Ryan McCarthy rYMCCARTHYisonecom 4135354071 Discuss Forward Reserve Heat Rate calculation methodology Forward Reserve Heat Rate Calculation 2 Forward Reserve Threshold Price has multiple purposes in the markets ID: 929774
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Slide1
September 2-3, 2015 | NEPOOL Markets Committee
Ryan McCarthy
rYMCCARTHY@iso-ne.com | 413.535.4071
Discuss Forward Reserve Heat Rate calculation methodology
Forward Reserve Heat Rate Calculation
Slide22
Forward Reserve Threshold Price has multiple purposes in the markets
The Forward Reserve Threshold Price is calculated prior to each operating day by multiplying the Forward Reserve Heat Rate by the lower of the day-ahead natural gas or oil priceThe Forward Reserve Threshold Price is used for two purposes in the markets
Establishes the minimum level at which Forward Reserve Resources need to offer to qualify to meet a Forward Reserve ObligationEstablishes the
maximum
level at which Import Capacity Resources can offer into the energy market to qualify as meeting their Capacity Supply Obligation
Slide33
Forward Reserve Heat Rate is currently set at a level intended to minimize frequency of dispatch
The Forward Reserve Heat Rate is established for each Forward Reserve Procurement Period (winter and summer)
The Forward Reserve Heat Rate is set based on the 2.5 percentile value of a historical analysis of hourly “implied heat rates”III.9.6.1 “…The Forward Reserve Threshold Prices shall be set in accordance with the ISO New England Manuals so that Forward Reserve Resource capability has (a) a low probability of being dispatched for energy and (b) a high probability of being held for reserve purposes.”
The Forward Reserve Heat Rate is capped at the PER Proxy Unit heat rate of 22,000 Btu/kWh
III.9.6.2 “…Forward Reserve Heat Rate: shall be fixed for the duration of the Forward Reserve Procurement Period and announced in the announcement for the Forward Reserve Auction. New Forward Reserve Heat Rates shall be specified for successive auctions, and shall be the lesser of: (a) the value determined in accordance with applicable ISO New England Manuals; or (b) the heat rate defined for the PER Proxy Unit in Section III.13.7.2.7.1.1.1(b) less 1 Btu/kWh.”
Slide44
The calculation of the Forward Reserve Heat Rate is done in a two step process
Using the real-time hourly LMP for the Hub and the lower of the day-ahead oil or natural gas fuel price indices for New England, calculate an hourly implied heat rate:
Real-Time Hourly LMP / Min (Natural Gas Price, Oil Price)The calculation ranks the hourly implied heat rates in order and selects the observation occurring at the 97.5 percentile
This data is calculated over an historical period of time
ISO historically used data from 2003, but modified this approach to use the most recent five years in 2014 for the Summer 2014 Delivery period
ISO shifted to using data from 2003 for the 2015/16 winter period
Slide55
Historical Forward Reserve Heat Rates
Slide6Forward Reserve Heat Rate Calculation discussion
6
Slide77
Changes to market design and market conditions require the FRM Heat Rate to be reviewed
Implied hourly heat rate calculations done on a annual basis may not reflect the complexities of a seasonal fuel structureImplied heat rate calculations, under certain market conditions, may not produce representative results
Real-Time LMP set off of intraday fuel pricesReal-Time LMP set on different fuel in real-time than lower day-ahead fuel priceReal-Time LMP includes RCPF
When the Forward Reserve Heat Rate calculations were originally established, many of these dynamics were not contemplated
Slide88
Market conditions related to fuel prices have contributed to increasing the FRM Heat Rate
Low gas environments have produced increased heat rates as fixed offer components divided by a low fuel prices result in higher implied heat rates
These implied heat rates are being equally applied to non-summer months, months which have significantly higher fuel prices and which generally produce lower implied heat rates
Using the lower of day-ahead fuel price can create high heat rates when the marginal fuel in real-time is the higher cost day-ahead fuel
The heat rate calculation then computes an hourly heat rate based off of the “lower of” day ahead fuel causing the implied heat rate to increase
Redispatch for reserves in real-time can result in higher cost fuels setting real-time LMP
Inclusion of RCPF in the real-time LMP can result in extremely high implied heat rates being calculated.
For example, $1,100/MWh RT LMP / $15.00/
mmBtu
gas price calculates a heat rate of 73.33
mmBtu
/
MWh
Slide99
Example: Higher day-ahead fuel price setting the real-time LMP
Had the calculation accounted for the non-marginal fuel switching, and not used the “lower of” methodology, the heat rate used in the calculation would have been 10.83.
By ascribing a “lower of” methodology in this instance, the Forward Reserve Heat Rate calculation uses an oil fuel price compared to an LMP based upon a much higher gas price and applies the higher value to future seasons
Hour
Ending
Real
Time LMP ($/MWh)
Day Ahead Oil
Price ($/
mmBtu
)
Day Ahead Gas
Price
($/
mmBtu
)
Marginal
Resource Fuel Type
Implied FR
Heat Rate
(
mmBtu
/
MWh
)
Implied Marginal Unit Heat Rate
10
$160
$13
$30
Oil
12.30
12.30
11
$170
$13
$30
Oil
13.07
13.07
12
$190
$13
$30
Oil
14.61
14.61
13
$325
$13
$30
Gas
25.00
10.83
Slide1010
Additional offer flexibility in real-time allows resources to modify offers entered on the prior day
Energy Market Offer Flexibility changes have afforded participants the ability to change their offer parameters within the operating day based off of the cost of intraday fuel
RT LMPs in Forward Reserve Heat Rate calculation that have significant fuel price differences between the day ahead fuel price and the intraday fuel price may not be reflective of heat rate of the underlying resource setting the price
Slide1111
Example: Intraday fuel setting real-time LMP
Had the calculation accounted for intraday fuel pricing, and not used the “lower of” fuel methodology, the heat rate used in the calculation would have been 12.5.
By ascribing a “lower of” fuel methodology in this instance, the FRM calculation misrepresents the heat rate and applies it to future seasons
Hour
Ending
Real
Time LMP ($/MWh)
Day Ahead Gas
Price
($/
mmBtu
)
Intraday Gas
Price
($/
mmBtu
)
Marginal
Fuel Type
Implied FR
Heat Rate
(
mmBtu
/
MWh
)
Implied Marginal Unit Heat Rate
10
$90.00
$9
$14.50
Day Ahead
10.00
10.00
11
$100.00
$9
$14.50
Day Ahead
11.11
11.11
12
$110.00
$9
$14.50
Day Ahead
12.22
12.22
13
$181.25
$9
$14.50
Intraday
20.13
12.50
Slide1212
Next Steps
The ISO will work with participants through the stakeholder process to evaluate the Forward Reserve Heat Rate calculation and develop recommendationsThe ISO would like to have any changes in place for the Summer 2016 auction