ICAP Demand Curve. Objectives. Zachary T. Smith Manager, Capacity Market Design, NYISO. Upon the completion of this module, trainees should be able to

(1)

FOR TRAINING PURPOSES ONLY

ICAP Demand Curve

Zachary T. Smith

Manager, Capacity Market Design, NYISO

Intermediate ICAP Course

June 18-19, 2019 Rensselaer, NY 12144

1

Objectives

Upon the completion of this module, trainees should be able to

 Identify the steps of the ICAP Demand Curve reset (DCR) process

 Describe the benefits of sloped ICAP Demand Curves

 Identify the points used in developing the ICAP Demand Curves

 Understand the stepwise process of determining an ICAP Demand Curve

 Determine how the UCAP Demand Curves are used in solving the ICAP Spot Market Auction

 Explain the process for translating the ICAP Demand Curves to UCAP values

(2)

ICAP Demand Curve Reset (DCR) Process

Stakeholder process Documents posted for stakeholder

comments NYISO Board of Directors review/approval

NYISO filing with FERC of Board approved ICAP Demand Curves for Year 1,

assumptions/methodologies for annual updates for Year 2-4 Order issued by FERC accepting new

curves for Year 1, assumptions/methodologies for

annual updates for Year 2-4

Annual updates of certain parameters for the years between

periodic reviews (i.e., years 2 through 4)

3

(3)

Sloped Demand Curve



Implemented to determine the ICAP Spot Market Auction

Market-Clearing Price



An enhancement to the previously used inelastic vertical demand

curve

• Incorporates a more gradual slope that will value additional capacity

beyond the minimum requirement



First ICAP Spot Market Auction using sloped demand curve was

conducted at the end of April 2003 for the first month of the

2003-2004 Capability Year (i.e., May 2003)

5

Sloped Demand Curve



Advantages of a sloped demand curve

• Increases system and resource reliability

• Values additional UCAP above NYCA and Locational Minimum Installed

Capacity Requirements

• Reduces price volatility and provides more accurate price signals

• Provides signals for capacity investment

(4)

Inelastic Demand Curve

 Market clearing price of capacity was previously set by a deficiency auction

construct using a vertical (inelastic) demand curve through the 2002-2003 Capability Year

 Designed such that supply and demand converge at an administratively

determined point

• Price of any excess capacity beyond the minimum requirement is valued at zero

100% Requirement Demand MW $/kW-month 0 7

Inelastic Demand Curve



Disadvantages of inelastic demand curve

• Price Volatility – potential for large price variations resulting from small

changes in supply curve

• Resulted in very high ICAP prices during deficiency and extremely low

prices at times of surplus capacity

• Discouraged generators from participating in the New York markets

• Poor signals for planning and financing new capacity

• Unpredictable revenue streams

• Undermining the incentive for Market Participants (MPs) to enter into

(5)

Market Prices with Inelastic Demand

NYCA Spot Market Prices

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 May , 200 0 Jul, 2000 Sep, 200 0 Nov , 200 0 Jan, 2001 Mar , 200 1 May , 20 01 Jul, 2 001 Sept , 200 1 Nov , 200 1 Jan, 200 2 Mar , 200 2 May , 200 2 Jul, 2002 Sept , 20 02 Nov , 200 2 Jan, 2003 Mar , 200 3 $/ kW M on th 10

Transition from Inelastic to Sloped

Demand Curve

Demand MW $/kW-month 0 Surplus capacity 10

(6)

Benefits of Sloped Demand Curve

 Reduce potential impact of exercise of market power

• Reduce revenues from withholding vs. receiving capacity payment

 Lessen price fluctuations

• Effect of supply changes on clearing prices

 Correlation with costs

• Guide market towards adequacy of capacity investment

 Identifies value of excess capacity

MW Slope of Curve $/KW- month $0 0 11 MW $0 $/kW-month 0

Inelastic vs. Sloped Demand Curve

UCAP Required

Price Difference with Inelastic curve $ 3.00

Price Difference with Sloping curve $ 1.50 $12.00 $2.00 $4.00 $6.00 $8.00 $10.00

(7)

