Workshop on GT Viability in the NEPOOL Market

Workshop on GT Viability in the NEPOOL Market

Presented by Andrew P. Hartshorn

Prepared for NEPOOL Markets Committee Meeting

February 13, 2001

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GT VIABILITY WORKSHOP Overview

This presentation describes in more detail the assumptions behind the GT viability analysis:

• The historical reserve quantity and price data used in the analysis.

• The assumptions made about the shape of the reserve supply curve.

• How the historical reserve quantity and price data are used to derive the 10-minute and 30-minute reserve prices using the demand curve.

• The results of the GT viability analysis.

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TIME

10-Minute Spinning Reserve Available

(MW)

10-Minute Spinning Reserve Required

(MW)

10-Minute Non-Spinning Reserve

Available (MW)


Required (MW)

30-Minute Operating Reserve

Available (MW)


Required (MW)1/1/00 2:04 2124 583 2524 582 2268 580

1/11/00 17:04 1782 611 927 611 993 5812/4/00 6:04 1232 640 2100 640 1318 582

TIME

Year 2000 Posted 10-Minute Non-

Spinning Reserve Price ($/MWh)

Year 2000 Posted 30-Minute

Operating Reserve Price ($/MWh)

1/1/00 2:04 $0.05 $0.001/11/00 17:04 $0.02 $0.03

2/4/00 6:04 $0.06 $0.06

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A snapshot of the real time dispatch was taken in each hour of year 2000. The snapshots identified the level of total reserves available and total reserves required by reserve type.

Data for posted 10-minute NSR and 30-minute operating reserve prices were collected for the same period of time.

The tables show data for three hours representing the three potential relationships between 10-minute and 30-minute reserve prices.

GT VIABILITY Initial Reserve Data

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The most common relationship is one where the 10-minute price is higher than the 30-minute price.

When the posted 30-minute price was greater than the posted 10-minute price the posted 30-minute price was cascaded up to the 10-minute price.

Other price adjustments made as part of the assumptions included capping energy prices at $1000/MWh and 30-minute reserve prices at $100/MWh.

GT VIABILITY Historical Price Relationship

Price

Relationship Count

10 Min > 30 Min 8128

30 Min > 10 Min 62

10 Min = 30 Min 147

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TIME

10-Minute Spinning Reserve Available

(MW)

10-Minute Spinning Reserve Required

(MW)


Available (MW)


Required (MW)


Available (MW)


Required (MW)1/1/00 2:04 2124 583 2524 582 2268 580

1/11/00 17:04 1782 611 927 611 993 5812/4/00 6:04 1232 640 2100 640 1318 582

TIME

10-Minute Reserves

Designated (MW)

Spare 10-Minute

Reserves (MW)

30 Minute-Reserves

Designated (MW)

Spare 30-Minute

Reserves (MW)

Total Available 30-

Minute Reserves

(MW)1/1/00 2:04 1165 3483 580 1688 3433

1/11/00 17:04 1222 0 581 1899 37022/4/00 6:04 1280 0 582 2788 4650

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The total quantity of 30-minute reserves available was then estimated for each of the price relationships identified

• If the posted 30-minute price < posted 10-minute price: The quantity of 10-minute reserves in excess of those designated were necessarily offered at prices above the posted price for 30-minute reserves.

• If posted 30-minute price posted 10-minute price: A horizontal supply curve at the 10-minute clearing price has been assumed for all 10-minute reserves in excess of those designated as 10- or 30-minute resources.

GT VIABILITY Initial Reserve Data

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Q

P

1745 Q30req

3433 Qta

1165 Q10req

?

Residual 10-Minute Reserve Available

Residual 30-Minute Reserve Available

$0.05 P10

$0.00 P30

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GT VIABILITY Supply Curve Shape

Why was a horizontal supply curve assumed?• The observed reserve clearing prices and designated reserve levels

only identify one point on the supply curve.• Some assumption must be made about the shape of the supply curve

for lower and higher reserve quantities.• Choosing a horizontal supply curve at times when the 30-minute

posted prices and requirements were below the demand curve results in lower reserve prices and conservative estimates of GT revenues.

