Seattle City Light: Benefits of EIM Participation

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1 Seattle City Light: Benefits of EIM Participation Final Report May 31, 2016 Arne Olson, Partner Nick Schlag, Managing Consultant Jack Moore, Director Ana Mileva, Senior Consultant Conleigh Byers, Associate

2 Outline About E3 & the Energy Imbalance Market (EIM) Study scope & modeling framework Modeling assumptions Base Case EIM Case Benefits of EIM participation Sensitivity analysis of EIM benefits Price volatility Hydro availability Limits on participation Conclusions 2

3 Energy and Environmental Economics, Inc. (E3) San Francisco-based consultancy with 40+ professionals Rigorous analysis on a wide range of energy issues for utilities, regulators, gov t agencies, power producers, technology companies, and investors Resource planning, asset valuation, cost of service, rate design, EE/DR/DG cost-effectiveness, value of solar, renewable procurement, renewable integration, transmission development, deep decarbonization pathways, market analysis Our experience has placed us at the nexus of planning, policy and markets 3

4 Energy Imbalance Market Overview CAISO s Energy Imbalance Market (EIM) established by CAISO and PacifiCorp to enable efficient subhourly trading of energy across a broader geographic footprint EIM entities in participating BAAs submit bids into 15- & 5-minute real-time market on a voluntary basis Market optimization runs for the whole footprint, determining optimal redispatch among participants Since market inception in 2014, EIM footprint has expanded to include Nevada Energy (2015), and multiple additional entities have announced intentions of joining CAISO estimates EIM has generated a total benefit of $65 million to participants over first 18 months of operations 4

5 EIM Value Proposition: What Can I Do That I Don t Do Today? EIM creates the option to buy or sell within the hour, with less notice, and at a lower volume and cost, and can use optimization to find beneficial match of buyers & sellers Uses left over transmission that wasn t expected to be needed hourly, but could be useful in real time Centralized dispatch can identify optimized transactions that are too short term or otherwise would go unidentified in bilateral world without consolidated cost & bid information Market framework allows generators to be compensated for value of flexibility in generation that may not be reflected in daily block sales 5

6 E3 Experience Studying EIM Benefits E3 has developed a deep understanding of the nuances and intricacies of the dynamics of energy imbalance markets since completing an analysis of the benefits of a WECC-wide EIM in 2011 Following this initial assessment, E3 has completed benefits studies for each of the entities that have joined or announced intentions to join the EIM: PacifiCorp (2013) NV Energy (2013) Puget Sound Energy (2014) Arizona Public Service (2015) Portland General Electric (2015) Idaho Power Company (2016) 6

7 STUDY SCOPE & MODELING FRAMEWORK

8 Benefits of EIM Participation With its sizeable fleet of flexible hydroelectric resources, Seattle City Light is well-positioned to harvest a number of benefits from EIM participation: Additional revenues through arbitrage of subhourly markets Focus of this study Additional revenues through arbitrage between bilateral and EIM markets Additional revenues through sales of flexible ramping capacity Not quantified Reduced need to carry flexibility reserves; reduced costs of managing forecast errors 8

9 Framework for Benefits Assessment City Light is unique in comparison to existing EIM entities: Load primarily served by owned & contracted flexible hydro resources Surplus hydro generation sold to market to reduce retail rates Benefits Calculation Net Market Revenues (with SCL EIM Participation) E3 created a dispatch model to estimate City Light s net market revenues with and without EIM participation Captures City Light s market behavior under different wholesale price streams Uses 5- and 15-minute price data from historical years Assumes market could accommodate all desired City Light transactions at the historical market price Flexible modeling approach allows streamlined development of new scenarios and sensitivity analysis Net Market Revenues (without SCL EIM Participation) Benefit of SCL EIM Participation 9