NYCA Spot Market Auction Prices

13 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 May, 20 00

Oct, 2000 Mar, 2001 Aug

, 2001

Jan, 2

002

Jun, 20

02

Nov, 2002 Apr,2003 Sept,2003 Feb,2004 Jul

,2004 Dec, 20 04 May, 20 05

Oct, 2005 Mar, 2006 Aug

, 2006

Jan, 2

007

Jun, 20

07

Nov, 2007 Apr, 2008 _{Sept, 2008} Feb, 2009 Jul, 2

009

Dec,

2009

May, 20

10

Oct, 2010 Mar, 2011 Aug

, 2011

Jan, 2

012

Jun, 20

12

Nov, 2012 Apr, 2013 _{Sept, 2013} Feb, 2014 Jul, 2

014

Dec,

2014

May, 20

15

Oct, 2015 Mar, 2016 Aug

, 2016

Jan, 2

017

Jun, 20

17

Nov, 2017 Apr, 2018 _{Sept, 2018} Feb, 2019

$/kW Month

NYCA Spot Market Prices 2000 - 2019

Sloped Demand Curve Implemented

Let’s Review

14

Which ICAP market auction uses a demand curve?

a. Capability Period (“Strip”) Auction

b. Monthly Auction

c. ICAP Spot Market Auction

d. None of the above

(8)

Let’s Review

15 If you apply the same given change in a supply curve for Demand Curves A, B, and C,

select the demand curve that would result in the largest change in price. A. Demand Curve A

B. Demand Curve B C. Demand Curve C

D. The price change would be the same for Demand Curves A, B, and C

$/KW- month MW Demand Curve A $0 0 A MW Demand Curve B $/KW- month $0 B 0 MW Demand Curve C $/KW- month $0 0 C

Let’s Review

If you apply the same given change in a supply curve for Demand Curves A, B, and C, select the demand curve that would result in the least change in price.

A. Demand Curve A B. Demand Curve B C. Demand Curve C

D. The price change would be the same for Demand Curves A, B, and C

MW Demand Curve A $/KW- month $0 0 MW Demand Curve B $/KW- month $0 0 MW Demand Curve C $/KW- month $0 0 A B C

(9)

Let’s Review

17

The effects of an inelastic demand curve on ICAP Spot Market

Auction clearing prices were:

a. Insignificant changes in capacity market prices when

surplus and tight capacity existed

b. Stable capacity market prices

c. Volatile capacity prices and revenues from the ICAP Spot

Market Auction

d. None of the above

Development of ICAP Demand Curves

(10)

Development of the ICAP Demand Curves



ICAP Demand Curve considers:

1. Projected annual net Energy and Ancillary Services revenues of peaking plant

2. Locational Minimum Installed Capacity Requirement for Locality, and NYCA Minimum Installed Capacity Requirement for NYCA-wide 3. The point at which the value of additional surplus capacity above

the applicable minimum requirement declines to $0 (“zero-crossing point”)

4. Levelized embedded cost of a new peaking plant in each Locality, as well as the rest of state capacity region

19

Projected Annual Net EAS Revenues of

Peaking Plant

[Cost – (Energy + Ancillary Services revenues)] = Annual ICAP Spot Market Auction revenue required

MW $0

$/kW-month

0

Stimulate investment ICAP market price _{required for adequate}

revenues to cover costs for new peaking plant

Or

net cost of new entry

(11)

Development of the Demand Curve



The ICAP Demand Curves are established based on supply

conditions that slightly exceed the applicable minimum

requirement (“level of excess” conditions)

• Level of excess

• Locational Minimum Installed Capacity Requirement for Locality, and NYCA Minimum Installed Capacity Requirement for NYCA-wide, plus

• MW value of the relevant peaking plant’s capacity

21

100% of Minimum Requirement

(forecast peak load * minimum requirement %) MW $0

$/kW-month

0

Minimum Installed Capacity Requirement

Reference Point

ICAP market price required for adequate revenues to cover costs for new peaking plant

Clearing price level when capacity meets 100% of minimum requirement

Reference point – first point of the ICAP Demand Curve

2

(12)

