of administrative Net CONE • Curves with a minimum price cap (as a % of Gross CONE) are resilient to reliability

erosion in cases of low Net CONE or underestimation of administrative Net CONE

Supply Curve • Larger shock sizes require a wider demand curve in order to maintain reliability • Performance incentive regimes and supply curve shapes more generally have little

impact on the performance of demand curves (even though they can have a significant impact on the supply curve)


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Next Steps

Timing Scope

SAM 2.0-3.0 Sept-Dec 2017

Oct 4 Web/Phone Meeting

Gather feedback from workgroup on scope

Oct 10 In-Person Meeting:

Discuss preliminary analysis of potential demand curve shapes Review Alberta-specific considerations affecting price volatility and desirable curve width/parameters Expand on and complement introduction of demand curve concepts/principles by providing information on

modeling approach, impacts of key parameters and principles, preliminary suggestions about the “workable range” of demand curve parameters

Nov 1 Meeting:

Discuss materials prepared in response to workgroup questions, requested sensitivity analysis, and requested demand curve alternatives

Nov 29 Meeting (Today):

Discuss candidate curves and gather feedback

Jan-Mar 2018 Outline outstanding uncertainties/questions to be reviewed; gather stakeholder input on necessary refinements to candidate curves

Apr-Jun 2018 Make final adjustments to demand curve based on final design decisions and defined reliability requirement

Provide final presentation to stakeholders on selected demand curve and recommendations to be included in report

Recommendations Report/Testimony: Prepare final recommendations report and deliver to AESO. Document the defined objectives, principles, workgroup process, and dissention. Include final recommended Demand Curve


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Contact Information

The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc.

DAVID LUKE OATES Associate │ Boston, MA [email protected] +1.617.234.5212

KATHLEEN SPEES Principal│ Boston, MA [email protected] +1.617.234.5783

JOHANNES PFEIFENBERGER Principal │ Boston, MA [email protected] +1.617.234.5624

JUDY CHANG Principal and Director │ Boston, MA [email protected] +1.617.234.5630


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About The Brattle Group

The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governmental agencies worldwide.

We combine in-depth industry experience and rigorous analyses to help clients answer complex economic and financial questions in litigation and regulation, develop strategies for changing markets, and make critical business decisions.

Our services to the electric power industry include:

▀ Climate Change Policy and Planning

▀ Cost of Capital

▀ Demand Forecasting Methodology

▀ Demand Response and Energy Efficiency

▀ Electricity Market Modeling

▀ Energy Asset Valuation

▀ Energy Contract Litigation

▀ Environmental Compliance

▀ Fuel and Power Procurement

▀ Incentive Regulation

▀ Rate Design and Cost Allocation

▀ Regulatory Strategy and Litigation Support

▀ Renewables

▀ Resource Planning

▀ Retail Access and Restructuring

▀ Risk Management

▀ Market-Based Rates

▀ Market Design and Competitive Analysis

▀ Mergers and Acquisitions

▀ Transmission


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Offices

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demand curve shape - aeso€¦ · draft materials for discussion 1| brattle.com agenda overview...

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