• Similarly, for the few occasions when the 30-minute posted prices and requirements were above the demand curve a revised 30-minute price was determined by interpolating down to the demand curve using a vertical supply curve, again resulting in lower reserve prices and conservative estimates of GT revenues.

• The alternative to making these assumptions would be to reconstruct the actual supply curve for each interval.

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$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

0 500 1000 1500 2000 2500 3000 3500

Quantity of Replacement Reserve

Pri

ce (

$/M

W)

10-Minute Requirement = 1200 MW

30-Minute Requirement = 1700 MW

30-Minute Requirement + 500 = 2200 MW

Reserve Demand Curve

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The demand curve used to determine the price of 30-minute reserves was defined according to the following specifications: • A maximum price of $100 would be reached at the historical 10-

minute reserve requirement.• A price of $50 would be reached at the historical 30-minute reserve

requirement.• A price of $1.35 would be reached at the historical 30-minute

requirement plus 500 MW.• A price of $0.10 would be reached at the historical 30-minute

requirement plus 1,200 MW.

Note that the graph on the prior page assumes a 1,200 MW 10-minute requirement and a 1,700 MW 30-minute requirement. Individual demand curves were calculated for each real-time dispatch interval based on the actual reserve requirements in that real-time dispatch interval.

GT VIABILITY Demand Curve Assumptions

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Two reserve supply curve scenarios were analyzed:• The first scenario assumed that the supply of reserves would not have been

affected by changes in replacement reserve targets at the unit commitment stage.

• The second scenario assumed that changes in replacement reserve targets at the unit commitment stage would result in a MW for MW reduction in real-time supply of reserves– A 400 MW commitment change was assumed for data before

September 15th.– A 250 MW commitment shift was assumed for data from September

16th.

To model the impact of these changes in unit commitment targets, the 400 MW or 250 MW were subtracted from the total available reserves before projecting the total available quantity onto the demand curve. If less than 400 MW of 30-minute reserves were available the remainder was subtracted from available the 10-minute reserves.

GT VIABILITY Supply Curve Assumptions

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There were four outcomes that together describe all hours of the year in each of the supply curve shift scenarios.

Case 1 : The 30-minute price is set by the demand curve price at total available reserves excluding spare 10-minute reserves.

Case 2: The 30-minute price is set by the demand curve price at total available reserves (no spare 10-minute reserve was available).

Case 3: The 30-minute price is set by the demand curve price at total available reserves including spare 10 minute reserves.

Case 4: The 30-minute price is set by the 10-minute reserve price and the quantity purchased is reverse interpolated from the demand curve.

There were a number of instances where the posted 30-minute price and quantity was above the demand curve. In every case where this occurred the interpolation down to the demand curve resulted in these hours becoming a Case 1 outcome.

GT VIABILITY Observed Outcomes in the Results

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Qta: total available reserve excluding spare 10-minute reserves

Q30req: total 30-minute reserve requirement

Q30h: total reserve purchased given demand curve model

Qta+spare: total available reserve including spare 10-minute reserves

P10req: posted 10-minute reserve price

P30req: posted 30-minute reserve price

P10h: 10-minute reserve price determined using the demand curve model

P30h: 30-minute reserve price determined using the demand curve model

Pta: price on the demand curve associated with Qta

Pta+spare: price on the demand curve associated with Qta+spare

GT VIABILITY Illustration Definitions

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Q

P

1745 Q30req

3339 Qta,30h

Pta,30h $0.09

6722 Qta+spare

P10req,10h $0.57

Pta+spare $0.02

P30req $0.00

Case 1 -- Total Available Sets Price, Spare > 0

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GT VIABILITY Case 1

The 30-minute price is set by the demand curve price at a quantity equal to the total available reserves excluding spare 10-minute reserves.

The posted 10-minute price is greater than the posted 30-minute price and the interpolated price from available reserves (excluding the additional 10-minute reserves).