10 Model Overview E3 developed an optimization model to maximize City Light s net revenue in wholesale markets subject to constraints of load service, generation capability, and transmission limits City Light Loads City Light Resources SCL hydro fleet BPA & other contracts Dispatch Optimization Model SCL Net Revenue Wholesale Market Mid C bilateral market Proxy EIM pricing nodes Optimization dispatches resources across multiple horizons, from hourly to 5-minute intervals 10

11 Simulation Framework Model optimizes City Light dispatch in three sequential stages Modeling Sequence Hourly Dispatch Fifteen Minute Dispatch Five Minute Dispatch Base Case Net Revenue Mid C (HLH/LLH) No change in hourly dispatch between Base Case & EIM Case EIM Case Net Revenue Mid C (HLH/LLH) CAISO RT15 (15 min) CAISO RT5 (5 min) In subhourly stages, hydro resources can increase or decrease output from previous set points in order to sell or buy in CAISO EIM 11

12 Detailed Data Requirements Most data used to model City Light s operations in EIM was provided directly by City Light Category Item Source Loads Resources Wholesale Market Prices Transmissi on Rights System load shapes Hourly & five minute shapes Hydro characteristics for each City Light hydro plant: Min/max output (MW) Hourly & five-minute dispatch (MW) Long-term contracts Hourly shapes (MW) Bilateral HLH/LLH Prices Hub: Mid C CAISO EIM Real Time Subhourly LMPs Node: Chehalis_Node3 City Light owned/contracted rights to wholesale market hubs Hub: Mid C Nodes: CAISO (via PSE) Provided by City Light Provided by City Light Provided by City Light Provided by City Light (from ICE) CAISO OASIS (15-min & 5- min) Provided by City Light 12

13 BASE CASE MODELING ASSUMPTIONS

14 Base Case Summary The purpose of the Base Case is to create a model that simulates City Light s operations under 2015 conditions Hydro, load, bilateral market prices, etc. Base Case serves as a baseline against which the value of EIM participation can be compared Modeling Sequence Hourly Dispatch Fifteen Minute Dispatch Five Minute Dispatch Base Case Net Revenue Mid C (HLH/LLH) 14

15 Daily Hydro Energy Budgets Hydro resources constrained by daily historical energy budget, maximum output level Runoff occurs early (Feb-Mar) Low output during traditional runoff Used for 2015 historical scenario Traditional runoff Used for sensitivity analysis 15

16 Dispatch Logic for Hydro Plants Non-dispatchable resources are modeled as fixed hourly profiles Cedar River, South Fork Tolt, Gorge, Lucky Peak Dispatchable resources are constrained by a daily energy budget and are dispatched on an hourly basis against Mid-C market prices Ross, Diablo, Boundary Surplus hydro sold at Mid C market, subject to 650 MW limitation Mid C market modeled in HLH/LLH blocks Additional sales modeled at a $10/MWh discount to Mid C (reflects cost of purchasing short-term transmission) 16

17 Snapshots of Hourly System Dispatch Historical system dispatch, Jan 6, 2015 Simulated system dispatch, Jan 6, 2015 Hydro Load Contracts Historical system dispatch, July 15, 2015 Hydro dispatch pattern indicative of HLH/LLH trading in bilateral Mid-C market Simulated system dispatch, July 15,

18 Benchmarking Against Historical Hydro Dispatch Hourly hydro dispatch (2015) Optimization tends to use hydro more flexibly than it operates in reality Duration curves of production Estimated revenue from surplus hydro sales in 2015: $37 million 18

19 EIM CASE MODELING ASSUMPTIONS

20 EIM Case Summary The EIM case is built off of the Base Case, but allows SCL to buy and sell from CAISO s 15- and 5- minute markets to generate additional revenues City Light s hydro resource are redispatched on a subhourly time scale to enable transactions with CAISO Modeling Sequence Hourly Dispatch Fifteen Minute Dispatch Five Minute Dispatch EIM Case Net Revenue Mid C (HLH/LLH) CAISO RT15 (15 min) CAISO RT5 (5 min) 20

