demand response auction - ieso.ca › sector-participants › engagement... · • the ieso’s...

Version 0.1

Public

Draft – For Discussion Purposes

Demand Response Auction Market Design Document Draft for Discussion Purposes

Issue: Version 0.1

Issue Date: November 21, 2014

Version 0.1

Public of 20

Document Change History

Issue Reason for Issue Date

Table of Changes

Reference (Section and Paragraph)

Description of Change

Version 0.1

Public of 20

Table of Contents

Contents List of Figures ...................................................................................................................................... 4 List of Tables ........................................................................................................................................ 4 1. Introduction ................................................................................................................................... 5

1.1 Executive Summary ......................................................................................................... 6 1.2 Purpose .............................................................................................................................. 6 1.3 Assumptions and Limitations ........................................................................................ 6 1.4 Glossary ............................................................................................................................. 7

2. Eligibility ....................................................................................................................................... 8 2.1 Market Participant Authorization .................................................................................. 8 2.2 Capacity Qualification ..................................................................................................... 9 2.3 Registration Requirements ............................................................................................ 12

3. Auction Parameters .................................................................................................................... 12 3.1 Length of Forward Period ............................................................................................. 12 3.2 Commitment Period ....................................................................................................... 12 3.3 Demand Curve ................................................................................................................ 13 3.4 Target Capacity Requirement ....................................................................................... 15

3.4.1 Locational-based Auctions (Zones) ....................................................................... 15 3.5 Target Price ...................................................................................................................... 16 3.6 Maximum Auction clearing price ................................................................................ 16 3.7 Min/Max Cleared Capacity Limits ............................................................................... 17 3.8 Auction Mechanics ......................................................................................................... 17

4. Performance ................................................................................................................................. 17 4.1 Resource Obligation ....................................................................................................... 17 4.2 Measurement and Verification ..................................................................................... 18 4.3 Non-Performance Penalties .......................................................................................... 18

5. Settlements .................................................................................................................................. 18 5.1 Prudential Support ......................................................................................................... 18 5.2 Cost Recovery ................................................................................................................. 18

Appendix A ........................................................................................................................................ 19 Appendix A Resource Obligation Example ............................................................................ 19 References........................................................................................................................................... 20 Related Documents ........................................................................................................................... 20

Version 0.1

Public of 20

List of Figures

Figure 3.2-1: Consumption Behaviour by a DR Resource .................................................................... 9

Figure 4.2-1: Illustrative Seasonal Uniform MW Profile .................................................................... 13

Figure 4.3-1: Sloped Demand Curve ..................................................................................................... 14

List of Tables

Version 0.1

Public of 20

1. Introduction

Demand response, which is the changing of electricity consumption by end-use customers in response to high market prices or to maintain system reliability, is an important part of Ontario’s diverse mix of energy resources. Such resources enable the province to meet its resource adequacy needs and provide reliable electricity supply for Ontario’s consumers.

Since 2002, the IESO energy market has provided a platform for large, industrial facilities to avoid the costs of consuming electricity in response to 5-minute dispatch instructions based on bids from these facilities which reflect the price sensitivity of their consumption. Such facilities were also capable of earning revenue through the IESO’s Operating Reserve market for being available to reduce their consumption in response to a contingency event on the power system, such as a significant loss of generation or transmission facilities.

In 2005 the Minister of Energy directed the Ontario Power Authority (OPA) to begin contracting for demand response initiatives across the province, recognizing the opportunity for expanding the number of facilities that could reduce their consumption during peak demand. The OPA instituted the DR3 contract-based program (as well as DR1 and DR21 programs) to incentivize large consumers to reduce their demand for electricity at times of peak demand and/or short supply, by forgoing consumption. In exchange for reducing their consumption, DR3 contract holders were given availability payments to make their demand reductions available during those periods and also given additional payments when that reduction was called upon by the IESO on behalf of the OPA.

Since the introduction of the OPA-contracted demand response programs, North American electricity markets that make use of capacity markets to meet their resource adequacy needs have been able to attract significant volumes of new demand response resources. Through this competitive process, these markets have been able to attract demand response resources at prices for availability payments which are significantly lower than those provided to Ontario demand response resources through the DR3 program.