The interpolated demand curve price is greater than the posted 30-minute price.

Shifted supply curve observations -- 2986 out of 8337 or 35.82%

No-shift observations -- 4181 out of 8337 or 50.15%

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Q

P

1743 Q30req

3187 Qta,ta+spare,30h

Pta,ta+spare,10h,30h $0.10

P10req,30req $0.02

Case 2 -- Total Available Sets Price, Spare = 0

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GT VIABILITY Case 2

The 30-minute price is set by the demand curve price at a quantity equal to the total available reserves (no spare 10-minute reserve was available).

The posted 10-minute price equals the posted 30-minute price and the interpolated price from available reserves is greater than both the posted 10-minute and posted 30-minute prices.

Supply curve shifted observations -- 281 out of 8337 or 3.37%


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Q

P

1745 Q30req

2957 Qta

Pta+spare,10h,30h $0.06

Pta $0.10

P10req $0.05

Case 3 -- Total Available + Spare 10-Minute Reserves Sets Price

P30req $0.00

4848 Qta+spare,30h

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GT VIABILITY Case 3

The 30-minute price is set by the demand curve price at a quantity equal to the total available reserves including spare 10 minute reserves.

The posted 10-minute price is greater than the posted 30-minute price and the interpolated price from total available reserves including the additional 10-minute reserves is greater than both the posted 10-minute price and the posted 30-minute price.

Shifted Observations -- 3252 out of 8337 or 39.01%

No-shift Observations -- 2002 out of 8337 or 24.01%

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Q

P

1745 Q30req

3109 Qta

P10req,10h,30h $0.05

Pta $0.10

Pta+spare $0.04

Case 4 --10 Minute Reserves Sets Price, Reverse Interpolate Quantity

P30req $0.00

5273 Q30h

5312 Qta+spare

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GT VIABILITY Case 4

The 30-minute price is set by the 10-minute reserve price and the quantity purchased is interpolated from the demand curve.

The posted 10-minute price is greater than the posted 30-minute price. The interpolated price from available reserves (excluding the additional 10-minute reserves) is greater than the posted 10 minute price and the interpolated price from available reserves (including the additional 10 minute reserves is less than the posted 10 minute price. The 30-minute price is therefore set by the posted 10-minute price.

The total quantity of reserve purchased is interpolated from the demand curve using the posted 10-minute price.

Supply curve shifted observations -- 1818 out of 8337 or 21.81%


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Q

P

3968 Qta,ta+spare,30h

P10req,30req,10h $0.45

Case 5 -- 30 Price Above Demand Curve, 10 and 30 Prices Equal

Pta,ta+spare,30h $0.08

Same as Case 1

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GT VIABILITY Case 5

Cases where the posted 30-minute reserve price and requirement are above the demand curve are transformed into Case 1 when the vertical interpolation onto the demand curve is performed.

After interpolating the 30 minute price and quantity down to the demand curve, the posted 10-minute price is greater than the demand curve price and a Case 1 outcome exists.

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Revenues Purely From Reserves ($/kWyr)

5% Outage10 Minute Unit

30 Minute Unit 10% Outage

10 Minute Unit

30 Minute Unit

A 400 MW Shifted Supply Curve until September 15, 250 MW Shift from September 16 $ 35.95 $ 27.76


No Shift of the Supply Curve $ 18.66 $ 7.95


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Ancillary service revenues for 10-minute and 30-minute GTs under each of the demand curve shift scenarios and two outage rates are shown on the previous page.

