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Copyright © 2017 The Brattle Group, Inc.
Kathleen Spees David Luke Oates
Judy Chang Peter Cahill
Johannes Pfeifenberger Elliott Metzler
Demand Curve Shape
Adequacy & Demand Curve Work Group
N ov e mber 2 9 , 2 0 1 7
Dra f t M a ter ia l s f o r D i sc uss io n
P RE PARED FOR
P RE PARED BY
Candidate Curves and Performance
Draft Materials for Discussion
| brattle.com 1
Agenda
▀ Overview
▀ Candidate Curves
▀ Robustness Testing
▀ Takeaways and Next Steps
Draft Materials for Discussion
| brattle.com 2
Overview
▀ This presentation responds to comments received during the 11/1 working group meeting. Based on this feedback we worked with AESO staff to develop three candidate curves for consideration by the working group
▀ We tested these curves for robustness based on the demand curve principles established by the working group, specifically:
− Performance in terms of reliability, price volatility, risk of excess capacity above the reliability requirement, and exposure to the exercise of market power
− Robustness to uncertainties in Net CONE
▀ AESO and Brattle view all of the three curves as workable for Alberta’s market, but they reflect different tradeoffs in each dimension of performance
▀ We hope to receive remaining comments or issues on the candidate curves from the working group today
▀ These candidate curves will be revisited once working assumptions are further confirmed (reliability requirement, Net CONE) in 2018
Draft Materials for Discussion
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Agenda
▀ Overview
▀ Candidate Curves
▀ Robustness Testing
▀ Takeaways and Next Steps
Draft Materials for Discussion
| brattle.com 4
Candidate Curves
Performance of Three Candidate Curves
% of Reliability Requirement Reserve Margin (% UCAP) UCAP MW ICAP MW
Target: 100 MWh/year EUE
Minimum Acceptable:
800 MWh/year EUE
Candidate Curve Results
▀ The work group made several recommendations including moving toward a steeper curve compared to preliminary analyses
▀ Brattle and AESO staff developed three candidate curves in line with work group input for consideration
▀ All curves meet the reliability standard, but have other performance tradeoffs
Cap at 1.75× Net CONE
Cap at 1.9× Net CONE
Cap at 1.6× Net CONE
Cap at 1.5× Net CONE (Prior Base)
Draft Materials for Discussion
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Candidate Curves
Summary of Performance Tradeoffs
The AESO and Brattle view these three candidate curves as being in the workable range of well-performing curves, but selecting one requires balancing tradeoffs
Steeper Curves Higher cap, lower foot quantity
Flatter Curves Lower cap, higher foot quantity
Advantages: • More robust to a wide range
of market conditions • Less reliability risk from
underestimated Net CONE • Less risk of excess capacity
above the reliability requirement
Advantages: • Lower price volatility • Less exposure to exercise of
market power & need for strict mitigation
1.6× Net CONE Price Cap
1.9× Net CONE Price Cap
Recommended Range
Draft Materials for Discussion
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2.0× Net CONE
1.5× Net CONE
Candidate Curves
Recommended Range of Parameters
% of Reliability Requirement Reserve Margin (% UCAP) UCAP MW ICAP MW
Target: 100 MWh/year EUE Minimum Acceptable: 800 MWh/year EUE
Cap at 1.75× Net CONE
Cap at 1.9× Net CONE
Cap at 1.6× Net CONE
Cap at 1.5× Net CONE (Prior Base)
Foot Position: Wider foot reduces price volatility, but increases risk of excess capacity above the reliability requirement in long market conditions Convexity: More convexity
(prior curves) required a wider foot to maintain reliability. A steeper and linear curve allows for bringing in the foot
Price Cap: Higher price cap increases price volatility, but decreases excess capacity above the reliability requirement Minimum on Cap: Reduces susceptibility to capacity below the reliability requirement
Candidate Curves
Price Cap
Range of Parameters Considered
1.0× Gross CONE
0× Gross CONE Min Price Cap
1.88× Reliability Requirement
1.07× Reliability
Requirement Foot Position
More Convexity (Prior Curves)
Linear Convexity
Draft Materials for Discussion
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Agenda
▀ Overview
▀ Candidate Curves
▀ Robustness Testing
▀ Takeaways and Next Steps
Draft Materials for Discussion
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Robustness Testing
Performance with High and Low Net CONE
Low Net CONE Sensitivity
High Net CONE Sensitivity All curves continue to perform well with high Net CONE, but volatility increases most with a higher price cap
Curves with a minimum cap prevent collapse with Low CONE, mitigating reliability erosion
Excess above reliability requirement reduced with lower minimum cap & steeper curves
Draft Materials for Discussion
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Robustness Testing
Performance with Error in Net CONE Estimate
Administrative Net CONE Underestimated by 20% Sensitivity
Administrative Net CONE Overestimated by 20%
Steeper curves mitigate excess above reliability requirement if Net CONE is overestimated
Minimum on price cap mitigates potential for poor reliability w/o significant excess capacity risk
Draft Materials for Discussion
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Robustness Testing
Exposure to Exercise of Market Power
% of Reliability Requirement Reserve Margin (% UCAP) UCAP MW ICAP MW
Cap at 1.75× Net CONE
Cap at 1.9× Net CONE
Cap at 1.6× Net CONE
Curve High-Price Region Low-Price Region
Cap at 1.6× Net CONE $70/MW-day $46/MW-day
Cap at 1.75× Net CONE $92/MW-day $62/MW-day
Cap at 1.9× Net CONE $116/MW-day $77/MW-day
Price Impact of Withholding 350 MW Before Accounting for the Mitigating Effect of Supply-Side Competition
Target: 100 MWh/year EUE
Minimum Acceptable:
800 MWh/year EUE
High Price Region
Low Price Region
▀ Flatter curves with lower price caps have the advantage of mitigating the incentive and ability to exercise market power
▀ Alberta’s relatively small and concentrated supply stack suggests a flatter curve may be preferable, but this will be taken up more comprehensively in the market mechanics group
Note: Price impacts shown here are based solely on the demand curve and therefore represent the maximum impacts. The shape of the supply curve could mitigate these impacts.