In the Ministry of Energy’s Long Term Energy Plan published in 2013 (LTEP 2013), Ontario signaled that responsibility for existing demand response initiatives, and the introduction of new demand response initiatives, would be transferred from the OPA to the IESO. In March 2014, the Minister of Energy encouraged the IESO to design and implement a demand response auction to transition existing DR2 and DR3 resources into the IESO-administered markets.

This document describes the high-level design of the Demand Response Auction process. This new process will provide a cost-effective, competitive platform for the selection of demand response resources to provide capacity availability and will replace the practice of multi-year contracting for demand response by the Ontario Power Authority.

1 The DR1 and DR2 programs were meant to incentivize voluntary consumption reductions and shifting consumption from on-peak to off-peak periods, respectively.

Version 0.1

Public of 20

1.1 Executive Summary

This section will be completed upon the finalization of the draft market design for the Demand Response Auction.

1.2 Purpose

This document describes the market design for the Demand Response Auction project. This proposed design serves as a reference document to facilitate further design discussions with stakeholders and to support the subsequent development of market rules, market manuals, business processes and procedures.

This design document reflects our current understanding of key design elements and the decisions required to support further development of detailed design.

This design document is not expected to represent a complete or final statement of the design. Rather, it represents the best statement of the expected design at this point in time. As the design evolves through subsequent design activities, the design concepts identified in this document may change in response to integration issues, implementation challenges or other concerns. Where these changes occur, an important part of the design and implementation process will be to engage stakeholders to discuss these changes.

This document is prepared for use by the following groups to assist them in understanding the changes this design introduces to the IESO-administered market:

• stakeholders participating in the Demand Response Auction stakeholder engagement initiative, the Demand Response Working Group and other interested stakeholders to assist in providing input into the design and to help assess any impact on their businesses and operations;

• all interested stakeholders, including Market Participants, to support discussions describing the Demand Response Auction detailed design; and

• the IESO’s Demand Response Auction project team and pertinent IESO departments as a reference throughout the project lifecycle.

1.3 Assumptions and Limitations

Throughout the document, references are made to the terms “Demand Response Market Participant” (DRMP) and “Capacity-Based Demand Response” (CBDR). These terms have specific meaning, detailed in market rules amendments that will take effect on March 4, 20152. For the purpose of this document, it should be assumed that the definition of a Demand Response Market Participant will be expanded, based on this market design, to include market participants who have been selected to provide demand response capacity through the demand response auction.

2 http://www.ieso.ca/Documents/Amend/mr2014/MR_00408_R00.pdf

Version 0.1

Public of 20

Similarly, references to “Capacity-Based Demand Response” or “CBDR” should be assumed to mean the DR3 program that transitions into the market rules on March 4, 2015 and will subsequently be modified from its current design, specifically with respect to eligibility and operational obligations, to facilitate design changes arising from this market design.

While this document makes references to specific parameters that might be used in various processes, it does not impart any assumptions as to what the value of those parameters might ultimately be. The setting of such parameters will be a matter of IESO policy to be determined at a later date under the amended authority of the market rules.

This design of the initial implementation uses the current market participant interfaces available. However, current limitations of system capabilities and implementation of necessary system changes may alter this design.

1.4 Glossary

Note: As design elements are added through subsequent revisions to this market design, this section will be updated to reflect additional terms which are relevant to the discussion but which are not defined in the market rules.

Demand Response Capacity is defined as the expected quantity of demand resources available to reduce consumption during a specified availability period. It is distinct from energy which is transacted through the energy market.

– End of Section –

Version 0.1

Public of 20

2. Eligibility

2.1 Market Participant Authorization

Prior to starting the Capacity Qualification process (see section 2.2) and subsequently submitting an offer into the DR Auction, participants will have to become authorized as Demand Response Auction Participants. This authorization type will be developed to both allow organizations to become authorized with the IESO for the purposes of participating in the auction and to be bound by IESO Market Rules. Subsequent authorization and registration for the IESO physical market will begin following completion of the auction, provided that the participant secures a position out of the auction. Participant authorization types for the IESO physical market are described below.

