may 13, 2013 - rc/mc meeting

MAY 13, 2013 - RC/MC MEETING

ISO New England Staff

Winter 2013/2014

Issues and Proposed Solutions

Fuel Dependence Risk

Presentation Overview

• Participant Feedback

• Current Proposal

• High Level Flow Chart

• Bid Submittals

• Walk Through Examples

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Feedback Consideration

• ISO has carefully considered feedback provided by the Participants over the series of meetings and correspondence to date and made several modifications.

• The stated objective, to obtain the incremental energy needs to help secure reliable system conditions this winter if severe weather occurs, must be achieved.

• We are dealing with a very limited timeframe to develop and implement a workable solution.

• ISO solution focuses on oil, dual fuel and demand response.• ISO considered and deliberated on an LNG option but could not

structure a workable proposal

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Concerns Regarding LNG• Primary concern: an LNG solution is inherently more complicated

– Multiple players must be involved in direct supply chain: storage facility, pipeline, generator

• Must get incentives right for each– Multiple sets of consumers and sources of natural gas add complexity

• Providing more supply might reduce gas released from other uses (e.g., fuel switching), which reduces effectiveness

• How do you ensure that an LNG program results in incremental energy? • Must design contracts so that LNG is used fully when needed, but pipeline gas is used

when economic• Are contracts for base-load service; peaking service; some combination?

– Opportunity costs drive regional gas prices• Natural gas spot price during winter 2012-13 ranged from $15 to $55, which

demonstrates that pricing is driven by opportunity costs• If ISO interferes with the opportunity cost by engaging in contracts with suppliers or a

subset of generators, it will impact the scarcity value, and affect the entire wholesale electric market

– Contracting mechanisms must somehow ensure that scarcity signals and efficient rationing via prices are not undermined

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Concerns Regarding LNG (cont.)

• Given the central role that natural gas plays in both the electric market and the home heating market, it is essential that all complexities be addressed; otherwise there is the potential to make the situation worse, not better

• Coupled with the extremely limited timeframe for developing a solution, ISO decided to focus on oil, which appears to be a much simpler problem– Even so, ISO struggled to put together a proposal that minimizes market impacts– Oil is demonstrably less complicated in each respect: one entity; opportunity costs

are very infrequent; once oil is in tank, only one consumer; oil is really a backstop fuel, not a centerpiece of market (electricity from natural gas resources was more expensive than that from oil resources only about 5 days last winter)

• Any LNG solution that relies on a level of ISO intervention in the fuel market (e.g., ISO taking ownership of LNG; or deciding when it is needed; or allocating amongst various parties), in our view is unworkable– That said, if a comprehensive proposal gets the support of stakeholders, the ISO

would consider it.

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Current Proposal

• In consideration of Participant feedback, ISO further developed the current proposal into three primary elements1. Procurement For Demand Response2. Procurement For Single Fuel Oil Generators3. Procurement For Dual Fuel Generators

• Market Solutions are on-going

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High Level Flow Chart

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Bid Submittal Format for Soliciting Incremental Energy Storage

• The ISO’s objective is to obtain the incremental energy needs to secure reliable system conditions this winter if severe weather occurs; target timeframe is December, January and February.

• In response to concerns raised in the last meeting about the but-for level of inventory, and in order to simplify the solicitation process, the ISO will solicit offers in price/quantity pairs for the full requirement.– The ISO anticipates ample competition, which will drive offer prices

toward the incremental costs and risks associated with the incremental fuel inventory quantities.

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Bid Submittal Format for Soliciting Incremental Energy Storage (cont’d)

• We would anticipate that as each resource offers more inventory (higher percentage of storage capacity) that their costs above their normal fuel management plan will increase.

• For example, a generator offering a quantity equal to their normal inventory levels would incur little incremental cost and therefore would likely offer that initial quantity at a relatively low price. As that generator offers additional quantity blocks the price would tend to rise to account for additional carrying costs and potential costs of dealing with surplus fuel at the end of the season.

• Bid price for each block will reflect incremental cost, competitive pressures, and expected procurement prices paid by ISO.