ANCILLARY SERVICES REVENUES Results

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Replacement Reserve Available Based on Demand Curve Analysis

Quantity of Replacement Reserve(MW)

Lower MW Upper MWCount of

Observations

Total Value of 1 MW of 10 Minute

Reserves ($)

Average Value of 1 MW of 10

Minute Reserves ($/hour)

Total Value of 1 MW of 30 Minute

Reserves ($)

Average Value of 1 MW of 30

Minute Reserves ($/hour)

-2000 0 354 17,451.16$ 49.30$ 11,857.87$ 33.50$ 0 500 2408 16,918.60$ 7.03$ 14,565.05$ 6.05$

500 1000 2284 1,699.25$ 0.74$ 1,435.84$ 0.63$ 1000 1500 965 173.27$ 0.18$ 153.75$ 0.16$ 1500 2000 549 54.69$ 0.10$ 48.65$ 0.09$ 2000 2500 287 23.50$ 0.08$ 22.43$ 0.08$ 2500 3000 323 26.70$ 0.08$ 21.53$ 0.07$ 3000 3500 374 21.05$ 0.06$ 21.05$ 0.06$ 3500 4000 416 18.85$ 0.05$ 18.84$ 0.05$ 4000 4500 251 9.00$ 0.04$ 9.00$ 0.04$ 4500 5000 116 2.98$ 0.03$ 2.98$ 0.03$ 5000 5500 10 0.15$ 0.02$ 0.15$ 0.02$

Totals 8337 36,399.20$ 28,157.13$

400 MW Shift in Supply Curve before September 15, 250 MW shift from September 16

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The table summarizes the reserve revenue calculations by level of replacement reserves for the shifted supply curve scenario. Most of the revenues from providing 10-minute reserves comes when less than 1,000 MW of replacement reserves was available in real time.


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Month Observed CountAverage 10 Minute

Reserve Price ($/MWhr)Average 30 Minute

Reserve Price ($/MWhr)Maximum 10 Minute

Reserve Price ($/MWhr)Maximum 30 Minute

Reserve Price ($/MWhr) Full CountJanuary 704 $3.64 $2.94 $213.65 $100.00 744February 694 $3.87 $3.69 $90.76 $90.76 678

March 708 $7.97 $7.47 $224.71 $86.48 744April 706 $13.04 $8.14 $444.73 $96.32 720May 688 $13.04 $8.87 $400.00 $100.00 744June 719 $3.72 $3.13 $343.80 $99.17 720July 716 $1.40 $1.36 $54.23 $54.23 744

August 742 $3.04 $2.99 $72.83 $72.83 744September 710 $0.55 $0.46 $26.46 $26.46 720

October 589 $0.24 $0.20 $35.35 $35.35 744November 668 $0.42 $0.39 $62.14 $62.14 720December 693 $0.85 $0.35 $271.23 $48.74 744

Annualized Revenue @ 5% Outage ($/MW) 35,948.16$ 27,755.34$ Annualized Revenue @ 10% Outage ($/MW) 34,056.15$ 26,294.53$

NEPOOL 10-Minute and 30-Minute Reserve Prices

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This table summarizes the reserve revenue calculations by month for the shifted supply curve scenario.

We have not adjusted the reserve revenues to reflect any weather or temperature related effects although the summer of 2000 was mild.


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The incremental cost of energy for the GT was derived using the following information:

• Natural gas spot prices for Boston City Gate provided by Energy Intel.

• Heat rate of 11,000 Btu/kWh.

• Variable O&M of $2.50/MWh.

Real-time energy prices were modeled using actual year 2000 real-time energy prices:

• Real-time energy prices greater than $1,000 on May 8th were reduced to $1,000 for this analysis.

INCREMENTAL ENERGY REVENUES Assumptions

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The GT would earn a margin on energy sales if the sum of fuel cost and variable O&M was less than the real-time energy price. However, we have already assumed a revenue stream for the GT in the reserves analysis. The GT would only want to generate energy if the margin on the energy sales was greater than the 10-minute reserve price.

Therefore, the incremental energy revenue (over and above reserve revenue) was determined by subtracting fuel cost, variable O&M and ancillary service revenue from the real-time energy price in every hour.

In every hour where the incremental net revenue is positive, it was assumed that the GT would generate energy instead of providing reserves.