There are two types of IESO market participants authorized to offer into the Demand Response Auction: Demand Response Market Participants (DRMP)3 and Wholesale Consumers. New IESO market participants must apply and become authorized as either a DRMP or a Wholesale Consumer prior to participating in the auction. Participants must indicate how they plan to deliver into the energy market at the time of their DR Auction offer. It is advised that new entrants begin the market participant authorization process well in advance of the DR Auction as this process could take a number of months and is followed by facility registration.4

Existing market participants who currently operate in the IESO administered markets as a DRMP or as a Wholesale Consumer are already authorized. However, demand response providers may seek to change their role in the markets in order to participate in the auction. These MPs may be subject to authorization requirements that would be completed prior to the auction.

A market participant seeking to be authorized as either a DRMP or a Wholesale Consumer will follow existing market registration processes outlined in Market Manual 1.1: Participant Authorization, Maintenance & Exit5. Upon receipt of a completed application, a representative from the IESO will contact the participant and guide them through the rest of the registration process.

Issues for Detailed Design

• Market rule changes to enable those without a DR3 contract from the OPA to become authorized as a DRMP

3 Refer to Section 1.3: Assumptions and Limitations 4 See section “Registration” for details on Facility Registration 5 This Market Manual will be updated in March 2015 as a part of CBDR implementation to reflect the addition of DRMP authorization requirements. The Manual currently contains requirements for Wholesale Consumers which will remain unchanged.

Version 0.1

Public of 20

2.2 Capacity Qualification

All market participants seeking to offer into the DR Auction will need to qualify their DR facilities prior to the auction.

IESO is inviting different types of demand side resources to participate in the DR Auction, namely Dispatchable Load and Capacity Based Demand Response. IESO proposes to translate these different methods of energy market delivery into an equivalent value – Qualified Capacity. One Megawatt (MW) of Qualified Capacity (QCAP) will be treated equally in the DR Auction, regardless of the manner in which the resource plans to deliver energy into the IESO-administered markets.

Participants will be required to submit historical consumption data to the IESO to support their application. IESO will qualify the quantity of MWs available to offer into a DR Auction based on a participant’s historical consumption over peak periods. The DR Auction is designed to target demand-side MWs that have an incremental impact on system needs. This qualification process may reduce MWs from resources that participate in Industrial Conservation Initiative (ICI) load reductions.

Figure 3.2-1: Consumption Behaviour by a DR Resource

IESO is proposing to look back two similar historical seasonal periods to provide an accurate representation of the resource’s historical consumption behaviour. It is being proposed that one year is not sufficient to account for effects of seasonality, while two years is not overly long to be considered irrelevant in gauging the resources actual consumption patterns.

Version 0.1

Public of 20

The IESO recognizes that for a participant’s initial qualifying period, consideration may need to be given for past participation in DR programs.

DR Auction participants seeking to qualify may have historical consumptions patterns that represent compliance to dispatch through a DR3 activation, a DR2 encouraged pattern of consumption, or an Operating Reserve activation for a dispatchable load. There will be a need to gross up historical patterns of consumption to recognize the acceptable availability of the facility during these events.

IESO is proposing the following formula to calculate Qualified Capacity:

QCAP = CCAP X (1-PAF)

Where:

• QCAP = Qualified Capacity MW

• CCAP = Claimed Capacity MW

• PAF = Performance Adjustment Factor

Claimed Capacity (CCAP) is the reduction amount that can be delivered by a demand-side resource. CCAP would include the resource’s historical consumption over peak periods, which accounts for historical participation and reductions through the Industrial Conservation Initiative (ICI).

IESO is proposing the following formula to calculate Claimed Capacity:

CCAP = Average Peak Load – Load Floor

Where:

• Average Peak Load is the participant’s average load over historic system peak hours (for defined hours of availability)

• Load Floor is the load’s consumption during the hours of a DR Activation which represents the loads lowest consumption level. This value requires supportive documentation during the qualification period (see section on Registration)

• Performance Adjustment Factor (PAF) adjusts Claimed Capacity based on the availability of the DR resource over a defined set of peak hours.

