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April 8, 2014 | Markets Committee

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April 8, 2014 | Markets Committee. Christopher Parent. [email protected] | 413.540.4599. Discussion of the potential outcomes of netting the Forward Capacity Auction price in the Forward Reserve Market under recent Forward Capacity Auction clearings. - PowerPoint PPT Presentation
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APRIL 8, 2014 | MARKETS COMMITTEE Christopher Parent [email protected] | 413.540.4599 Discussion of the potential outcomes of netting the Forward Capacity Auction price in the Forward Reserve Market under recent Forward Capacity Auction clearings Forward Reserve Market Netting of Forward Capacity Auction Price
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Page 1: April 8, 2014 | Markets Committee

APRIL 8, 2014 | MARKETS COMMITTEE

Christopher [email protected] | 413.540.4599

Discussion of the potential outcomes of netting the Forward Capacity Auction price in the Forward Reserve Market under recent Forward Capacity Auction clearings

Forward Reserve Market Netting of Forward Capacity Auction Price

Page 2: April 8, 2014 | Markets Committee

FRM Netting Rules may not produce appropriate outcomes under recent clearings in the FCA

• The monthly Forward Reserve Payment Rate is determined by subtracting the Forward Capacity Auction (FCA) price from the Forward Reserve Auction (FRA) price (“FRM Netting Rules”)– This value is capped at zero (i.e., not allowed to be negative)

• There are three potential outcomes included for discussion related to the FRM Netting Rules:1. Participants may choose not to offer into the FRA if the Forward

Reserve (FR) Offer Cap is limiting2. Higher incremental FRM cost offers may clear instead of lower

incremental FRM cost offers3. Forward Reserve Payment Rates may be lower in constrained Reserve

Zones and higher in the system

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Page 3: April 8, 2014 | Markets Committee

1A. Participants may choose not to offer into the FRA when the FCA price exceeds the FR Offer Cap

• The FRM Netting Rules result in the Forward Reserve Payment Rate being $0.00/kW-month* for the NEMA Reserve Zone for the Forward Reserve Delivery Periods associated with the 8th commitment period

• Anytime the FCA price exceeds the Forward Reserve Offer Cap, there is no incentive for participants to offer into the FRA because there is no incremental value in clearing since the Forward Reserve Payment Rate will always be zero

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*In FCA8, the NEMA FCA price was $15.00/kW-month, while the Forward Reserve Offer Cap is set at $14.00/kW-month.

Page 4: April 8, 2014 | Markets Committee

1B. Participants may choose not to offer into the FRA if their offer is greater than the FR Offer Cap

• Participant C would likely not offer into the FRA as the maximum potential monthly Forward Reserve Payment Rate would be capped at $7.34 which is below their incremental FRM cost of $8.00– The FRA price is capped at the Forward Reserve Offer Cap of $14.00

• Under conditions in which FCA price approaches the Forward Reserve Offer Cap, there is an increased likelihood that participants may choose not to offer into the FRA because they are unable to reflect their incremental FRM costs into the FRA

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Participant Location Product FRM Offer($/kW-month)

FCA Price* ($/kW-month)

Incremental FRM Costs

($/kW-month)

C NEMA TMOR $14.66 $6.66 $8.00

*In FCA7, the NEMA FCA price was $6.66/kW-month.

Page 5: April 8, 2014 | Markets Committee

2. Higher incremental FRM cost offers may clear instead of lower incremental FRM cost offers

• Assuming that the NEMA reserve constraints are not binding and the offer from Participant A or B would meet the system requirement, the FRA would clear the offer from Participant B– The FRA price would be $7.15 for the system and NEMA

• Participant B would be paid $4.00 to provide the obligation; however, Participant A’s offer (that did not clear) would have been a less costly option to meet the system requirement requiring only a $2.00 payment

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Participant Location Product FRM Offer($/kW-month)

FCA Price* ($/kW-month)

Incremental FRM Costs

($/kW-month)

A NEMA TMOR $8.66 $6.66 $2.00

B System TMOR $7.15 $3.15 $4.00

*In FCA7, the NEMA FCA price was $6.66/kW-month, while the system FCA price was $3.15/kW-month.

Page 6: April 8, 2014 | Markets Committee

3A. Participants may be paid a “premium” if an offer from a local zone is marginal in meeting the system requirement

• Assuming that the NEMA reserve constraints are not binding and the offers from Participant A and B are both required to meet the system requirements, the FRA price would be $8.66 for the system and NEMA

• The NEMA monthly Forward Reserve Payment Rate is $2.00 – Participant A is compensated at their incremental FRM costs

• The system monthly Forward Reserve Payment Rate is $5.51 (which is higher than the NEMA monthly Forward Reserve Payment Rate)– Participant B receives a premium of $3.51 (difference between the NEMA

and system FCA prices) for meeting the system requirements

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Participant Location Product FRM Offer($/kW-month)

FCA Price ($/kW-month)

Incremental FRM Costs

($/kW-month)

A NEMA TMOR $8.66 $6.66 $2.00

B System TMOR $7.15 $3.15 $4.00

Page 7: April 8, 2014 | Markets Committee

3B. System Forward Reserve Payment Rate can be higher than the zonal Forward Reserve Payment Rate

• Assuming that the NEMA reserve constraints are binding and the offers from Participant A and B are marginal to meet the FRM requirements, the FRA price would be $8.66 for the NEMA and $7.15 for the system

• The NEMA monthly Forward Reserve Payment Rate is $2.00 and the system monthly Forward Reserve Payment Rate is $4.00

• The system Forward Reserve Payment Rate is higher than the NEMA Forward Reserve Payment Rate even though the reserve constraint for NEMA was binding

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Participant Location Product FRM Offer($/kW-month)

FCA Price ($/kW-month)

Incremental FRM Costs

($/kW-month)

A NEMA TMOR $8.66 $6.66 $2.00

B System TMOR $7.15 $3.15 $4.00

Page 8: April 8, 2014 | Markets Committee

Summary and Next Steps

• There are three potential outcomes which were presented for discussion related to the FRM Netting Rules:1. Participants may choose not to offer into the FRA to meet the FRM

requirements if the Forward Reserve Offer Cap is limiting2. Higher incremental FRM cost offers may clear instead of lower

incremental FRM cost offers when an import-constrained Capacity Zone experiences price separation in the FCA from the system Capacity Zone

3. Forward Reserve Payment Rates may be lower in constrained Reserve Zones and higher in the system when an import-constrained Capacity Zone experiences price separation in the FCA from the system Capacity Zone

• ISO is planning to collect feedback on these items and assess solution options to be discussed with stakeholders later in 2014 or beginning of 2015– ISO believes that any changes need to be in effect by April 2016 for

Summer-2016 Forward Reserve Delivery Period (and start of the 7th CCP)

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