Market Renewal Discussion with the Ontario Waterpower Association February 26, 2018
Disclaimer • This presentation and the information contained herein is provided for information and discussion purposes only. This presentation does not constitute, nor should it be construed to constitute, legal advice or a guarantee, representation or warranty on behalf of the IESO. In the event of any conflict or inconsistency between the information contained in this presentation and the Market Rules, the Market Manuals, any IESO contract or any applicable legislation or regulation, the provisions of the Market Rules, Market Manuals, contract, legislation or regulation, as applicable, govern. 2
Overview Today’s discussion will include: • Recap of Market Renewal • Focused discussion on cascade hydro participation in a day-ahead market • Update on work related to non-emitting resources 3
Market Renewal • Market Renewal is an ambitious set of initiatives which will amount to a fundamental redesign of Ontario’s electricity markets and prepare us for future change • Although our current design has served Ontario well, the demands of a modern grid are evolving rapidly • Reforms are required today in order for the IESO to continue to manage the grid reliably and cost effectively • IESO vision is a market with transparent prices for the services needed to meet system needs 4
Mission and Guiding Principles Mission 5
Scoping Market Renewal • Single Schedule Market An ENERGY • Day Ahead Market workstream • Real Time Unit Commitment MRP A CAPACITY • Incremental Capacity Auction workstream More Frequent Intertie Scheduling and other Operability/Flexibility projects will be explored as part of a broader conversation on the Future of Ontario’s Electricity Market The IESO will also continue to explore near-term market enhancement projects that are consistent with MRP 6
Single Schedule Market Replace Ontario’s two schedule system with a single schedule market that better aligns price with dispatch Improved Improved Reduced Reduced price signals price signals complexity complexity increase increase unlocks unlocks efficiency of efficiency of other design other design dispatch and dispatch and changes changes investments investments investments Together, these outcomes will reduce the production cost of electricity 7
Day-Ahead Market What is changing? •A new market allowing suppliers/consumers to lock into guaranteed prices for supply/consumption a day ahead of when it is required What are the benefits? •Efficient way of improving operational certainty for system operators as real-time approaches •Improves financial certainty for dispatchable resources •Establishes a hedge against price volatility in the real-time market caused by changes in supply and demand 8
Incremental Capacity Auction Incremental Capacity Auction • Will secure • Will secure • Will procure a single • Will procure a single • A stable long-term • A stable long-term resources to meet resources to meet uniform capacity uniform capacity mechanism that will mechanism that will system adequacy system adequacy product product secure capacity in a secure capacity in a needs that are not needs that are not technology agnostic technology agnostic • Other products and • Other products and met by contract or met by contract or manner from manner from services will be services will be rate regulation rate regulation diverse resource diverse resource incentivized via incentivized via types types • Contracted and • Contracted and other revenue other revenue regulated capacity regulated capacity streams streams • Fundamental • Fundamental will not be eligible will not be eligible change in risk change in risk to participate to participate allocation from allocation from contract paradigm contract paradigm 9
Areas of Interest for OWA Members • New market design will require new approaches to participating in the IESO administered markets • OWA members will need to understand key changes and can explore new opportunities Key Considerations for OWA Members ICA Location Marginal Contract DAM •All resource types will participate in Pricing (LMP) Amendments •Obligations and competitive auction implications for •Nodal pricing for MP •Amendments •Auction timelines, energy limited suppliers; price required but IESO not obligations, and resources of interest variations across ON aiming to extract capacity qualification to OWA value from contracts •Non-MP supplier of interest to pricing determined OWA by OEB 10
QUESTIONS & COMMENTS 11
DAY-AHEAD MARKET CASCADE HYDRO PARTICIPATION 12
Current Day Ahead Scheduling Process • Cascade hydro systems have ponding capabilities and complex intertemporal relationships governing their output that can be difficult to model 2 hrs G1 G2 G3 4 hrs • The existing Day Ahead Commitment Process (DACP) design recognized this problem and addressed it by allowing cascade resources to resubmit their offers after the first run of DACP in order to correct any infeasible schedules prior a second and final run of DACP. 13
Current DACP & Transitioning Issues All Cascade Initial Final Run of Final Resources Initial Run of Initial Hydro Resubmission Submission Resource Submit Resource Revise and DACP DACP Window Window Schedules Offers Schedules Resubmit (11:00 – 12:00) 10:00 - 11:00 (12:00 - 13:00) Published (Quantities Published Offers as 06:00 – 10:00 at Prices) Needed • While this is an appropriate solution for non-financially binding DACP, retaining the resubmission window under a financially binding day-ahead market (DAM) would provide one group of participants the potential to improve their own financial positions but harm others’ 14
Problem Statement • With no resubmission window available under a future DAM, cascade hydro resources may receive financially binding DAM schedules that are DAM All Resource DAM operationally infeasible Submission Resources Schedules Execution Window Submit and Prices 09:00 - 12:30 Offers Published 06:00 – 09:00 • This can create financial risk because undelivered day- ahead schedules may have to be bought back at higher real- time prices 15
Two Settlement Mechanics Day Ahead Real-Time (Balancing) Q DA x $ DA (Q RT – Q DA ) x $ RT Real-time deviations from day-ahead obligations must be bought or sold back at real-time prices. Real-Time Output DAM Schedule 16
Key Observations in Other Markets • Responsibility for managing operational and financial risk lie with the market participant – Participants are in the best position to most efficiently manage these risks – Typically managed through their offer curve submissions • Ways in which system operators assist cascade resources and other resource technologies in mitigating some of their operational and financial risk include: – Offer requirements (market rules) – Modelling generic offer parameters that participants can couple with their offer curves 17
Typical Offer Strategies • Cascade resources typically manage their operating characteristics through their offer curves – Offer desired quantities at lower prices and undesired quantities at higher prices, for example: Dispatchable G1 for 2 hrs at high $ G1 for 4 hrs at low $ (Flexible) Strategy G2 for 2 hrs at low $ G2 + G3 for 4 hrs at high $ Illustration G3 for 2 hrs at high $ 2 hrs G1 G2 G3 4 hrs • These base strategies are used in other DAMs with cascade hydro penetration similar to Ontario (i.e. New York and California) 18
Dispatchable Strategy: Potential Barriers • Offers strategies can also be used to exercise market power and the DAM will include features designed to mitigate these behaviours: Behaviour Mitigation Physically withholding supply in Must Offer Requirements – the order to increase margins for other minimum quantity a resource must remaining supply. offer into the DAM Economically withholding supply Reference Levels – price caps that by offering at very high prices replaces the offer price of a resource when you’re one of the only when it is deemed to be resources available. economically withholding • While these measures are necessary, they may further limit a cascade resource’s ability to generate feasible DAM schedules through their offer curves 19
Dispatchable Strategy: Potential Barriers • Assuming G1 only wants to clear 50 MW in the DAM to respect downstream needs for G2 (anything more considered infeasible) • Without mitigation, G1 could offer no more than 50 MW into DAM • However with mitigation, G1 is at a greater risk of receiving an infeasible schedule above 50 MW Barrier 1: Must offer requirement of at least 80 MW G1 offer prices ($) G1 offers 1 st 50 MW low and next 50 MW high 200 Barrier 2: Reference level (price cap) of $120 G1 may be scheduled to an infeasible schedule of 100 MW if clearing prices exceed the reference level 30 Desired Schedule G1 capability (MW) 50 100 Market power mitigation design may limit the extent to which offer curves can be used to respect operating characteristics for cascade resources 20
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