Post on 20-Jan-2016
description
ASM Phase IILFRM Offer Cap
NEPOOL Markets Committee
25 May 2005
Marc D. Montalvo
ISO-NE Markets Development
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LFRM Offer Cap Outline
• Proposed Cap• Derivation of Cap• Questions
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Proposed LFRM Offer Cap
• Single Offer Cap for all Zones
• Hard price cap set equal to the offer cap
• Cap equals $17,000 MW-month
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Offer Cap: Background Issues
• All LFRM resources are also LICAP resources.
• An LFRM resource is distinguished from a LICAP resource by the delivery requirements and penalty structure of the LFRM service.
• A supplier would not logically take on an incremental LFRM obligation without the reasonable expectation of incremental compensation.
• In any location the LFRM clearing price should be at least as great as the LICAP auction clearing price.
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Need for the Offer Cap
• Prices should be allowed to rise to a level indicative of the need for additional resources.
• This price is greater than or equal to the carrying cost of a new entrant at long run equilibrium.
• Under shortage conditions there is no competitive discipline on prices.
• An administratively imposed cap constrains the price to protect buyers from otherwise unchecked prices while providing proper price signals to potential suppliers.
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Constructing the Offer Cap
• GOAL: Estimate the costs that an Increment of LFRM Supply would have to Recover to be willing to enter the market.
• A supply offer in the LFRM market is composed of the following:
1. expected foregone energy revenues
2. expected foregone commitment costs
3. expected penalties
4. incremental O&M and/or capital investment
5. expected LICAP clearing prices
6. risk premium
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Foregone Energy Revenues
• The expected foregone energy revenues are a function of:
– Incremental variable cost
– LMP
– LFRM threshold price.
• The foregone energy revenues for an aero-derivative CT were estimated using historical data.
– 2004 daily natural gas index prices at NE City Gate from Platts/Argus
– Heat Rate = 10,500 Btu/kWh
– 2004 LMPs
– Strike Price = Gas Price x 14,500 Btu/kWh Heat Rate
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Foregone Energy Revenues
• Using the historical data, the foregone energy revenues for an aero-derivative CT offering into the LFRM market would have been on the order of $0.10 to $0.20 per kW-month.
• Let the foregone energy revenues be $0.15/kW-month.
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Foregone Commitment Costs
• An aero-derivative CT does not have to be on-line to supply its reserve capability.
• The expected foregone commitment costs (startup and no-load) for an off-line resource are zero.
• The foregone commitment costs are $0.0/kW-month.
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Penalty Exposure
• The expected penalties for a new aero-derivative CT should be low given the expected high availability and startup performance.
• Given the performance penalties proposal and assuming an EFORd of 5.0% and a failure to start rate of 5.0%, the expected penalties are estimated to be on the order of $0.60 to $0.70 per kW-month.
• Assume that the value of expected penalties is $0.65/kW-month.
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LICAP Clearing Prices• According to the LICAP demand curve, the LICAP clearing price
will not exceed 2xEBCC or approximately $16/kW-month.
• This price means that there is a general capacity shortage in the location.
• If this were the case, the market would be calling for incremental capacity of any type.
• If the incremental LICAP resource was able and chose to offer its supply into the LFRM market, it would incur no incremental capital costs to provide the LFRM service.
• All of the costs associated with carrying the incremental capital investment could be recovered through the LICAP market.
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Estimating the Cost of LFRM Incremental Supply
• Let the benchmark LFRM technology be an aero-derivative CT.
– The aero-derivative CT can provide either the ten or thirty minute LFRM service.
– Modularity and available range of sizes (low granularity relative to local requirements) make these resources well suited to providing incremental supply.
• From the LICAP case, an aero-derivative CT has an annual carrying cost in the $10 to $13/kW-month range.
• If the LFRM clearing price exceeds the carrying cost of an aero-derivative CT plus the expected incremental cost of providing the LFRM service, an investor should be willing to build an aero-CT to meet the LFRM demand.
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Incremental O&M and/or Investment
• The incremental capital investment required to meet the LFRM obligation with a new aero-derivative CT is the annual carrying cost of the machine.
• The incremental capital investment is $13/kW-month.
• If the LICAP price were expected to be less than $13/kW-month, say $10/kW-month, the LFRM supply offer would reflect an Incremental Investment Component of $13 - $10 = $3/kW-month.
• Assuming a LICAP price of $16/kW-month and an annual carrying cost of $13/kW-month, the expected LICAP Price recovers the entire annual carrying cost of the investment.
• The incremental investment component to be recovered from LFRM is $0/kW-month.
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Risk premium
• The value of foregone energy revenues and penalties are estimates of the expected value.
• The risk premium is an amount that the supplier would add to his offer to cover the probability that his expected value estimates are incorrect, i.e., underforecasted.
• For the sake of this discussion, assume that the risk premium is equal to 10% of the expected value of foregone energy revenues and penalties, or $0.08/kW-month.
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Summary of Offer Cap Derivation
Foregone energy revenues $0.15/kW-month
Foregone commitment costs $0
Expected penalties $0.65
Incremental O&M and Investment $0.0
LICAP clearing price $16.0
Risk premium $0.08$16.88/kW-month
Approximately $17/kW-month
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Questions