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Incremental Fuel Price/Quantity Offers Concept

• Base Block– consistent with normal

inventory and is expected to have little additional cost

• Up to 3 additional offer pairs – it is expected that these

blocks will have increased incremental costs

• If supply curve is steep, ISO may elect not to purchase the full requirement

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Base Block

Inventory (MWH, barrels)/ Offer Price

Incremental Block 3


Incremental Block 2


Incremental Block 1


WINTER 2013/2014

Supplemental Obligation Program – Objectives

Objectives

• ISO will review the offers and award the MWh allotment to the Resources up to 2.4 million MWh (4.2 million barrels of oil)

• The total procurement is expected to be made up from three resource components: – Oil Fired Generation – Dual Fuel Generation (Gas Primary, Liquid Secondary)– Demand Response

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WINTER 2013/2014

Supplemental Obligation Program – Market Solutions

Market Solutions - Update

• Additional Market Solutions under Consideration for Next Winter– Real-time reserve requirements and when RCPFs are triggered– Constraints modeled in real-time (e.g., local second contingency

protection) that could be also modeled in the day-ahead market.

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WINTER 2013/2014

Supplemental Obligation Program - Demand Response

Changes to Winter DR Program Term Sheet From April 30th Stakeholder Discussions• Asset Eligibility, Selection, and Registration

– Clarified language regarding asset eligibility– Added provision allowing aggregation of end-use facilities into assets– Eliminated “deliverability” provision

• Metering and Meter Data Reporting– Added provision on meter data reporting for aggregations

• Settlement– Clarified computation of monthly average MW performance– Excluded 30-minute notification time from performance computations– Added section describing asset obligations and settlement if an asset were

dispatched more than 10 times during the program term

• Penalties– Clarified computation of monthly average MW performance and energy

penalty provisions

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Concerns Regarding Simultaneous Participation of Assets in Winter DR Program and FCM• Adding Winter DR Program MW and retaining FCM

MW improves reliability and decreases oil purchases

• Shifting MW from FCM to Winter DR Program would not improve system reliability or reduce oil purchases– When shifting the dispatch of FCM MW from just after to just

before OP-4, the same assets would be used to address the same reserve deficiency

– Since these assets would be utilized around the same point in the dispatch, these assets would provide little to no additional energy

– Allowing FCM MW to participate in the Winter DR Program would increase costs but not offset oil purchases

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Concerns Regarding Simultaneous Participation of Assets in Winter DR Program and FCM (cont)• Complexity of performance measurement and allocation

– Rules and software would need to be developed to address:• Overlapping Winter/FCM Dispatch• Overlapping Winter Dispatch and Partial FCM Dispatch• Overlapping day-ahead or real-time Transitional Demand Response and

Winter Dispatch • Allocation of asset performance (including over- and under-performance)

between Winter DR Program and FCM Resource• Disconnect between Winter DR Program asset-based dispatch and FCM

Resource-based dispatch– Time and resources are not available to develop the necessary rules

and software to address these issues

• For these reasons, the ISO does not believe that simultaneous participation of assets in Winter DR Program and FCM is desirable or feasible

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DR Winter Program Settlement Examples

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Asset Size 10 MWProposal Price 3.00$ /kW - MonthEnergy Price 250.00$ /MWhPenalty Rate 250.00$ /MWhHours of Dispatch 30 Hours/Month

MonthProposal Payment

Energy Payment Penalty

Total Revenue

Dec-2013 30,000$ 75,000$ -$ 105,000$ Jan-2014 30,000$ 75,000$ -$ 105,000$ Feb-2014 30,000$ 75,000$ -$ 105,000$ Total Program 90,000$ 225,000$ -$ 315,000$

Scenario 1: Asset Performs Perfectly

DR Winter Program Settlement Examples (cont)

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Total Revenue

Dec-2013 -$ -$ (75,000)$ (75,000)$ Jan-2014 -$ -$ (75,000)$ (75,000)$ Feb-2014 -$ -$ (75,000)$ (75,000)$ Total Program -$ -$ (225,000)$ (225,000)$



Total Revenue

Dec-2013 24,000$ 60,000$ (15,000)$ 69,000$ Jan-2014 24,000$ 60,000$ (15,000)$ 69,000$ Feb-2014 24,000$ 60,000$ (15,000)$ 69,000$ Total Program 72,000$ 180,000$ (45,000)$ 207,000$

Scenario 2: Asset Never Performs

Scenario 3: Asset Performs at 80% in Each Dispatch

WINTER 2013/2014

Supplemental Obligation Program - Oil Fired Generation

Offers

• Offers are submitted by the participants including but not limited to:– MWh

• The total amount of initial energy inventory that the Resource offers pursuant to this supplemental program

