Proposed Zone 4 Solution Follow Up to Questions from the February 22 Competitive Retail Solution Task Team Meeting

Transcription

1 Proposed Zone 4 Solution Follow Up to Questions from the February 22 Competitive Retail Solution Task Team Meeting Competitive Retail Solution Task Team March 7, 2016

2 Response to 2.22 CRSTT Meeting Questions Bilateral Contracts o Under Exelon s proposal there is no change to the treatment of bilateral contracts Bilateral contracts can be offered into the Zone 4 forward auction as a price taker (offer at zero) and will be cleared just like any other zero price offer. They receive the forward auction price and are charged the forward auction price resulting in a net auction financial obligation of zero o Proposed 20% constraint on external resources: Bilateral contracts associated with external resources with a zero priced offer will automatically clear if total imports bidding as price-takers into Zone 4 are below the 20% constraint. If total imports bidding as price-takers are above the 20% constraint the price-taker bids will be prorated equal to the constraint LSEs will still own the MWs associated with the bilateral contract that did not clear due to the 20% constraint and can offer this into the PRA or sell bilaterally to a buyer outside of Zone 4. The risk of not being able to be fully hedged with bilateral contracts with resources external to Zone 4 exits under today s PRA rules due to the Capacity Import Limit and Local Clearing Requirement o Bilateral transaction prices are shaped by physical market outcomes therefore it is imperative to reform the Zone 4 market design to ensure resource adequacy through all types of transactions 2

3 Response to 2.22 CRSTT Meeting Questions Capacity Performance (CP) o A CP product is assurance that generators will be available and able to support the system during high load, high stress periods through adequate economic incentives o A capacity product without CP still allows a generator to be paid even if they do not perform/aren t available when needed o Under CP if a generator does not perform it will on average not get paid anything because its hourly performance charges will offset its capacity revenues o Energy prices in MISO during scarcity hours do not sufficiently reflect the full value of being available due to, price caps and reliability actions during scarcity conditions. Request for Unit Specific Costs o The purposes of the MISO CRSTT is not to determine the appropriate rate of return as is done in vertically integrated states. It is to determine a competitive market solution that produces a competitive price signal for non-rate based resources located in a restructured state in order to sustain and attract new needed investment to meet resource adequacy needs at the least cost to consumers 3

4 Response to 2.22 CRSTT Meeting Questions Long Term Commitment Guarantee from Resources in Zone 4 o A sufficiently designed competitive market will ensure efficient entry, retention, and exit of resources based on sound competitive market price signals. If the market is designed correctly resources will exit the market when they are no longer the least cost most reliable resource needed to meet demand, and will attract new investment when and where needed. Application of Forward Auction Transmission Impacts in Prompt Year PRA o MISO should treat forward auction transmission impacts similar to other issues that impact the transmission system today that must be accounted for when determining transmission capability for prompt year PRA purposes such as generation additions and retirements, transmission upgrades, and imports and exports out of MISO Minimum Offer Price Rule o Exelon is not proposing incorporation of a MOPR provision into the Zone 4 solution at this time 4

5 Response to 2.22 CRSTT Meeting Questions 5 Can a PJM RPM-CP design be filed by May 5 and implemented starting with the 2017/2018 Planning Year o A PJM RPM-CP style auction is the best and quickest path to success given it has been proven to be highly effective in maintaining resource adequacy by retaining and attracting new resources at reasonable costs. It has already been found just and reasonable by FERC for application in northern IL and therefore provides helpful precedent, minimizing regulatory timing hurdles. It will be critical that the current timing is adhered to so that such a construct can be implemented in time for the 17/18 planning year. In addition, anything short of this design likely will not result in adequate competitive market outcomes requiring timely and costly ongoing revisions. Will the enactment of a low carbon portfolio standard in Illinois eliminate or reduce the need for a MISO capacity market redesign for Zone 4 o No. Both are needed to address related but separate problems, the resolution of which will ensure existing, safe, emissions-free sources of base load generation remain operational. The proposed MISO capacity market reforms in Zone 4 are needed to fix the current market structure which fails to address resource adequacy in the competitive marketplace. The current Zone 4 capacity market fails to create a market signal that Zone 4 suppliers can utilize to drive investment. This flawed structure threatens reliability and ultimately raises costs for Illinois residents and businesses. Separately, Illinois legislation is necessary to recognize the value of nuclear facilities as a source of zero-emission electric generation. A low carbon portfolio standard will allow the State to transition to meet its carbon goals in a cost effective manner.