MW $0

$/kW-month

0

Zero-Crossing Point

Zero-crossing point - second point of the ICAP Demand Curve is the point at which additional surplus capacity has $0 Value

100% of Minimum Requirement

(forecast peak load * minimum requirement %)

3

23

Development of the ICAP Demand

Curves



Levelized embedded cost of a new peaking plant

• Technology that results in lowest fixed cost and highest variable cost

among technologies that are economically viable

(13)

MW $0

$/kW-month

0

Maximum Clearing Price

1.5 x estimated levelized cost to develop new peaking plant

[cost – (Energy + Ancillary Services revenues)] = Annual ICAP Spot Market Auction revenue required

4

25

ICAP Demand Curve Slope

100% of Minimum Requirement MW $0 $/kW-month 0 Reference point Maximum clearing price

Zero-crossing point

(14)

ICAP Demand Curve Slope

MW $0 $/kW-month 0 If surplus: •Price is below reference price If shortage: •Adequate revenues to recover cost and induce investment 27 100% of Minimum Requirement MW $0 $/kW-month 0

Increase/decrease in net cost of new entry

increase/decrease in required MW

(15)

Let’s Review

29

The slope of the ICAP Demand Curve increases when:

a. The Zero-crossing point increases

b. The Reference point increases

c. Maximum Clearing Price increases

d. All of the above

e. None of the above

Let’s Review

30

What is the maximum clearing price that

could occur for this ICAP Spot Market

Auction?

a. $3.00

b. $ 6.00

c. $ 9.00

d. $ 12.00

e. None of the above

$12.00 MW $/kW-month 0 $0 $10.00 $8.00 $6.00 $4.00 $2.00

(16)

Steps to Determining an ICAP

Demand Curve

31

Example: Determining the NYC ICAP

Demand Curve 2014-2015

ICAP Reference point



Annual levelized embedded cost of new peaking plant

• Construction/installation

• Fixed operation and maintenance (O&M)

• Miscellaneous adjustments

• NYC peaking plant: dual-fuel F-Class Frame Turbine with selective

catalytic reduction (SCR) emissions control technology – Annual levelized embedded cost $209.14/kW-year

(17)

Example: Determining the NYC ICAP

Demand Curve 2014-2015

ICAP Reference point



Net of projected annual revenues from Energy and Ancillary

Services

• Estimated net Energy and Ancillary Services revenues for NYC

peaking plant: $33.49/kW-year



Annual ICAP revenue required (i.e., net cost of new entry)

• $209.14/kW-year - $33.49/kW-year = $175.65/kW-year

• [cost – (Energy + Ancillary Services revenues] = annual ICAP market

revenue required

33

Example: Determining the NYC ICAP

Demand Curve 2014-2015

ICAP Reference point



Annual ICAP revenue required: $175.65/kW-year

• Account for seasonal changes in capacity availability (WSR)

• Convert to $/kW-month

• $18.55/kW-month is NYC ICAP Demand Curve reference point at 100% of

the applicable minimum ICAP requirement

(18)

Example: Determining the NYC ICAP

Demand Curve 2014-2015

$0.00 $3.00 $6.00 $9.00 $12.00 $15.00 $18.00 $21.00 $24.00 $27.00 82 85 88 91 94 97 100 103 106 109 112 115 118 $/KW -M onth (ICAP)

% of Minimum ICAP Requirement

2014/2015 $18.55

ICAP Reference point

35

Example: Determining the NYC ICAP

Demand Curve 2014 - 2015

Determine % capacity above requirement when clearing price is $0

 Zero-crossing point: 115% for G-J Locality

• G-J Locality:

locational forecast peak load x Locational Minimum Installed Capacity Requirement (LCR) x 115%

 Zero-crossing point: 118% for NYC & LI

• NYC & LI:

locational forecast peak load x Locational Minimum Installed Capacity Requirement (LCR) x 118%

 Zero-crossing point: 112% for NYCA

• NYCA:

forecast NYCA peak load x NYCA Minimum Installed Capacity Requirement (IRM) x 112%

(19)