Draft Materials for Discussion
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Agenda
▀ Overview
▀ Candidate Curves
▀ Robustness Testing
▀ Takeaways and Next Steps
Draft Materials for Discussion
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Takeaways from Analysis to Date
The demand curve tests and stakeholder discussions conducted since October 10th have led to several takeaways about the drivers of capacity market performance:
Performance Driver Takeaway
Demand Curve Steepness
• Steeper curves are more robust to a wide range of market conditions, have less reliability risk from underestimated Net CONE, and less risk of excess capacity above the reliability requirement
• Flatter curves have lower price volatility and less exposure to exercise of market power & need for strict mitigation
• A curve based on the marginal reliability value is too steep to achieve reliability
Price Cap • Higher price caps can allow for steeper curves (with associated pros and cons) • With the recommended range of curves, reliability performance is maintained in
instances of high Net CONE or overestimation of administrative Net CONE • Without a minimum on the price cap, reliability will erode in instances of low Net
CONE or underestimation of administrative Net CONE • Curves with a minimum price cap (as a % of Gross CONE) are resilient to reliability
erosion in cases of low Net CONE or underestimation of administrative Net CONE
Supply Curve • Larger shock sizes require a wider demand curve in order to maintain reliability • Performance incentive regimes and supply curve shapes more generally have little
impact on the performance of demand curves (even though they can have a significant impact on the supply curve)
Draft Materials for Discussion
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Next Steps
Timing Scope
SAM 2.0-3.0 Sept-Dec 2017
Oct 4 Web/Phone Meeting
Gather feedback from workgroup on scope
Oct 10 In-Person Meeting:
Discuss preliminary analysis of potential demand curve shapes Review Alberta-specific considerations affecting price volatility and desirable curve width/parameters Expand on and complement introduction of demand curve concepts/principles by providing information on
modeling approach, impacts of key parameters and principles, preliminary suggestions about the “workable range” of demand curve parameters
Nov 1 Meeting:
Discuss materials prepared in response to workgroup questions, requested sensitivity analysis, and requested demand curve alternatives
Nov 29 Meeting (Today):
Discuss candidate curves and gather feedback
Jan-Mar 2018 Outline outstanding uncertainties/questions to be reviewed; gather stakeholder input on necessary refinements to candidate curves
Apr-Jun 2018 Make final adjustments to demand curve based on final design decisions and defined reliability requirement
Provide final presentation to stakeholders on selected demand curve and recommendations to be included in report
Recommendations Report/Testimony: Prepare final recommendations report and deliver to AESO. Document the defined objectives, principles, workgroup process, and dissention. Include final recommended Demand Curve
Draft Materials for Discussion
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Contact Information
The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc.
DAVID LUKE OATES Associate │ Boston, MA [email protected] +1.617.234.5212
KATHLEEN SPEES Principal│ Boston, MA [email protected] +1.617.234.5783
JOHANNES PFEIFENBERGER Principal │ Boston, MA [email protected] +1.617.234.5624
JUDY CHANG Principal and Director │ Boston, MA [email protected] +1.617.234.5630
Draft Materials for Discussion
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About The Brattle Group
The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governmental agencies worldwide.
We combine in-depth industry experience and rigorous analyses to help clients answer complex economic and financial questions in litigation and regulation, develop strategies for changing markets, and make critical business decisions.
Our services to the electric power industry include:
▀ Climate Change Policy and Planning
▀ Cost of Capital
▀ Demand Forecasting Methodology
▀ Demand Response and Energy Efficiency
▀ Electricity Market Modeling
▀ Energy Asset Valuation
▀ Energy Contract Litigation
▀ Environmental Compliance
▀ Fuel and Power Procurement
▀ Incentive Regulation
▀ Rate Design and Cost Allocation
▀ Regulatory Strategy and Litigation Support
▀ Renewables
▀ Resource Planning
▀ Retail Access and Restructuring
▀ Risk Management
▀ Market-Based Rates
▀ Market Design and Competitive Analysis
▀ Mergers and Acquisitions
▀ Transmission