JULY 10, 2013 | NEPOOL MARKETS COMMITTEE

Ben EwingMARKET DEVELOPMENT

BEWING@ISO-NE.COM413.535.4361

Analysis of out-of-merit compensation under Offer Flexibility NCPC design. And alternate NCPC credit methodology requested by Markets Committee.

NCPC Payments Major Initiative Impact Analysis Results

Matt BrewsterMARKET DEVELOPMENT

MBREWSTER@ISO-NE.COM413.540.4547

BACKGROUNDOverview of the purpose for the Impact Analysis and high-level assumptions utilized in the analysis

Impact analysis provides qualitative and quantitative results for proposed changes• The NCPC Payments project is a major initiative

• In accordance with the Framework for Evaluating Major Initiatives, the ISO has prepared a quantitative impact analysis using the methods previously discussed with stakeholders

• The impact analysis is intended to demonstrate impact of ISO’s proposed NCPC rules for Offer Flexibility on resource credits for being scheduled out-of-merit– Compare historical resource credits under the existing design to

credits under proposed design

• Out-of-merit resources receive 94% of historical NCPC credits

Assumptions used for Impact Analysis

• Study period: 2010 – 2012 calendar years

• Resource credits calculated under the Offer Flexibility NCPC rules are based on historical energy market data

• DA and RT commitment Decision Intervals are modeled using available data (e.g., day-ahead or RT schedule, min run time)

• Self-scheduled resources are treated as energy offer of floor price ($0/MWh) at requested dispatch level, No Load and Start-Up fees of $0

• Default commitment reason is 1st contingency (“economic”) when unspecified

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Participants requested alternative analyses

• As part of major initiative process, participants may propose alternative analyses to perform. The ISO received two such requests:

• Examine upper bound on NCPC Credits– Use of hourly accounting periods

• Consider Start-Up and No Load costs in DA NCPC.

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OUT-OF-MERIT NCPC CREDITS UNDER OFFER FLEXIBILITY DESIGN PROPOSAL RESULTSOffer Flexibility NCPC credit estimates are directionally consistent with expectations: decreased DA NCPC; increased RT NCPC particularly for flexible resources; and overall increase in NCPC payments

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NCPC Credits increase by 28% across the three year study period

Existing Design* Offer Flexibility Design

Year DACredit

RTCredit

Total Credits

DACredit

RTCredit

Total Credits

Dollar Change

Percent Change

2010 $7.1 $80.1 $87.2 $4.2 $103 $107.3 $20 23%

2011 $8.7 $60.6 $69.3 $4.2 $87 $91.1 $21.8 31%

2012 $21.3 $60.9 $82.2 $11.1 $96.5 $107.6 $25.4 31%

Totals $37.1 $201.6 $238.7 $19.5 $286.5 $306 $67.2 28%

Dollar values shown in millions*Actual historical credits

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Resources dispatched out-of-merit are a small percentage of RT Credits

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Offer Flexibility Design

Dollar Values Percentage of Total Credit

Year DACredit

RTCommit Credit

RT Dispatch Credit

DACredit

RTCommit Credit

RT Dispatch Credit

TotalCredit

2010 $4.2 $98.8 $4.2 4% 92% 4% $107.2

2011 $4.2 $81.1 $5.9 5% 89% 6% $91.2

2012 $11.1 $92.1 $4.4 10% 86% 4% $107.6

Totals $19.5 $272 $14.5 6% 89% 5% $306

Dollar values shown in millions

NCPC Credits increase total Energy Market cost by less than 1% annually

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Existing Design Offer Flexibility Design

Year Total Energy Market Value

NCPC Credits

Percent of Energy Market

NCPC Credits

Percent of Energy Market

2010 $6,630 $87.2 1.3% $107.3 1.6%

2011 $6,170 $69.3 1.1% $91.1 1.5%

2012 $4,770 $82.2 1.7% $107.6 2.3%

Dollar values shown in millions

DA decrease and RT increase are consistent with the Offer Flexibility NCPC design• Day-ahead NCPC credits decrease

– No Load and Start-Up fees are not considered (only cost of energy)

• Real-time NCPC credits increase– Credit formulation compensates for difference in value when the

resource’s best alternative would be more profitable than following ISO commitment or dispatch instruction• Existing design determines only break-even payments

– Separate accounting periods for each resource schedule within the day (profitable run does not offset loss for another)• Existing design nets all profits/losses across entire day