Example: Determining the NYC ICAP

Demand Curve 2014/2015

$0.00 $3.00 $6.00 $9.00 $12.00 $15.00 $18.00 $21.00 $24.00 $27.00 82 85 88 91 94 97 100 103 106 109 112 115 118 $/KW -M onth (ICAP)

2014/2015 $18.55

Zero-crossing point $0.00

Zero-crossing point

37

Example: Determining the NYC ICAP

Demand Curve 2014/2015

Maximum Clearing Price



Max price = 1.5 x levelized embedded cost of new peaking plant



Annual levelized embedded cost for NYC peaking plant =

$209.14/kW-year

• 1.5 x $209.14/kW-year = $313.71/kW-year



Convert $313.71/kW-year to $/kW-month

• $313.71/kW-year / 12 months = $26.14/kW-month



Maximum ICAP clearing price values are not seasonally adjusted

(20)

Example: Determining the NYC ICAP

Demand Curve 2014/2015

$0.00 $3.00 $6.00 $9.00 $12.00 $15.00 $18.00 $21.00 $24.00 $27.00 82 85 88 91 94 97 100 103 106 109 112 115 118 $/KW -M onth (ICAP)

2014/2015 $18.55

$0.00 $26.14 Maximum Clearing Price

Maximum Clearing Price

39

Example: Determining the NYC ICAP

Demand Curve 2014/2015

$0.00 $3.00 $6.00 $9.00 $12.00 $15.00 $18.00 $21.00 $24.00 $27.00 82 85 88 91 94 97 100 103 106 109 112 115 118 $/KW -M onth (ICAP)

100% ICAP Required Reference point $18.55 Zero-crossing point $0.00 $26.14 Maximum Clearing Price

Representative For Training Use Only

(21)

Example of Service Tariff §5.14.1.2

ICAP Demand Curve Values

Maximum Clearing Price Reference point Zero-crossing point

41

Year 4

ICAP Demand Curve Timeline

Year 1 Year 2 Year 3

Demand Curve Reset – Every 4 years

Year 1 ICAP Demand Curves

Established by quadrennial review process (Slide 3) ICAP Demand Curve, Year 2-4

Established by an annual update process

•Net Energy and Ancillary Services revenue estimates updated based on most recent 3 years of historic data

•Estimated levelized embedded cost of new peaking plant updated using a composite escalation factor

•Winter-to-Summer ratio updated

•Updated ICAP Demand Curves posted on NYISO website on/before November 30th_of year prior to start of Capability Year to which updated curves will apply

Every Capability Period

•ICAP Demand Curves translated from ICAP to UCAP

•ICAP Demand Curves developed for - G-J Locality

- LI - NYC - NYCA

•Year 1 ICAP Demand Curve parameters are in the Services Tariff in ICAP values

•UCAP values listed in the NYISO ICAP Automated Market System (AMS)

(22)

Let’s Review

43

1. Develop an ICAP Demand Curve using the following data:

•Seasonally adjusted net cost of new entry: $ 15.00/kW-month

•Additional surplus capacity value of $0: 118% of minimum ICAP requirement •Estimated levelized embedded cost of new peaking plant: $ 16.00/kW-month

$0.00 $3.00 $6.00 $9.00 $12.00 $15.00 $18.00 $21.00 $24.00 $27.00 82 85 88 91 94 97 100 103 106 109 112 115 118 $/KW -M onth (ICAP)

Annual Update Process

 Set in place to update the ICAP Demand Curves formulaically each year beyond the first year of the reset period, for the remaining three years of each period

 Annual Update is designed to provide more accurate price signals for the capacity market by incorporating updated information through an open and formulaic process, using publically available data and models

 Updated ICAP Demand Curves posted on the NYISO website on/before November 30th_{of year prior to start of Capability Year to which updated}

(23)

Annual Update Components

 Net Energy and Ancillary Services revenue estimates revised based on most recent three years of historic data

• Energy Market Prices (Energy and Ancillary Services)

• Fuel Costs

• Emission Costs

 Estimated levelized cost of new peaking plant updated using a composition escalation factor

• General Inflation

• Construction Labor

• Material Costs

• Turbine Costs

 The winter-to-summer ratio (WSR) updated using data from same historic period as updated net Energy and Ancillary Services revenue estimates