6 Proposed Zone 4 Resource Adequacy Solution Competitive Retail Solution Task Team February 22, 2016

7 Summary of Exelon s Proposed Southern IL Resource Adequacy Solution The overarching principal of Exelon s Southern IL (Zone 4) solution is to adapt PJM s Reliability Pricing Model (RPM)) to Zone 4, while integrating with the rest of MISO as seamlessly as possible RPM has proven to be highly successful at maintaining reliability at a reasonable cost to consumers using competition to determine market revenues Zone 4 resources rely on market revenues, not a state rate recovery mechanism for capacity costs, and proper price formation is critical to ensure Resource Adequacy (RA) IL will benefit from one RA design Northern IL is in PJM and Southern IL borders PJM, market structure parity is important in ensuring that additional MISO resources are not lost to PJM over time FERC has approved both PJM & ISONE s capacity performance proposals Given this, the key elements of Exelon s proposed solution for Zone 4 are: Three-year forward auction for Zone 4 only, for a one year commitment period Mandatory participation for all Zone 4 loads and internal supply; optional for all other supply New net Cost of New Entry (CONE) to be developed for Zone 4 auction and set at similar level to Western PJM Downward-sloping demand curve for Zone 4 forward auction Constraint on external resources ability to serve Zone 4 in forward auction Strong performance incentives for resources cleared in Zone 4 forward auction Bid safe harbor level of 85% of net CONE in forward auction for existing internal Zone 4 generation resources Existing MISO Planning Reserve Auction (PRA) to serve as reconfiguration auction for Zone 4 7

8 Forward Auction for Zone 4 Capacity sufficient to supply Zone 4 s Planning Reserve Margin Requirement ( PRMR ) should be procured three years forward for a one year commitment period For example, the auction for the 2020/21 commitment period should take place in Spring 2017 Transitional forward auctions for the 2017/18, 2018/19, and 2019/20 commitment periods for Zone 4 should be run in quick succession in early 2017 MISO will procure Forward Zonal Resource Credits ( FZRCs ) on behalf of Zone 4 loads and administer the FZRCs in the reconfiguration auction; all charges and payments for prompt planning year to occur after reconfiguration auction consistent with existing PRA process A forward auction is necessary because: Capacity with long-lead investment time horizons, such as new builds, environmental upgrades at coal plants, and nuclear fuel/capex requires a visible forward price signal to make efficient and rational investment and retirement decisions, without RMR contracts, in a competitive market environment Traditional cost of service regulation provides the certainty needed for these decisions in other parts of MISO, but does not exist in Zone 4. 8

9 Mandatory participation for Zone 4 loads and internal supply Participation in the Zone 4 forward auction mandatory for all Zone 4 loads and existing internal Zone 4 generation supply, but optional for all other supply. Load / Supply Category Current Non-FRAP Zone 4 Demand Current FRAP Zone 4 Demand Non-Zone 4 Demand Existing Internal Zone 4 Generation Supply Resources External MISO Generation Supply Resources External Non-MISO Generation Supply Resources Demand-Response Supply Resources (Internal or External) How to Participate in Zone 4 Forward Auction? Mandatory. Loads are incorporated into demand curve and charged clearing price Mandatory. FRAP option removed. Participation not allowed; supply procured according to existing framework (PRA, self-supply/bilaterals, FRAP) Mandatory. Must submit a offer in forward auction unless exempted by IMM. Subject to market power mitigation Optional; Subject to Zone 4 performance rules in forward auction and constraint on amount of non-internal supply that can supply Zone 4 loads Optional; Subject to Zone 4 performance rules in forward auction and constraint on amount of non-internal supply that can supply Zone 4 loads Optional; Subject to existing qualification rules 9