– Total RT cost (Start-Up, No Load, Energy) is compared to RT revenue• Existing design evaluates only additional RT cost and revenue above

what cleared DA

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Flexible resources account for large percentage of increased NCPC Credits

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Start Time(hours)

Existing DesignTotal Credits

Offer FlexibilityTotal Credits

Dollar Change

PercentChange

<=1 $42.5 $59.9 $17.4 41%

<=4 $20.1 $25.1 $5.0 25%

<=8 $49.9 $79.1 $29.2 58%

> 8 $126.3 $141.9 $15.6 12%

Start Time (hours) = Cold Notification time + Cold Startup time

Dollar values shown in millions

Credits increase across cost allocation categories

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Existing Design Offer Flexibility Design

Category DA Credit

RT Credit

Total Credits

DACredit

RTCredit

Total Credits

Percent Change

Economic $18.0 $167.9 $185.9 $6.7 $235.2 $241.9 30%

SCR $0.0 $8.7 $8.7 $0.0 $8.6 $8.6 -1%

VAR $18.5 $7.3 $25.8 $12.6 $23.5 $36.1 40%

LSCPR $0.6 $17.8 $18.4 $0.2 $19.2 $19.3 5%

Total $37.1 $201.6 $238.8 $19.5 $286.5 $306.0 28%

Dollar values shown in millions

Values are across 2010-2012

Accounting period and hourly credit allocation impact changes among NCPC categories

• NCPC design for Offer Flexibility introduces two changes that influence the credits assigned to cost allocation categories1) Separate accounting periods significantly reduce the

blending of NCPC costs across commitment reasons– Distinct periods of operation generally have a single reason

2) NCPC credits are allocated pro rata to hours of net loss– Refer to explanation of Hourly NCPC Credit within

June 2013 MC presentation beginning at slide 5

• Both mechanisms more directly align NCPC cost with the reason for out-of-merit operation

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ALTERNATE METHOD 1 RESULTSAnalysis to estimate an upper-bound on NCPC credit increase as a result of sub-daily accounting periods

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Results demonstrate that sub-daily accounting periods increase NCPC Credits• Modified assumptions for this analysis:

– Resource Minimum Run Time treated as a single accounting period, with each subsequent hour as a separate accounting period

– In each hourly accounting period with a net loss, resource paid to break-even on cost (crude best-alternative formulation)

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Dollar values shown in millions

Existing Design Offer Flexibility Alternative Method 1

Year Total Credits

Total Credits

Percent Change

Total Credits

Percent Change

2010 $87.2 $107.3 23% $123.9 42%

2011 $69.3 $91.1 31% $105.8 53%

2012 $82.2 $107.6 31% $125.7 53%

Totals $238.7 $306 28% $355.4 49%

ALTERNATIVE METHOD 2 RESULTSUses a compensation methodology where Start-Up and No Load fees for DA schedules are considered for DA Credit

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Compensating fixed costs in DA Credit results in lower total NCPC credits• Modified assumptions for this analysis:

– Resources compensated in DA NCPC for Start-Up and No Load fees– Costs paid DA are not considered in RT Credit (same as existing design)– Consistent with Offer Flexibility proposal, the DA credit calculated as

amount necessary to be no worse off for clearing DA (break-even)

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Existing Design Offer Flexibility Alternative Method 2

Year TotalCredits

TotalCredits

PercentChange

TotalCredits

Percent Change

2010 $87.2 $107.3 23% $98.6 13%

2011 $69.3 $91.1 31% $81.7 18%

2012 $82.2 $107.6 31% $96.5 17%

Totals $238.7 $306 28% $276.8 16%

Dollar values shown in millions

Historical Start-Up and No Load fees considered for DA NCPC in excess of incurred RT costs are small

• Method for determining these values:– DA schedule start not matched by RT actual start means the Start-Up

cost considered in DA NCPC was not incurred RT– DA scheduled hours not matched by RT actual operation means the

No Load cost considered in DA NCPC was not incurred RT

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Dollar values shown in millions

Existing Design DA NCPC Cost not incurred RT

Year Total Credits Start-Up fees No Load fees

2010 $87.2 $0.94 $1.9

2011 $69.3 $1.52 $2.4

2012 $82.2 $0.9 $2.3

Totals $238.7 $3.36 $6.6