• Reflects the existing capacity in the market, as well as how temperature sensitive the existing capacity is, to allow proper shaping of the ICAP Demand Curve

45

Translating ICAP Demand Curves

to UCAP Values

(24)

Translating ICAP Demand Curves to

UCAP Values

Example: NYC 2014 Summer Capability Period



Determine UCAP reference point

• UCAP reference point = ICAP reference point/(1-AvgEFORd)

• $19.62/kW-month = $18.55/kW-month/(1 – 5.44%)



Determine UCAP at zero-crossing point

• UCAP at $0 = UCAP required x 118%

• UCAP required = NYC forecast peak load x LCR x (1-AvgEFORd)

– UCAP required = 11,782.80 MW x 85% x (1 - 5.44%) = 9,470.5 MW

• UCAP at $0 = 9,470.5 MW x 118% = 11,175.0 MW

47

NYC Demand Curve ICAP/UCAP

Translation Summer 2014



Determine UCAP Maximum Clearing Price

• UCAP Maximum Clearing Price = ICAP maximum price/(1-AvgEFORd)

(25)

NYC UCAP Demand Curve Summer 2014

$0.00 $3.00 $6.00 $9.00 $12.00 $15.00 $18.00 $21.00 $24.00 $27.00 $30.00 850 0 875 0 900 0 925 0 950 0 975 0 1 000 0 1 025 0 1 050 0 1 075 0 1 100 0 1 125 0 1 150 0 $/KW -M onth (ICAP) MW (UCAP) 100% ICAP Required Reference point $19.62 Zero-crossing point (118%) $0.00 Maximum Clearing Price $27.65

Representative For Training Use Only

49

Let’s Review

50

Which of the following identifies an item that could impact

the slope of the NYCA UCAP Demand Curve?

a. NYCA Installed Reserve Margin

b. Equivalent Demand Forced Outage Rate (EFORd)

c. Net cost of a new entry

d. All of the above

e. None of the above

(26)

Let’s Review

51

A decrease in the annual cost of a new entry will effect the UCAP

Demand Curve by:

(assume other curve values remain constant)

a. Increasing the Maximum Clearing Price b. Decreasing the Maximum Clearing Price c. Has no effect on the UCAP Demand Curve d. All of the above

e. None of the above

Demand Curves and the

ICAP Spot Market Auction

(27)

Use of Demand Curves in the

ICAP Spot Market Auction

 As discussed earlier, the ICAP Spot Market Auction uses the demand curves

 The demand curve serves to replace bids to purchase capacity

• Offers to sell capacity are still accepted

 All offers that are at or below the demand curve are awarded, and these MW are allocated out to Market Participants based upon deficiencies and LSE capacity requirements

53

Solving the Spot Market Auction

 Market positions are calculated for all Market Participants

• Deficiencies

• Excess

 Total capacity certified is calculated

 Starting at the total capacity certified, offers are then ranked based upon economics, and evaluated against the demand curve

 Market Participants that are deficient are awarded MW to cover deficiencies

 Excess MW purchased above requirements are allocated to LSEs based upon a load-ratio share

• These MW can be used in other locations to either meet deficiencies or be sold to other Market Participants

(28)

Solving the ICAP Spot Market Auction

awarded deficiency awarded excess capacity certified 100% of minimum requirement $/k W -M onth

Market Clearing Price (MCP) 55

Let’s Review

awarded deficiency awarded excess $/kW-M onth MCP 100% UCAP Req. 36,000 MW _{40,000 MW}

How much UCAP was cleared/purchased in the above ICAP Spot Market Auction, assuming no $0 offers? a. 4,000 MW b. 36,000 MW c. 37,230 MW d. 40,000 MW e. 100% UCAP Req.

(29)

Summary

 Identify the steps for ICAP Demand Curve reset (DCR) process

 Describe the benefits of sloped ICAP Demand Curves

 Identify the points used in developing the ICAP Demand Curves

 Understand the stepwise process of determining an ICAP Demand Curve

 Determine how the UCAP Demand Curves are used in solving the ICAP Spot Market Auction