10 Zone 4 Net CONE Must be Set at Level Similar to Northern IL The Net Cost of New Entry ( Net CONE ) is a critical input to the Zone 4 Forward auction design Net CONE equal to Gross CONE minus Energy and Ancillary Services revenue Critical input for calibrating demand curve, sizing performance incentives, and establishing appropriate maximum bids for resources subject to mitigation MISO does not currently develop or have an accurate measure of Net CONE for Zone 4 MISO estimates a Gross CONE (i.e. with no energy offset) using data from the Energy Information Administration that has consistently lagged and underestimated the actual Cost of New Entry MISO Gross CONE is not used in developing price formation so not historically scrutinized MISO Gross CONE estimate for Zone 4 is about $259/MWD for 2016/17. This estimate is much too low, particularly given that it does not include an energy offset The MISO IMM has estimated that the Net CONE for a natural gas combined cycle in MISO Central is about $300/MWD (see e.g. MISO 2014 State of Market Analytic Appendix Figure A13) Similarly, PJM s highly robust methodology for determining Net CONE currently estimates a Net CONE for the ComEd region of Northern Illinois of $307/MWD MISO should adopt the estimate for Net CONE used in Northern Illinois for the initial set of Zone 4 forward auctions to take place in 2017, and should begin a more robust process to develop a Zone 4 specific Net CONE for use in later auctions (starting in 2021/22) Initial auctions should use a Net CONE of $307/MWD, based on PJM s estimate of Net CONE for the ComEd region for 2019/20. 10

11 Capacity Price ($/MWD) Downward-Sloping Demand Curve for Forward Auction The Zone 4 design must include a downward-sloping demand curve The downward-sloping demand curve recognizes that capacity procured in excess of the PRMR provides value and reduces year-to-year volatility in clearing prices caused by vertical curve At a minimum, the existing PJM demand curve should be considered. PJM has developed a well-vetted shape for the demand curve used in RPM for northern IL Illustrative Zone 4 Demand Curve Using PJM Shape (PRMR of 10,420 MW, Net CONE of $307/MWD) Price Cap of 1.5 x Net CONE built into demand curve Point A: P=1.5 x Net CONE, Q = x PRMR PRMR for Zone 4 Point B: P=0.75 x Net CONE, Q = x PRMR Point C: P=0, Q = x PRMR MW of UCAP 11

12 Capacity Price ($/MWD) Constraint on External Supply set to 20% An external supply constraint is necessary because (1) it strikes a balance by not precluding external supply thereby capturing benefits of the MISO pool (2) recognizes the other parts of MISO are building and recovering costs to serve regulated native load in their state and their long-term commitment is not to Zone 4, and (3) transmission limits into Zone 4 have not been stable over time. This limit should be implemented as a constraint in the Zone 4 forward auction that specifies cleared external resources (whether non-miso or MISO outside zone 4) may not comprise more than 20% of the PRMR. In 2015/16 the import limit into Zone 4 was about 15% of PRMR External Supply Bids 0 External Supply Constraint in Zone 4 Forward Auction External Clearing Price Demand Curve External Supply 20% of PRMR Zone 4 Internal Clearing Price MW of UCAP Zone 4 Internal Supply Bids PRMR Implemented as a vertical demand curve for external supply, with external supply receiving a separate, lower price if the constraint is binding There is no constraint in the prompt year reconfiguration auction 12

13 Resources Cleared in Zone 4 Forward Auction to be Subject to Strong Performance Incentives Supply resources that clear the Zone 4 forward auction should be subject to performance incentives modeled on PJM s Capacity Performance ( CP ) product Ensures long-term reliability of supply resources and incentivizes reliability-enhancing investments Economically enforces requirement that new entrants and external resources make a physical commitment to Zone 4 Core features of performance incentives should include: All supply resources of all types cleared in Zone 4 forward auction subject to performance incentives during hours of scarcity or near-scarcity Over or under-performance relative to capacity commitment charged at an hourly rate based on Net CONE spread over the expected hours of scarcity or near-scarcity such that a non-performing resource can expect to forfeit 100% of its capacity revenues Uncommitted resources internal to Zone 4 able to earn bonus performance revenues if they remain in market and produce during assessment hours No excuses for non-performance. More detail on implementation of performance incentives is provided in the appendix. 13

14 Market Power Mitigation for Zone 4 Forward Auction Supply Category Existing Zone 4 Generation Resources Must-Offer in Forward Auction? Yes (IMM may exempt if retiring) Supplier-Side Mitigation Safe harbor bid level of up to 0.85 times Net CONE (about $260/MWD with Net CONE of $307/MWD) allows the generator to develop a competitive offer; May bid above this level if Going-Forward Costs (less energy revenues) documented with IMM exceed 0.85 x Net CONE New Build Generation Resources (Internal or External) Existing External Generation Resources Demand Response Supply Resources No No No None (although demand curve caps price at 1.5 x Net CONE) None (although demand curve caps price at 1.5 x Net CONE) None (although demand curve caps price at 1.5 x Net CONE) 14