21 Redispatching Flexible Units in EIM Based on City Light input, the dispatchable hydro fleet (Ross, Diablo, Boundary) is assumed to be capable of providing 300 MW of flexibility Also constrained by minimum & maximum capacity No ramping constraints are imposed on dispatchable hydro units Based on guidance from City Light Assumed Subhourly Flexibility MW Upper limit +300 MW (sales to EIM) -300 MW (purchases from EIM) Lower limit Hourly schedule Model has perfect foresight of EIM prices within each day Time Allows nearly perfect arbitrage of EIM price volatility 21

22 Market Access Assumptions in EIM E3 assumes City Light has sufficient internal transmission to deliver its own generation resources to loads SCL Access to external markets is limited by City Light s transmission rights Trading at Mid-C modeled in HLH/LLH blocks EIM pricing based on Chehalis_Node3 447 MW 500 MW CAISO EIM (via PSE) 650 MW 650 MW Surplus in excess of City Light s transmission to Mid C is sold at a discounted price ($10/MWh below Mid-C) Available in Base Case & EIM Case Available only in EIM Case Mid C 22

23 2015 Price Duration Curves: Mid-C & EIM Markets Volatile pricing in EIM markets is a potential source of value, but future volatility is uncertain and may change with increased participation and increased renewable penetrations Maximum prices in EIM markets reach $1,000/MWh EIM (RT5) EIM (RT15) Mid C Figure based on Chehalis node; however, similar patterns are evident throughout the footprint of CAISO s EIM 23

24 EIM Prices Show Significant Intraday Volatility The volatility of the subhourly EIM markets distinguishes it from the bilateral markets in which City Light has historically participated To measure intraday volatility, this study uses the metric of daily standard deviation : the standard deviation of a series of prices across each 24-hour day Figure based on Chehalis node; however, similar patterns are evident throughout the footprint of CAISO s EIM 24

25 EIM BENEFITS: HISTORICAL 2015 ANALYSIS

26 Summary Results: Benefits Under 2015 Historical Prices Estimated revenue from sales of surplus hydro to bilateral markets in 2015: $37 million Estimated incremental revenues from EIM participation under 2015 market conditions: $23 million per year Five Minute Market Fifteen Minute Market Mid-C Bilateral Market (no change between Base Case & EIM Case) Model assumes full optimization of hydro dispatch to take advantage of all arbitrage opportunities with perfect foresight 26

27 Hourly & Subhourly Operations in EIM: January 6, 2015 (Historical) Hour-Ahead System Dispatch Fifteen-Minute System Dispatch Day-Ahead Sales (Purchases) Surplus hydro sold at Mid-C market in HLH/LLH blocks Day-ahead sales Fifteen-Minute EIM Net Sales In subhourly simulations, hydro flexibility is used to arbitrage EIM prices (buy low, sell high) 15-min sales 15-min purchases Day-Ahead Mid-C Price CAISO Fifteen Minute EIM Price 27

28 Hourly & Subhourly Operations in EIM: July 13, 2015 (Historical) Hour-Ahead System Dispatch Fifteen-Minute System Dispatch Day-Ahead Sales (Purchases) Purchases from Mid- C market during low water conditions Fifteen-Minute EIM Net Sales Hydro can be used for arbitrage at all times except when hydro resources are at Pmin or Pmax 15-min sales Day-Ahead Mid-C Price Day-ahead purchases CAISO Fifteen Minute EIM Price 15-min purchases 28

29 Distribution of Market Revenue Throughout the Year Daily revenue from sales (purchases) to bilateral market ($37 million) When loads are high and hydro is low, City Light is a net buyer During runoff, sales of surplus hydro generates revenue Incremental daily revenue from arbitrage in EIM markets (+$23 million) Arbitrage in EIM market allows City Light to generate additional revenues throughout the year 29