IESO is proposing that the Performance Adjustment Factor be based on historical performance over the two prior seasonal periods. For example, if a resource has historically been on outage 10% of the availability period, then their claimed capacity would be discounted by 10%.

Under the historical method of calculating Performance Adjustment Factor (PAF), the treatment of historical performance will be different for new and existing resources. A “new” resource QCAP calculation may adjust for historical performance using a provisional performance factor, using historical performance of similar resources as the reference. With respect to “existing”

Version 0.1

Public of 20

resources, historical performance data is already known to IESO (i.e. DR3 resources or registered Dispatchable Load) and will be used to calculate the PAF of the resource.

IESO is proposing that certain milestones be met by market participants in order to submit an offer into the auction. These milestones will include:

• CBDR resources:

o For Aggregators

Sales plan to illustrate the ability to contract an adequate quantity of load by the delivery date of the auction.

A description of how resource facilities will be able to provide load reduction and deliver the qualified capacity.

Document the load facilities already under contract – size, location, contributor name.

o For direct CBDR resources

Load reduction plan including the minimum load level to which a consumer can reduce in response to a demand response activation if facility will not be separately metered.

• Dispatchable Loads

o Existing – it is likely that a new qualification submission will not be required for existing dispatchable loads.

o New – first time dispatchable load entrants must be able to document progress in each of the following areas:

Installation of telecom facilities – Remote Terminal Unit for telemetry, dispatch workstation

If applicable, wholesale revenue meter registration

Issues for Detailed Design:

• Process for calculating QCAP for new facilities, or for new Class A loads

• Process for calculating PAF for facilities that are new to DR

• Develop process for initial qualification period for the first auction to accommodate resources with prior DR involvement

• Submission process for historical data

o Technical requirements for allowable meter data – revenue grade required vs operational

• Develop specific milestones for various registration types

Version 0.1

Public of 20

2.3 Registration Requirements

This section will be updated after the material has been presented to stakeholders at the November 24 DR Auction meeting.

3. Auction Parameters

3.1 Length of Forward Period

The forward period is defined as the period of time following the DR Auction results to the first day of the Commitment Period (see section 3.2). In considering the length of the forward period, a balance between greater business certainty provided in a shorter forward period with an increased opportunity for new entry that may come with a longer forward period should be considered.

Therefore, the IESO proposes that the length of the forward period be five (5) months. This duration should allow for an equitable balance between the two interests cited above. The proposed forward period also has the advantage of minimizing the milestones required for offering into the auction for new load facilities operating as Dispatchable Load. For example, a three month forward period would require loads to make significant financial commitments to hardware before the results of the auction are published in order to comply with the timelines for in service. Five months will allow time for those decision and investments to take place after the auction results are published. This length of forward period will also allow aggregators sufficient time to bring all of their contributors under contract and prepare the necessary data to support their participation in the energy market.

3.2 Commitment Period

The commitment period is the length of time for which a successful Demand Response Auction Participant is obligated to make their qualified capacity available for dispatch through the energy market.

Following stakeholder input, the IESO is proposing a seasonal approach to the DR Auction. The seasonal approach will provide greater flexibility for DR resources to offer into the auction in a manner most consistent with their capability.

The two seasons will be defined as: below:

• Summer – May 1 to October 31

• Winter – November 1 to April 30

Version 0.1

Public of 20

Figure 4.2-1: Illustrative Seasonal Uniform MW Profile

The auction for both the summer and winter commitment periods will take place at the same time and will require separate offers into each of the two seasonal timeframes (Summer and Winter).

Participants will receive a separate schedule for both periods, and the two periods will have separate clearing prices.

3.3 Demand Curve

An auction demand curve is a representation of the reference point against which the auction is able to compare available offers to supply demand response capacity against a determined target requirement.

The IESO is proposing that a downward-sloping demand curve be adopted for the Demand Response Auction. When compared to a vertical or fixed requirement curve, a downward-sloping demand curve reduces price volatility, provides enhanced signal changes in the value of demand response capacity, and mitigates the influence of market power in setting the auction clearing price.

