AOCE helps NEPOOL Generators receive proper valuation and saves Consumers from overpaying
- Dec 6, 2020 8:01 pm GMT
In my last article I showed how States and Green Buyers are able to achieve their energy goals, at a just and reasonable cost, through an Always on Capacity Exchange (AOCE) operating as a wholesale market in New England, . This article shows how AOCE helps generators receive sufficient revenues from capacity payments to ensure they are able to meet their capacity supply obligations with ISO New England and maintain a viable business model.
The problems with today’s Forward Capacity Market are well known. Generators have been watching capacity payments shrink to a point where there simply isn’t enough revenue being provided to generators to ensure their availability. Fuel subsidies to the Mystic Units totaling in the hundreds of millions of dollars is but one example of how the capacity markets are failing to deliver the necessary funding to these generators in order to ensure reliable electric service to New England’s electricity consumers. You might be asking, why are these generators not receiving fair compensation for their capacity. The short answer is the current FCM design uses an MRI demand curve to set the value of capacity at a low price when there are excess supplies in the FCA at the last round. If there are enough of these excess resources in the FCA the capacity value eventually reaches zero on the MRI demand curve, which means generators will eventually receive nothing for their capacity obligations when excess generation surpasses a certain point on the MRI demand curve. This results in a large excess of capacity resources receiving compensation when they are unlikely to ever be dispatched by the ISO. This FCA clearing price is provided to all generators as part of the clearing process, which continues to decline, due to excess generators pushing the price ever lower. The end result is, the ISO fails to adequately compensate generators that we absolutely must have in operation to maintain reliability because these generators receive the same payment as all the other excess generators. AOCE is designed to properly value the generators that are needed for reliability, while eliminating the over-buying, and excessive costs to consumers for excess generators that are not needed for reliability. Here’s how AOCE accomplishes the objective function of lowest consumer cost for capacity for the right amount of generation capacity needed for reliability.
FYI: The IESO for Ontario recently reported a capacity clearing price of $197.58/MW-day, to give you a sense for the real value of capacity needed for reliability.
Step 1, retire the FCM as we know it. No more descending clock auction, no more MRI demand curve.
Step 2 replace the current FCM with an AOCE that allows generators to place their capacity offers into the exchange at a price point that they are confident provides adequate revenue to ensure their ability to commit to being available. Using the Mystic Units example above, there would be no requirement for fuel subsidies because the Mystic units capacity supply offers (in $ per MW per day) would have included all the embedded costs, including fuel supplies, and profits, needed to ensure their availability. These generator (seller) offers are submitted to AOCE for a particular “grid service” specifying the $/MW per day, location of the generation, start/end dates and hours for which the offers are enforce. For example, Solar generators, with no supplemental battery, would specify only the hours when the sun is shining. This allows more valuable services, such as ramping to receive higher valuations than plain old capacity services, i.e. baseload energy. Investors and other entities (buyers) , place bids into AOCE that ultimately align with some of these generator (seller) offers, forming a capacity commitment, which the ISO approves and becomes an Approved Capacity Commitment (ACC).
Step 3. The ISO determines the quantity of each grid service, in MW that is needed for reliability over a particular Reliability Commitment Period. This starts the clearing process. All of the ACC’s in AOCE offering grid services are grouped by grid service. Each grouping of grid service offers is then sorted into a supply curve (lowest to highest cost), similar to the way the Day Ahead Energy market operates. The marginal ACC, which satisfies the ISO’s specified quantity for a grid service sets the uniform clearing price for capacity for the grid service. All generator offers/ACC’s that clear ($MW/day below or equal to the price of the marginal unit) receive a capacity supply obligation (CSO) from the ISO. ACC buyers, e.g. investors, receive a capacity payment equal to the amount of MW’s/day in the CSO multiplied by the uniform clearing price. This independent, distinct clearing process by grid service type prevents the dilution of value (and payments received by generators) for services that are more valuable than others, providing generators with the financial support needed to guarantee their commitment to be available when needed to provide a specific services to grid operators. Here’s an example:
ACC-1: Generator G1 offering 10 MW of “intermittent grid service” at $2/MW per day is combined with Investor I1 bid matching the MW and price duration and location of the offer.
ACC-2: Generator G2 offering 500 MW of “baseload grid service” at $5/MW per day is combined with Investor I2 bid matching the MW and price duration and location of the offer.
ACC-3: Generator G3 offering 500 MW of “baseload grid service” at $7/MW per day is combined with Investor I3 bid matching the MW and price duration and location of the offer.
ACC-4: Generator G4 offering 200 MW of “up ramping service” at $12/MW per day is combined with Investor I4 bid matching the MW and price duration and location of the offer.
In this example, assume the ISO determines that, for reliability purposes, they need 1000 MW’s of baseload services, 200 MW of up ramping service and 20 MW of “Other grid services” for reliability purposes for a total of 1220 MW’s for reliability.
Each grid service is cleared independently to prevent price distortions across service offerings. The ISO would issue CSO’s and Capacity payments as follows, for this scenario:
ACC-3, is the marginal resource for baseload grid service at $7/MW/day, G3 receives a CSO of 500 MW and the ACC buyer, I3 receives a capacity payment of $3,500 ($UCP * 500)
ACC-2, is an inframarginal resource for baseload grid service, G2 receives a CSO of 500 MW and the ACC buyer I2 receives a capacity payment of $3,500 ($UCP * 500)
This meets the ISO’s reliability requirement for baseload grid services for the RCP.
The ISO continues the clearing process to acquire up ramping services:
ACC-4, G4 being the only offer for up ramping services sets the marginal clearing price (UCP) for up ramping grid services at $12/MW/day, Generator G4 receives a CSO of 200 MW to provide up ramping grid services and investor I4 receives a capacity payment equal to $2,400 (UPC * 12)
This satisfies the ISO’s required capacity for “up ramping services”.
The ISO continues the clearing process to acquire other capacity resources which are needed to satisfy the amount of capacity determined by the ISO to meet total reliability requirements for the region (1,220):
ACC-1 being the only other supply offer available in AOCE sets the marginal clearing price (UCP) for intermittent grid service at $2/MW/day, Generator G1 receives a CSO of 10 MW to provide intermittent grid service and investor I1 receives a capacity payment equal to $20 (UPC * 10)
But the ISO is still short by 10MW to meet their reliability requirement – that’s the topic for another article I plan to write about ISO Reliability Bids (ISORB).
Hopefully, this description of how AOCE properly compensates Generators and incentivizes investors to participate in an AOCE based wholesale capacity market framework helps the NEPOOL generation fleet see how AOCE properly values their service offerings, as opposed to today’s FCM approach which discounts their valuable capacity offerings because of excess capacity being acquired by the ISO.
Additional details of the AOCE proposal to NEPOOL are available at the NEPOOL website: http://nepool.com/Future_Grid_Ref_Library.php
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