Transcript Slide 1

Capacity Markets
Investment in Generation
Capacity Payments
October 31, 2005
J. W. Charlton
1
Objective
Advocate an organized capacity market in the
form of a formal capacity market versus an
energy only market
2
NYISO Overview
 NYISO formed December 1, 1999.
 Utility generation divestiture rate makes it one
of the most divested markets in nation.
 NYISO market volume about $7.5 billion in
2004 and over $30 billion since inception.
Highest market volume in East.
 Unique challenge: New York City is the world’s
biggest and most complex load pocket. World
finance and communications capital.
3
New York ISO
"Hub of the Northeast"
Hydro
Quebec
35,137 MW*
ISO New England
26,922 MW*
IESO
26,160 MW*
New York ISO
32,075 MW*
PJM
PJM 135,000 MW*
135,000 MW*
* = Peak Load in Megawatts
4
NEW YORK ENERGY BY
FUEL TYPE 2004
19%
GWh
GAS - 12387
15%
OIL - 939
GAS & OIL - 40087
28%
COAL - 22536
HYDRO - 28153
NUCLEAR - 40626
27%
2%
1%
OTHER - 2443
8%
5
NY Markets
 Day-Ahead Energy Market
 Real-Time Energy Market
 Ancillary Service Markets
 Installed Capacity (ICAP/UCAP) Market
6
Buying Power in New York
Bilateral
(forward)
Contracts
50%
NYISO
Day-Ahead
Market
45 – 50%
Real
Time
<5%
Bilateral Contracts outside the NYISO
NYISO Day-Ahead Market
NYISO Real-Time Market
50%
45 - 50%
<5%
100%
7
Day-Ahead Energy Market
 Security Constrained Unit Commitment
software simultaneously co-optimizes energy
and ancillaries for the least cost solution
 Hourly Locational Marginal Prices (LMP)
 Binding forward contracts to Suppliers/Loads
 Bilateral transactions accommodated
concurrently with supply and load bids
 Deviations settled against Real-Time Market
 Installed capacity suppliers are required to bid in
the Day-Ahead Energy market
8
Real-Time Energy Market
 Real-Time Commitment (RTC)
 Multi-period security constrained unit commitment & dispatch
 Co-optimizes to simultaneously solve load, reserves & regulation
 Runs every 15 minutes, optimized over 10 1/4hour periods – total 2 ½
hours
 RTC15 posts at time 15 and optimized from T30 through T180
 Issues binding commitments for units to start at T30 and T45
 Real-Time Dispatch (RTD)





Multi-period security constrained dispatch
Co-optimizes to simultaneously solve load, reserves & regulation
Runs approximately every 5 minutes
Optimizes over a 60 minute period
RTD15 posts at T15 and optimizes from T15 through T75
9
Ancillary Service Markets
Highlights
 Market-Based Services
 Regulation
 10-Minute Spinning Reserve
 Total 10-Minute Reserve
 30-Minute Reserve
 Cost-Based Services
 Scheduling, Control and Dispatch
 Voltage Support
 Black Start
10
NYISO Installed Capacity Market
 ICAP Requirements:
 are set in advance for the upcoming Capability Year by the New
York State Reliability Council (NYSRC).
 Load Serving Entities (LSEs) meet their NYISO-allocated
ICAP requirements by:
 Self-Supply or Bilateral Transactions with Suppliers.
 Purchasing in the Capability Period Auctions (6-month strip).
 Purchasing in the Monthly Auctions (for balance of Capability
Period).
 Paying for the balance of their obligation procured on their behalf in
the Spot Market Auction (1-month) using a Demand Curve.
 All supply is certified/checked out monthly.
11
NY Market Revenue Stream
 The New York Energy market:
 allows suppliers to recover their variable costs and to
compete for profits.
 The New York Ancillary Services market:
 allows suppliers to recover lost opportunity costs when
providing ancillary services.
 The New York Installed Capacity (ICAP) market:
 is intended to promote Resource Adequacy and;
 allow suppliers to recover a portion of their fixed (capital)
costs.
 The total revenue from these markets is the total
revenue stream for suppliers.
12
Need for ICAP Markets
13
Revenue Sources
 Potential sources of revenues for generating resources are:
 Revenue from the energy market during non-shortage hours,
net of fuel and operating costs
 Revenue generated in periods of shortage when prices can
“spike” to levels 20 times higher than the average annual
energy price.
 Revenue received in the capacity market.
 Ancillary services revenues
 The economic value of these sources of revenue governs
investment and retirement decisions in wholesale electricity
markets
14
Substitutes
 Capacity revenues and energy revenues are essentially
substitutes.
 Under any combination of energy and capacity markets, it is
ultimately the market participants that determine the prices in
both markets.
 Markets with higher capacity revenues generally sustain
higher capacity margins and, hence, exhibit less frequent
price spikes associated with shortages.
 Conversely, markets that generate lower capacity revenues
will result in lower capacity margins and more frequent price
spikes associated with shortages.
 In the limit, energy-only markets that have no capacity
revenues rely almost exclusively on severe price spikes to
establish long-term economic signals.
15
History and Political Reality

The Northeastern U.S. Markets are a product of:








the history of power system operation
planning practices
historic grid topology
limitations on offer prices to limit market power abuse
eliminating “seams” issues as barriers to trade, and
the need to provide rational long-term price signals that would encourage
investment in new generation and transmission where needed
The political reality is that energy prices will not be allowed to
“spike” to the levels necessary to encourage new generator
investments.
Even if market design did not limit offer prices, regulatory
uncertainty would discourage investment in new generating
resources
16
Insuring Reliability

Several proposals have been entertained to move to an “energyonly” market design.
 Simply cannot be made to work with offer caps of $1000 or less
 Regulators and many Stakeholders will not support higher offer caps
 Suppliers will forever face regulatory uncertainty


Traditional utility owners have divested, or are divesting, their
generation portfolios or spinning them off to unregulated
generating companies.
There has been significant debate over how to maintain an
adequate reserve margin.
 Minimum installed capacity requirements were imposed on the regulated
utilities in the Northeast long before divestiture.

To guarantee the same level of reliability under a market scenario,
all load serving entities are simply required to contract for
sufficient capacity to meet their installed capacity obligations.
17
Installed Capacity Markets
in the Northeastern U.S.
 ICAP Requirements are set for the
upcoming capability year.
 Load serving entities can meet their ICAP
requirements by:
 Self-Supply
 Bilateral Transactions with Suppliers
 Forward Auctions
 Deficiency/Spot Market Auctions
 After-the-fact penalty procurement
18
Locational ICAP
 Due to transmission constraints into certain
localities, areas or zones, some LSE’s must
procure at least some of their ICAP requirements
from resources electrically located within that
locality.
 New York (NY) has had locational requirements since
inception. There are two such transmission constrained
zones:
• New York City and
• Long Island
 PJM and ISO-NE have proposals pending before FERC to
introduce locational ICAP to their control areas.
19
Summary/Conclusion


The design of the Northeastern installed capacity markets was
born of the pre-existing planning and operating practices of the
power pools in the northeast.
The market structures and design features recognize the need for:








system reliability (insured through installed capacity requirements)
overall market designs coordinating energy, capacity and ancillary services
reining in potential market power
encouraging robust competition
mitigating potential barriers to trade
certainty, market stability, and
recognizing the political realities of energy price caps and regulatory
oversight.
The designs presently employed with installed capacity markets
uniquely balances all of the market needs while appropriately
recognizing the value of capacity to meet reliability criteria.
20