15 Safe Harbor Bid Level for Existing Zone 4 Resources is Supported by Performance Incentive Opportunity Cost The proposed bid safe harbor for Zone 4 existing resources of 0.85 times Net CONE is based on the expected net revenues associated with forgoing a capacity commitment and instead receiving performance incentive revenues Resources with no capacity commitment may earn performance incentive revenues by remaining in market and producing during periods of scarcity or near-scarcity The safe harbor represents the lost of opportunity cost of forgoing this opportunity when the resource accepts a capacity commitment A mathematical derivation of the opportunity cost basis for the safe harbor is provided in the appendix In addition to its opportunity cost basis, the bid safe harbor level has additional benefits Allows resources the ability to develop a competitive offer that includes hard-to-quantify but significant cost elements such as market risk, operational risk, and fuel security Reduces administrative burden on IMM in reviewing requested offer levels. 15

16 MISO-wide Planning Reserve Auction ( PRA ) to serve as reconfiguration auction for Zone 4 forward auction 3 years, ~ 3 months prior to delivery year 3 years, ~ 1 month prior to delivery year 3 year period ~ 2 months prior to delivery year ~ 1 months prior to delivery year Delivery year March 2017 May 2017 May 17 May 20 March 2020 April 2020 MISO determines planning parameters for Zone 4 Forward Auction Zone 4 Forward Auction Runs MISO administers Zone 4 Forward Capacity Credits MISO determines planning parameters for MISO-Wide PRA PRA Runs MISO-Wide using existing rules, Including Zone 4 June 20 May 21 Delivery Year; All costs allocated to LSEs Based on load forecast and LOLE study looking out 3 years Procures GW of Forward ZRCs on behalf of Zone 4 load Mix of Zone 4 internal resources and non-zone 4 resources (80 / 20 if external resource constraint binds) MISO holds Forward ZRCs as passthrough entity on behalf of Zone 4 loads If cleared resources from forward auction drop out, they must buy out of commitment by paying MISO the highest of (1) 0.85 times Zone 4 Net CONE, (2) Zone 4 forward clearing price, (3) Zone 4 clearing price in PRA Determined according to existing methodology using most current LOLE study for delivery year Parameters include Zone 4 as normal PRA runs using current rules MISO enters FZRCs procured through Zone 4 forward auction into PRA as price-taking resources Uncleared Zone 4 resources may participate in PRA as normal PRA effectively serves as reconfiguration auction for Zone 4 Resources cleared in Zone 4 forward auction are paid price from forward auction Resources that clear in PRA only are paid PRA clearing price Zone 4 LSEs are charged cost of Zone 4 forward procurement, plus cost of supplying Zone 4 in PRA, less credit for Zone 4 forward ZRCs cleared in PRA Examples in appendix shows how resources and loads are paid and charged under this framework 16

17 APPENDIX 17

18 Specific Features of Performance Incentives, and Mathematical Basis for Safe Harbor Bid Level Specific features of performance incentives, as applied to Zone 4 All forward-cleared supply resources of all types subject to performance incentives during hours when performance assessment in effect, regardless of whether resource is in Zone 4 or not Resource performance assessed during periods of scarcity or near-scarcity, with assessment screen chosen to produce 30 performance assessment hours per year on average Performance assessment in effect during any hours in which the RTO or any region containing Zone 4 is subject to a Maximum Emergency Generation Alert, Warning, or Action Performance assessed by comparing actual hourly output of resource to its UCAP commitment multiplied by the balancing ratio in that hour (balancing ratio = hourly load / total cleared UCAP forward-committed to Zone 4). This comparison can result in either under- or over-performance. Over/under performance credited or charged at an hourly rate equal to Zone 4 Net CONE spread over 30 hours/year. If Net CONE = $307/MWD, the hourly rate is $3,735/MWh Credits to over-performing resources funded from charges paid by under-performing resources Uncommitted Zone 4 internal resources may receive over-performance credits Performance penalty annual stop-loss of 150% of Net CONE Bid safe harbor based of 0.85 times Net CONE based on opportunity cost of not accepting capacity commitment The bid safe harbor level is the difference between expected performance incentive revenues with and without a capacity commitment Expected Performance Incentive Revenues with a capacity commitment: (Net CONE / H) * H * (A B); where H = the expected annual number of performance assessment hours (30) A = the expected performance (capacity factor) of the resource during performance assessment hours B = the expected balancing ratio during performance assessment hours, where balancing ratio equals the hourly load divided by total committed UCAP. Historical balancing ratio in PJM has been 85%. This represents the resources capacity commitment Expected Performance Incentive Revenues without a capacity commitment: (Net CONE / H) * H * A The B term is missing because the resource lacks a capacity commitment Difference between the two = Net CONE x B = Net CONE x