– MW• The capacity provided by the Resource

– $/MWh• Offer price for the energy, not the MW

• These will need to be specifically defined in the Market Rule

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Energy Required

• ISO will review the offers and award the MWh allotment to the Resources equivalent up to 4.2 million barrels of oil

• Assumed fuel heating value = 137,000 btu/gal

• Assumed generator heat rate = 10,000 btu/kWh

4,200,000 barrels 42 gallons 137,000 btu kWh MWh

= 2,400,000 MWh1 barrel gallon 10000 btu 1000 kWh

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Resource Selection

• Optimize based on selection criteria– Minimize/maximize (as appropriate) generator operating

characteristics– Minimize cost– Historical availability and performance– Diversity of location– Total capacity of resources

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Resource Allocation

• Once the MWh allocation has been determined, it will be published and released to the Resources.

• Each Resource must have its agreed upon inventory on site on December 1, 2013.

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Fuel Retention

• ISO will conduct a fuel survey on 12/1/2013.

• All Resources in the program will send in their fuel survey ON DECEMBER 1st.

• ISO will compare their inventory to the agreed-upon inventory to verify that the procurement is in place.

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Resource Performance Evaluation

• The availability of each Resource will be evaluated against its supplemental energy obligation in the program.

• Oil inventory will be submitted regularly via fuel surveys to verify the inventory for each Resource.

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Payment and Penalties

• At the end of each month, penalties will be calculated based on that month’s performance.

• Resources will receive payment from the program based on:– Performance during each month, with commitment and dispatch as a

baseline– ISO will evaluate whether or not oil inventory is sufficient to meet

remaining obligation

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Examples

• For all examples:– Generator has the full amount of required oil at the beginning of the

winter– The generator runs perfectly for the ISO commitment and dispatch– Oil inventory goes down proportional to the MWh received on the

power system from the generator

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Example 1: Expected Oil Depletion Under Supplemental Procurement

• On two occasions, ISO commits the generator to run for a week at a time.

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• ISO commits the generator to run one day a week, for 15 hours per day, throughout the winter.

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• ISO commits the generator to run continuously from December 1 through January 1.

• Their oil inventory is continuously depleted as they run.

• The generator is not dispatched again from January 2 through the end of the winter.

• At the end of the winter period, the generator retains title to the remaining oil inventory.

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Program Completion

• On March 1, 2014 all program participants are released from their winter obligations from the program and retain title to the oil.

• All Resources are still subject to the rules and regulations of the existing market structure before, during, and after the procurement period.

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Scenario 1

• Generator meets on-site fuel requirement and does not get committed

December 1st: Does the generator have agreed upon amount of oil in

tanks on site?

Generator remains eligible for full payments subject to performance

penalties

Was the generator committed and

dispatched on oil during the procurement period?

The generator can use oil after the procurement

period as desired. Generator receives full

payment

Yes No

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Scenario 2

• Generator meets on-site fuel requirement and operates as committed


tanks on site?


penalties

Does the generator committed and

dispatched on oil during the procurement period

perform as expected?



Yes

Yes

No performance penalties within the structure of

this program. Generator receives payment as

determined December 1

Yes

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Scenario 3

• Generator meets on-site fuel requirement and does not operate for some committed hours


tanks on site?


penalties






Yes

Yes

No

Generator does not receive the supplemental payment for the hours in which it did not operate

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Scenario 4

• Generator does not fully meet on-site fuel requirement, repeat Scenarios 1, 2, and 3


tanks on site?







period as desired. Generator receives

payment as determined on Dec. 1

No

Yes

Is the generator completely deficient?

NoNo

No





Yes

Generators’ monthly payments are

proportionally reduced and generator pays per

gallon penalty

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Scenario 5

• Generator has no fuel on 12/1/2013


tanks on site?