30 Increasing revenue Historical Market Volatility Creates Revenue Opportunities Volatility in EIM markets provides opportunities for City Light to capture revenues through arbitrage by using the flexibility of its hydro resources Fifteen Minute Market (2015 Historical) Five Minute Market (2015 Historical) Jan 6 July 15 Each dot represents one day of 2015 Increasing volatility 30

31 Summary of Analysis The flexibility of City Light s hydro fleet provides it with a significant opportunity to take advantage of market conditions in the EIM Market volatility is the main driver of City Light s revenue, as flexible hydro resources can be dispatched to arbitrage market prices as a storage resource Most EIM participants, whose generation resources are primarily less-flexible thermal resources, cannot take advantage of price volatility in this respect Benefits to City Light under historical pricing patterns are significant when compared with revenue from historical system surplus sales Sensitivity analysis is conducted to test the effect of several assumptions on the results based on 2015 market & hydro conditions: Volatility of EIM prices Hydrological conditions Potential constraints on volume of City Light EIM participation 31

32 EIM BENEFITS: IMPACT OF VOLATILITY

33 Relationship Between Volatility and Revenue Volatility in EIM markets is identified as a key driver of City Light s revenues as an EIM participant Key questions to inform sensitivity analysis are: 1. Is there any reason to suggest that current levels of volatility observed in EIM are anomalous? What can be learned from the historical record of CAISO subhourly market prices? 2. How will volatility change in the future? How will expansion of EIM participation and changes in resource portfolios impact volatility in market? 33

34 Historical Volatility in CAISO Markets Intraday volatility has been a characteristic of CAISO s subhourly market since its inception Historical 5-min pricing (Chehalis) 2015 Historical 5-min pricing (Tesla) Historical pricing data indicates that volatility observed in NW in 2015 was typical of CAISO markets, perhaps even understated 34

35 NVE s Joining the EIM Has Not Impacted Volatility Noticeably NVE joins EIM NVE commenced financially binding EIM operations on December 1, 2015 While median daily standard deviation varies by month, NVE joining the EIM has not dampened volatility noticeably 35

36 Future Volatility in the EIM Future developments will have competing influences on the volatility Addition of more EIM participants is expected to reduce volatility ( ) Addition of intermittent renewable generation to meet policy goals will lead to increases in volatility ( ) Unclear which of these fundamental changes will prove stronger than the other future volatility in EIM market is an uncertainty 36

37 High Renewable Goals Will Increase EIM Volatility Growing penetrations of renewables will increase net load forecast error and subhourly variability, increasing system need for operational flexibility Curtailment of renewables in real-time dispatch will result in intervals with zero/negative market prices Both impacts will lead to increases in volatility as states pursue higher RPS goals GWh curtailment per month Source: CAISO Market Performance & Planning Forum Renewable curtailment has already been observed in large quantities in subhourly markets and will continue to rise 37

38 Overview of Volatility Sensitivities Multiple sensitivities provide insight into relationship between pricing volatility & EIM benefits: 1. Internal CAISO pricing: substitute pricing at Tesla node on CAISO system for Chehalis; provides insight into how much of 2015 benefit was driven by unique conditions at Chehalis 2. Clipped pricing: 2015 prices at Chehalis bounded at $0 and $100/MWh; provides information on how dependent revenue is on tail events 3. Dampened volatility: 2015 prices at Chehalis with volatility reduced by 40% to reflect potential reductions with expanded EIM participation 38

39 Volatility Sensitivity #1: EIM Prices Based on CAISO Node Pricing record at Chehalis reflects only a single year of activity with a single non-caiso participant (PacifiCorp) Chehalis As a second reference, E3 quantified City Light revenues in EIM assuming sales & purchases at Tesla a central part of the CAISO system with a much longer record of pricing data available NOTE: prices at Tesla include California s carbon cost and thus are not directly comparable to expected EIM prices on City Light s system Tesla 39