INCREMENTAL ENERGY REVENUE Methodology

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Additional Energy Revenues - Boston City Gate Gas Prices ($/kWyr)



10 Minute Unit

30 Minute Unit





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The tables show the incremental energy revenues associated with the base case project (11,000 Btu/kWh heat rate).

• The left table shows the incremental energy revenue for either a 10-minute or 30-minute GT with a 5% outage rate under each of the demand curve shift scenarios.

• The right table shows the incremental energy revenue for either a 10-minute or 30-minute GT with a 10% outage rate under each of the demand curve shift scenarios.

INCREMENTAL ENERGY REVENUE Results

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Supply Curve Shift Scenario

400 MW to September 15, 250

MW After September 15 10 Minute Unit 30 Minute Unit

Month Observed Count

Average Additional Energy Margin

($/MWhr)

Maximum Additional Energy Margin

($/MWhr)

Average Additional Energy Margin

($/MWhr)

Maximum Additional Energy Margin

($/MWhr) Full CountJanuary 704 $1.81 $126.02 $2.02 $126.02 744February 694 $0.05 $8.27 $0.05 $8.55 678

March 708 $0.02 $8.07 $0.02 $8.07 744April 706 $0.36 $60.60 $0.50 $95.89 720May 688 $4.97 $671.54 $7.56 $857.77 744June 719 $0.92 $323.93 $1.24 $324.22 720July 716 $0.60 $76.49 $0.61 $76.49 744

August 742 $0.78 $31.57 $0.78 $31.57 744September 710 $0.84 $244.38 $0.85 $244.38 720

October 589 $1.07 $45.69 $1.08 $45.69 744November 668 $0.27 $22.67 $0.27 $22.67 720December 693 $4.94 $557.91 $5.02 $557.96 744

Additional Margin @ 5% outage $11,691.48 $14,060.14Additional Margin @ 10% outage $11,076.14 $13,320.14

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The table shows the monthly breakdown of incremental energy revenue under the shifted supply curve scenario.

Much of the incremental energy revenue would be earned in January, May and December. It is noteworthy how little incremental energy revenue would be earned in June, July and August.

INCREMENTAL ENERGY REVENUE Results

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Total Revenues ($/kWyr)



10 Minute Unit

30 Minute Unit





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GT VIABILITY Base Case Results

Combining the reserve and energy revenues together, the tables show the total net revenues in $/kWyr for 10-minute and 30-minute GTs with 5% and 10% outage rates and each of the supply curve shift scenarios.

Based on a levelized revenue requirement of $54.47/kWyr the GT project would not be viable under any of the scenarios, based on 2000 prices.

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GT VIABILITY Total Reserve Costs

Total reserve costs for the 8337 hours modeled are shown in the table for both shifted supply curve scenario and the no shift scenario.

Total Reserve Costs

A 400 MW Shifted Supply Curve until September 15, 250

MW Shift from September 16

No Shift of the Supply Curve

Total 10-Minute Reserve Cost ($M/year) 61.63$ 31.85$ Total 30-Minute Reserve Cost ($M/year) 13.88$ 4.14$

Total Replacement Reserve Cost ($M/year) 4.73$ 2.72$ Total Reserve Cost ($M/year) 80.24$ 38.71$

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GT VIABILITY Project Sensitivity

If the installation cost of the GT is reduced from $350/kW to $320/kW and the size of the project is reduced from 100 MW to 45 MW, the levelized revenue requirement is reduced to $50.66/kWyr.

The sensitivity case also assumes the heat rate is reduced from 11,000 Btu/kWh to 9,000 Btu/kWh.

Reducing the heat rate reduces the cost of generating energy which:

• Increases the margin on hours where generating energy was the most profitable option in the base case.

• Increases the number of hours where generating energy was preferable to providing reserves.

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10 Minute Unit

30 Minute Unit





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GT VIABILITY Project Sensitivity

The total net revenues for the project sensitivity case are shown in the tables.

The 10-minute GT now meets its $50.66/kWyr revenue requirement at both the 5% and 10% outage rate under the shifted supply curve scenario.

The 10-minute GT does not meet the revenue requirement if there is no supply curve shift.