The key reference points on the downward-sloping curve will include:

• Target MW quantity represents the amount of qualified demand response capacity that the auction seeks to clear. As described below, if local requirements or constraints are required for a particular region of the province, zonal MW targets may be defined.

• Price, expressed in $/MW-day, will be associated with the target MW quantity and will reflect the estimated costs necessary to support sufficient return on investment for a new, representative demand response resource, net of the expected ancillary services

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MW

Illustrative Seasonal Uniform MW Profile

Version 0.1

Public of 20

revenues and avoided energy costs in the energy market for that representative resource.

• Maximum auction clearing price, sets a limit on the price at which the auction will compensate successful demand response resources for their capacity.

• Maximum and minimum MW quantities define the range of MW within which the auction will be permitted to successfully clear. The auction will not clear more MW than the maximum quantity and will pay all cleared resources $0/MW-day if this upper limit is reached, based on the offers for demand response capacity. Similarly, the auction will also not clear fewer MW than the minimum MW quantity established and, if cleared at this MW quantity, all successful resources will be paid the maximum auction clearing price.

Figure 4.3-1: Sloped Demand Curve

The slope of the demand curve will be shaped by the reference points (shown above). The selection of the reference points will have an impact on the outcome of the auction, with respect to the value of demand response capacity, as well as the auction’s ability to signal appropriate investment decisions for demand response resources.

Version 0.1

Public of 20

3.4 Target Capacity Requirement

In the Ontario government’s LTEP 2013, the Ministry of Energy forecasted that 500 MW of wholesale demand response would be expected to be available to meet Ontario’s resource adequacy needs until 2020, at which point the role of demand response is expected to increase.

Prior to each auction, the IESO will assess the amount of demand response participating in the Capacity-Based Demand Response program (transitioned from the DR3 program) as well as the resources participating in IESO demand response pilot programs. The target MW requirement for each auction will be determined by the IESO based on the quantity of demand response expiring from both the Capacity-Based Demand Response program and the demand response pilot programs in an effort to maintain the overall 500 MW demand response planning target.

If through the course of its forecasting and reliability studies the IESO identifies additional supply needs above the 500 MW target which can best be addressed by demand response, the auction target MW requirement will reflect this change.

The need for separate auction zones, defined by system or transmission needs, will be discussed in the next section. For such zones, a target MW requirement will be determined based on those needs and the target MW requirement for those impacted zones will be added to the 500 MW target.

The target MW requirement for each auction, including any zonal requirements and the rationale for such requirements, will be signalled to potential market participants in the Pre-Auction report targeted for publication 30 days prior to the submission deadline for qualification into the auction.

3.4.1 Locational-based Auctions (Zones)

There will be geographic zones defined for the Demand Response Auction. These zones will be defined by their locational limitations or on specific regional needs arising from planning studies. The DR auction may clear at different prices in different zones if limitations or zonal needs are present, which will depend on the supply balance in each zone.

The MW limitations and specific needs in each zone will be communicated to DR Auction participants through the pre-auction report.


• Format of Pre Auction report

• Determination of MW requirement for each season - which may differ for each season

• Locational zones will need to be determined and modelled in the auction clearing mechanism. This locational design will need to be stakeholdered as part of detailed design

Version 0.1

Public of 20

3.5 Target Price

The target price is directly associated with the target MW required and is an important characteristic of the demand curve. It is selected to be representative of the price at which new demand response resources would be incentivized to enter the market and recover the necessary costs to make their capacity available, recognizing their revenue opportunities and avoided costs in the energy market.

Traditionally, the target price in capacity auctions (at the target MW required) has been determined through a determination of the “Net Cost of New Entry6”. Since the IESO is undertaking a demand response-only auction, where capacity auctions in other jurisdictions are allowing for direct competition between demand and supply resources, the information available from those other jurisdictions is limited in its value for this DR Auction proposal.

There is, however, value in the principle that the target price should represent the cost of new entry as a demand response resource. The experience of historical contract costs for Ontario demand response resources, particularly the type of peak capacity resource that the demand response auction is looking to procure, will be a useful guide in determining the target price for the auction.