40 Revenue Impact of CAISO Internal Pricing EIM revenues based on Tesla pricing are comparable to revenues based on Chehalis node ($26 million per year) Five Minute Market Fifteen Minute Market Mid-C Bilateral Market (no change between Base Case & EIM Case) Note that this sensitivity would overstate City Light revenues due to inclusion of CO2 allowance costs at Tesla node 40

41 Volatility Sensitivity #2: Clipped Prices in EIM Extreme pricing events could be a significant source of revenue but are rare and unpredictable Especially during these periods, assumption that City Light is a price taker in the market may not be valid Examining benefits based on a price stream bounded at $0 and $100/MWh provides some insight into relative importance of extreme events for City Light s benefits min pricing at Chehalis 41

42 Revenue Impact of Clipped Prices Sensitivity Removing outlier prices reduces EIM revenues; however, revenue is still significant ($19 million per year) Much of EIM benefit stems from moderate intraday volatility Five Minute Market Fifteen Minute Market Mid-C Bilateral Market (no change between Base Case & EIM Case) 42

43 Volatility Sensitivity #3: Dampened Volatility All else equal, continued expansion of the EIM footprint could lead to a reduction in volatility of prices in EIM markets While this effect is highly uncertain, it is a key driver of the benefits to City Light To measure the impact of reductions in pricing volatility in the EIM on City Light s benefits, E3 examined a sensitivity in which volatility in the EIM markets is reduced by 40% Representative of potential impact of footprint expansion Ignores potential increases in volatility due to buildout of renewable resources 43

44 Revenue Impact of Dampened Volatility Reductions in market volatility result in lower revenues ($15 million per year) Magnitude of impact roughly proportional to reduction (40%) Five Minute Market Fifteen Minute Market Mid-C Bilateral Market (no change between Base Case & EIM Case) 44

45 Summary of Volatility Sensitivities Key result of volatility sensitivities: reductions in volatility result in fewer opportunities for energy arbitrage, less revenue Total benefit: $23 $26 $19 $15 Five Minute Market Fifteen Minute Market Mid-C Bilateral Market (no change between Base Case & EIM Case) 45

46 EIM BENEFITS: IMPACT OF HYDRO AVAILABILITY

47 Sensitivity: 2013 Hydro Conditions Hydro conditions in 2015 were anomalous seasonal profile does not match typical expectation Pairing 2013 hydro conditions with 2015 market prices provides some insight into the benefits of EIM participation under more typical hydro conditions Any correlation between daily hydro budgets and prices or loads is lost by pairing multiple years, but this analysis is at least indicative 47

48 Revenue Impact of Hydro Sensitivity Hydro conditions have direct impact on revenue in day-ahead markets but lesser impact on EIM revenues ($23 million per year) EIM revenues derived from flexibility, not energy Five Minute Market Fifteen Minute Market Mid-C Bilateral Market (increases under hydro sensitivity due to change in hydro conditions) 48

49 EIM BENEFITS: IMPACT OF EIM TRADING VOLUMES

50 Volume of Transactions in EIM Market For City Light to make use of the full flexibility of its hydro resources (+/- 300 MW), EIM must have sufficient depth to absorb this quantity either through: Uninstructed imbalances Economic dispatch of generators elsewhere in EIM footprint Quantifying the depth of the EIM market is challenging, but some useful indicators are available While expansion of CAISO EIM may tend to suppress volatility ( ), it also increases the depth of the market ( ) By allowing City Light to trade with new counterparties, EIM expansion will increase likelihood that City Light can fully monetize the value of its flexibility 50

51 Historical Exchanges Among Balancing Authorities Transfers among balancing authorities is not a direct proxy for the total depth of market, ignoring economic trades through EIM within each BA Nonetheless, transfers highlight large volumes of power flowing through EIM market MW MW Dec 1, 2015 Apr 9, 2016 Source: CAISO Market Performance & Planning Forum 51