19 Example of Resource Payments and Load Costs Under Proposed Zone 4 Solution Example 1: Zone 4 forward auction under-procures Assume: o 10 GW cleared in Zone 4 forward auction (8 GW internal, 2 GW elsewhere in MISO) o Zone 4 forward clearing prices of $200/MWD for internal resources, $100/MWD for external o 2 GW of internal Zone 4 resources do not clear forward auction and remain uncommitted o When PRA runs prior to delivery year, MISO North as a whole clears 105 GW of resources at a price of $250/MWD; all 10 GW of forward-procured resources clear because they are entered as price-takers o The Zone 4 PRMR in the PRA is 11 GW o The 2 GW of uncleared resources from Zone 4 also clear in the PRA How are resources paid and loads charged? (ignoring bilateral transactions and FRAPs) o Zone 4 forward-cleared resources are paid their original forward clearing price: 8 GW x $200/MWD + 2 GW x $100/MWD = $1.8 M / day o Resources that clear in PRA only are paid the PRA clearing price: 95 GW x $250/MWD = $23.75 M /day o Zone 4 loads are charged the cost of forward-procured resources plus the cost of serving Zone 4 load in the PRA less the value in the PRA of the forward procured resources 8 GW x $200/MWD + 2 GW x $100/MWD (cost of forward auction) + 11 GW x $250/MWD (cost of serving Zone 4 load in PRA) 10 GW x $250/MWD (value in PRA of forward-procured resources) = $1.8 M + $2.75 M - $2.5 M = $2.05 M / day (about $186/MWD) o o Non-Zone 4 loads are charged the cost of serving the load in the PRA: 94 GW x $250/MWD = $23.5 M / day ($250/MWD) Total revenues = = $25.55 M/day; Total costs = = $25.55 M/day 19

20 Example of Resource Payments and Load Costs Under Proposed Zone 4 Solution (cont.) Example 2: Zone 4 forward auction over-procures Assume: o 10 GW cleared in Zone 4 forward auction (8 GW internal, 2 GW elsewhere in MISO) o Zone 4 forward clearing prices of $200/MWD for internal resources, $100/MWD for external o 2 GW of internal Zone 4 resources do not clear forward auction and remain uncommitted o When PRA runs prior to delivery year, MISO North as a whole clears 100 GW of resources at a price of $50/MWD; all 10 GW of forward-procured resources clear because they are entered as price-takers o The Zone 4 PRMR in the PRA is 9 GW o The 2 GW of uncleared resources from Zone 4 do not clear in the PRA How are resources paid and loads charged? (ignoring bilateral transactions and FRAPs) o Zone 4 forward-cleared resources are paid their original forward clearing price: 8 GW x $200/MWD + 2 GW x $100/MWD = $1.8 M / day o Resources that clear in PRA only are paid the PRA clearing price: 90 GW x $50/MWD = $4.5 M /day o Zone 4 loads are charged the cost of forward procured resources plus the cost of serving Zone 4 load in the PRA less the value in the PRA of the forward procured resources 8 GW x $200/MWD + 2 GW x $100/MWD (cost of forward auction) + 9 GW x $50/MWD (cost of serving Zone 4 load in PRA) 10 GW x $50/MWD (value in PRA of forward-procured resources) = $1.8 M + $0.45 M - $0.5 M = $1.75 M / day (about $194/MWD) o Non-Zone 4 loads are charged the cost of serving the load in the PRA: 91 GW x $50/MWD = $4.55 M / day ($50/MWD) o Total revenues = = $6.30 M/day; Total costs = = $6.30 M/day 20