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ICAP Demand Curve
Zachary T. Smith
Manager, Capacity Market Design, NYISO
Intermediate ICAP Course
June 18-19, 2019 Rensselaer, NY 12144
1
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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
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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
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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
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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
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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
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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
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Transition from Inelastic to Sloped
Demand Curve
Demand MW $/kW-month 0 Surplus capacity 10FOR TRAINING PURPOSES ONLY
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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 RequiredPrice 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
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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
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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
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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
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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
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Development of ICAP Demand Curves
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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
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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
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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
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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
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MW $0
$/kW-month
0
Maximum Clearing Price
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
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ICAP Demand Curve Slope
100% of Minimum Requirement MW $0 $/kW-month 0 Reference point Maximum clearing price
Zero-crossing point
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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
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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
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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
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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
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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
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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
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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%
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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
Zero-crossing point $0.00
Zero-crossing point
37
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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
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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
$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)% of Minimum ICAP Requirement
100% ICAP Required Reference point $18.55 Zero-crossing point $0.00 $26.14 Maximum Clearing Price
Representative For Training Use Only
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Example of Service Tariff §5.14.1.2
ICAP Demand Curve Values
Maximum Clearing Price Reference point Zero-crossing point
41
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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 30thof 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)
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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)
% of Minimum ICAP Requirement
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 30thof year prior to start of Capability Year to which updated
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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
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Translating ICAP Demand Curves
to UCAP Values
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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)
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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
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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
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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
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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
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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
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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 MWHow 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.
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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
Explain the process for translating the ICAP Demand Curves to UCAP values
57
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References
NYISO Services Tariff Section 5.14
NYISO Installed Capacity Manual
ICAP sections of NYISO website
• ICAP Market System
• ICAP Working Group