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GT VIABILITY Mild Year Sensitivity

This entire base case analysis is derived from year 2000 reserve and energy prices. The 2000 summer was very mild.

To analyze the potential impacts of a “normal” summer, we reviewed the average clearing price of forward market contracts for Summer 2000 peak energy transacted before May 1st and compared them to the average peak energy price observed during the summer months of June, July and August.

• The average forward market transaction for on-peak summer energy traded before May 1st was $94.17/MWh.

• The average real-time energy price for on-peak summer hours was $45.71/MWh.

A second sensitivity case was created off the base case by multiplying each on-peak summer real-time energy price by 94.17/45.71 or 2.06.

LECG 44


When reviewing the results from the mild year sensitivity case it is important to note:

• The sensitivity was based on the 11,000 Btu/kWh base case scenario.• A price cap of $1,000/MWh was kept in place so actual results in this

sensitivity reflect an energy price ratio between the original and final real-time prices of something less than 2.06.

• Reserve prices were not changed.• No allowance was made for potential changes in gas prices as a result

of increased demand.• The variance effects of the incremental energy calculation may have

been skewed by the multiplicative treatment of the real-time prices. The energy margin is very sensitive to the shape of the price duration curve.

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10 Minute Unit

30 Minute Unit





LECG 46


The total net revenues for the mild year sensitivity are shown in the tables.

The $54.47/kWyr revenue requirement for the base case project is now met under every 10-minute and 30-minute scenario regardless of outage rate or supply curve shift.

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Percentage of Time Demand Curve Set the Reserve Clearing Price


30 Minute Unit

A 400 MW Shifted Supply Curve until September 15, 250 MW Shift from September 16 41.7% 99.9%

No Shift of the Supply Curve 26.4% 99.8%

LECG 48

GT VIABILITY Demand Curve Sets Reserve Price

The only element of the analysis that affected how often the demand curve set the 10-minute and 30-minute price was whether the supply curve was shifted or not. It did not depend at all on the type of GT modeled or the mild year sensitivity.

The table shows that the 30-minute reserve price was set by the demand curve much of the time whether the supply curve was shifted or not. The 10-minute reserve price was set by the demand curve 41.7% of the time if the supply curve was shifted and 26.4% of the time if the supply curve was not shifted.

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GT Capacity Factors for 10 Minute GT

Base Case8280 Heat Rate GT Mild Year

A 400 MW Shifted Supply Curve until September 15, 250 MW Shift from September 16 6.9% 20.7% 21.8%

No Shift of the Supply Curve 8.8% 24.3% 23.0%

GT Capacity Factors for 30 Minute GT

Base Case8280 Heat Rate GT Mild Year

A 400 MW Shifted Supply Curve until September 15, 250 MW Shift from September 16 7.2% 21.2% 22.0%

No Shift of the Supply Curve 9.3% 25.4% 23.5%

LECG 50

GT VIABILITY GT Capacity Factors

The GT capacity factors were affected by the supply curve shift, the heat rate of the GT and the mild year sensitivity.

The capacity factors have not been adjusted for outage rates. They are simply the percentage of hours in the year that the unit would have been selected for energy had it been available the whole of the year.

Note that the increase in capacity factor for the mild year sensitivity is very pronounced given that the only hours that changed in this case were the on-peak hours of June through August.

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GT VIABILITY Conclusions

• During the low load summer of 2000, the demand curve as proposed, in conjunction with incremental energy revenues, would have provided less revenue than the levelized revenue requirement for the base case project.

• If forward market prices had materialized, it is likely that the demand curve, in conjunction with incremental energy revenues, would have provided more than sufficient revenues to meet the levelized revenue requirement for the base case project.

• A better turbine with lower heat rates and lower capital cost would probably have met its levelized revenue requirement.

• The sensitivity studies show that the demand curve provides a reasonable expectation of adequate revenues and incentives to construct new quick start units.

Documents

Workshop on GT Viability in the NEPOOL Market