No

Yes

Generator is removed from program



gallon penalty

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Scenario Summary


tanks on site?


penalties







period as desired. Generator receives

payment as determined on Dec 1

Yes No

Yes


NoNo

Yes

Generator is removed from program

No





Yes



gallon penalty

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Oil Winter Program Settlement Examples

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Generator Size 200MWGenerator MWh bid 17,000MWhGenerator Oil Volume Agreement 30,000barrelsInventory Offer Price 15.00$/MWhAssumed Market Price for Oil on Dec. 1 100.00$/barrelDelivery Cost New York Harbor New England 5.75$/barrelPenalty Rate for Oil 105.75$/barrelEnergy Agreement Price Payment 255,000$Revenues in the scenarios below are in addition to energy, capacity, and ancillary payments made under existing Market Rules

Scenario 1: Generator meets on-site fuel requirement and does not get committed

Month Proposal Payment

Hours of non-performance

Oil Barrel Deficiency

Non-performance Penalty

Oil Deficiency Penalty Total Penalty Total Revenue

December-2013 $ 85,000 0 0 $ - $ - $ - $ 85,000 January-2014 $ 85,000 0 0 $ - $ - $ - $ 85,000

February-2014 $ 85,000 0 0 $ - $ - $ - $ 85,000

Total Program $ 255,000 0 0 $ - $ - $ - $ 255,000

Scenario 2: Generator meets on-site fuel requirement and operates as committed






December-2013 $ 85,000 0 0 $ - $ - $ - $ 85,000 January-2014 $ 85,000 0 0 $ - $ - $ - $ 85,000

February-2014 $ 85,000 0 0 $ - $ - $ - $ 85,000

Total Program $ 255,000 0 0 $ - $ - $ - $ 255,000

Oil Winter Program Settlement Examples (cont.)

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Scenario 3: Generator meets on-site fuel requirement and does not operate for some committed hours






December-2013 $ 85,000 4 0 $ (457) $ - $ (457) $ 84,543 January-2014 $ 85,000 0 0 $ - $ - $ - $ 85,000 February-2014 $ 85,000 80 0 $ (10,119) $ - $ (10,119) $ 74,881

Total Program $ 255,000 84 0 $ (10,576) $ - $ (10,576) $ 244,424

Scenario 4: Generator does not fully meet on-site fuel requirement, and does not operate for some committed hours






December-2013 $ 76,500 4 3,000 $ (411) $ (317,250) $ (317,661) $ (241,161)January-2014 $ 76,500 0 0 $ - $ - $ - $ 76,500 February-2014 $ 76,500 80 0 $ (9,107) $ - $ (9,107) $ 67,393

Total Program $ 229,500 84 3,000 $ (9,518) $ (317,250) $ (326,768) $ (97,268)The generator met 90% of their agreed upon fuel level

Scenario 5: Generator does not procure any fuel






December-2013 $ - 0 30,000 $ - $ (3,172,500) $ (3,172,500) $ (3,172,500)January-2014 $ - 0 0 $ - $ - $ - $ - February-2014 $ - 0 0 $ - $ - $ - $ - Total Program $ - 0 30,000 $ - $ (3,172,500) $ (3,172,500) $ (3,172,500)

The generator met 0% of their agreed upon fuel level

WINTER 2013/2014

Supplemental Obligation Program -Dual Fuel Generation

Overview

• Dual fuel generators will agree to swap to/operate on a secondary fuel should the unit’s primary fuel not be available

• Dual fuel for this proposal is the capability of operating on natural gas (primary) and a liquid fuel distillate or residual (secondary)

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Requirements

• Subject to the same obligations as the Oil Supplemental Program

• Additionally, demonstrate prior to December 1st swapping from the primary fuel to secondary fuel within three hours and operation on secondary fuel– Duration of testing based on manufacture specifications– Must include a minimum of 60 minutes at ECOMAX– Test plan must be submitted and approved by the ISO

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Resource Selection

• Optimize based on selection criteria– Minimize cost– Historical availability and performance– Ability to switch while on-line– Initial fuel inventory– Test Plan– Operating characteristics including physical restrictions

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Energy Payment

• Out-of-merit energy costs (NCPC) for successful demonstration of swapping and operating on the secondary fuel in accordance with the unit’s ISO approved test plan

• If unit has a standing offer at the start of the operating day on its primary fuel and swaps to its secondary fuel with the ISO’s approval, the forecaster will substitute the secondary fuel reference cost as the supply offer for the duration of the operating day

• The substitution to a secondary cost curve will be open to all dual fuel units until Hourly Re-offer becomes available

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may 13, 2013 - rc/mc meeting

Documents

iso solution

pipeline gas

fuel market

opportunity costsif

winterany lng solution

natural gas resources

lng cont

ownership of lng