52 Transmission May Limit City Light s Access to EIM Market City Light s main connection to the EIM market is via Puget Sound, whose connection to the rest of the EIM is approximately 300 MW Source: California ISO 52

53 Sensitivity: Limited City Light Participation The simple model used to simulate City Light s participation in EIM does not directly consider how much of City Light s flexibility can be absorbed by the market Limitations of market depth Limitations of transmission capability While these factors are not directly modeled in this study, the model can be used to illustrate how City Light s revenues would change if these or other factors do limit its ability to participate To examine this relationship, E3 modeled a scenario in which City Light s hydro resources can provide only +/- 150 MW of flexibility within the hour 53

54 Revenue Impact of Limited Participation Relationship between volume of participation and revenues is nearly linear; benefits reduced by approximately half ($13 million per year) Five Minute Market Fifteen Minute Market Mid-C Bilateral Market (no change between Base Case & EIM Case) 54

55 EIM BENEFITS: LOW BENEFIT SENSITIVITY

56 Sensitivity: Combining Dampened Volatility & Limited Participation To provide a lower bound estimate on the benefits captured by City Light through EIM participation, E3 combined the impacts of the Dampened Volatility and Limited Participation sensitivities Impacts of these two sensitivities are nearly entirely independent, and are hence multiplicative: A 40% reduction in volatility reduces net EIM revenues by approximately 35% A 50% reduction in the limit on EIM participation (+/- 300 to +/- 150 MW) reduces net EIM revenues by 45% Benefits with both limited participation and dampened volatility: $8 million per year 56

57 CONCLUSIONS

58 Summary of Analysis Market-based modeling identifies significant of potential additional revenues from EIM participation: $8-23 million per year Intraday price volatility in EIM markets is the key driver of magnitude of City Light s benefits Volatility is and has been a characteristic of CAISO s subhourly markets Volatility will be impacted by future changes in resource portfolio ( ) and EIM footprint expansion ( ), but will not be eliminated entirely Sensitivity RT15 Revenue RT5 Revenue Total EIM Revenue 2015 Base Case $14 $9 $23 Pricing Sensitivities Internal CAISO Pricing* $17 $9 $26 Clipped Prices $13 $6 $19 Dampened Volatility $9 $6 $15 Average Hydro Sensitivity $14 $9 $23 Limited Participation Sensitivity $8 $5 $13 Dampened Volatility, Limited Participation** $5 $3 $8 * Not included in final range because of impact of California carbon adder on revenue estimate ** Combines impact of Dampened Volatility and Limited Participation sensitivities 58

59 Conclusions Participation in EIM provides City Light with an opportunity to monetize the value of its untapped hydro flexibility While benefit is evident, this study s large potential range reflects uncertainty of the size of future market opportunities in CAISO s EIM Actual realized benefits through EIM arbitrage may be lower than upper bound due to a number of factors: Modeling assumes perfect foresight of EIM pricing; in reality, without perfect foresight, City Light will not be able to arbitrage prices perfectly Modeling allows City Light to capture all potential arbitrage revenues; in reality, bidding strategies may lead to foregone opportunities Modeling assumes City Light has no impact on market prices; in reality, the addition of a large flexible hydro resource could dampen volatility especially during periods of extreme pricing Beyond EIM revenue quantified in this study, City Light is in position to capture additional benefits through EIM Improved understanding of market dynamics may allow City Light to generate additional revenues through arbitrage across multiple days or between markets Additional revenues through sale of flexible capacity to satisfy flexible ramping capacity requirements 59

60 Thank You! Energy and Environmental Economics, Inc. (E3) 101 Montgomery Street, Suite 1600 San Francisco, CA Tel Web Arne Olson, Partner Nick Schlag, Managing Consultant Jack Moore, Director Ana Mileva, Senior Consultant Conleigh Byers, Associate