In determining the target price, as a function of the net costs associated with new entry, the IESO will have to take the following into account:

• The type of demand response resource that will likely be incentivized to enter the market and its expected operating characteristics7

• The benefit from the avoided cost of energy consumption expected by demand response resources,

• The energy market revenues from the provision of ancillary services, such as operating reserve or frequency regulation

The target price should be set, in conjunction with the target MW, to ensure that the market is signaling true investment signals over time to drive new entry when required.


• Process and timing for calculation of target price at target MW, including the selection of a representative demand response resource

3.6 Maximum Auction clearing price

This section will be updated in a subsequent version of this document. 6 Gross Cost of New Entry (CONE) is the levelized capital and fixed operations and maintenance costs that a new entrant needs to recover to make its required return on investment. The Net CONE is the Gross CONE less projected operating profits earned from electricity energy and ancilliary services sales. 7 In capacity markets, the representative resource is usually a simple cycle natural gas generation facility expected to operate as a “peaking” generation resource. For a demand response auction, a similar reference resource will need to be established.

Version 0.1

Public of 20

3.7 Min/Max Cleared Capacity Limits

This section will be updated in a subsequent version of this document.

3.8 Auction Mechanics

The intersection of supply and demand will determine the price and quantity cleared in the DR Auction. The DR Auction will be cleared in a single pass with all cleared offers receiving the same clearing price unless there are locational constraints.

The supply of DR capacity for the auction will be provided by the participant. The participant offers supply to the DR Auction through a price-quantity offer. The price offered represents the minimum revenue which the participant is willing to accept to provide DR capacity. The quantity offered is the amount of qualified MW that will be provided at the offered price.


• Format of dispatch data for auction (for example, number of price quantity pairs allowed)

4. Performance

4.1 Resource Obligation

Resource obligation refers to the obligations of DR Auction participants who have a cleared offer in the DR Auction. See Appendix A for a comprehensive example of a resources obligation from the beginning of the capacity qualification process to how they would be expected to participate in the energy market.

DR resources that have a DR Auction obligation must participate in the energy market over the hours of availability to satisfy that obligation or be subject to availability payment clawbacks.

Cleared DR Auction offers will participate in the energy market as either:

1. Capacity-Based Demand Response

2. Wholesale Consumer – Dispatchable Load

The method of energy market participation is determined at the time the DR Auction offer is submitted. However, in the case where a participant clears the DR Auction as a “new” Dispatchable Load resource but is unable to meet the delivery date as a Dispatchable Load, the DR Auction would allow that resource to participate as a CBDR resource.

Version 0.1

Public of 20

Participants with a DR Auction obligation will have a “must bid” requirement, meaning that in order to fulfil their availability requirement they must submit bids into the energy market. It is through the participant’s energy bids that will signal to the IESO the resource’s availability to provide demand response. IESO will require bids to be submitted into both the Day-ahead Commitment Process (DACP) and the real-time energy market to fulfil the “must-bid” requirement.

Both types of participants will bid their load reductions into the energy market. Each bid is composed of two parts: the maximum price at which the participant wishes to consume energy and the quantity of energy that is associated with that price.

The energy bids that participants submit are evaluated based on economics. An economic bid is a bid at a price greater than the market clearing price and means the participant will consume the quantity of energy associated with that bid. An uneconomic bid is a bid lower than the market clearing price and means the participant will not consume the quantity of energy associated with that bid. When a bid is uneconomic at the time of dispatch, Demand Response for that resource is activated.

Hours of Availability have yet to be determined and may be different for the winter and summer season, reflecting the seasonal differences in load profiles.

4.2 Measurement and Verification

This section will be updated in a subsequent version of this document.

4.3 Non-Performance Penalties


5. Settlements

5.1 Prudential Support


5.2 Cost Recovery


Version 0.1

Public of 20

Appendix A

Appendix A Resource Obligation Example

– End of Section –

Version 0.1

Public of 20

References

Document Title Document ID

Related Documents

Document Title Document ID

– End of Document –