December 10-11, 2019| Markets committee Hanhan

Transcript:December 10-11, 2019| Markets committee Hanhan:
December 10-11, 2019| Markets committee Hanhan Hammer, Chris Geissler 413.535.4049 | hhammer@iso-ne.com; 413.535.4367 | CGEIssler@iso-ne.com Day-Ahead Reserves - Alternative Settlement Design and its Fuel Security Implications ENERGY SECURITY IMPROVEMENTS: MARKET-BASED APPROACHES 2 Winter Energy Security Improvements WMPP ID: 125 Proposed Effective Date: June 1, 2024 In accordance with FERC’s July 2, 2018 order in EL18-182-000, the ISO must develop and file improvements to its market design to better address regional fuel security, and file by April 15, 2020 Key Projects – Energy-Security Improvements Discussion Paper 2019-04-09 and 2019-04-10 MC A00 ISO Discussion Paper on Energy Security Improvements – Version 1 3 Prior Energy-Security Improvement Presentations November ESI presentation September ESI presentation August ESI presentation July 30 ESI presentation July 8-10 ESI presentation June ESI presentation May ESI presentation April ESI presentation 4 Presentation Outline Section 1: Introduction Section 2: Design Comparison Section 3: Design Incentives - Examples Section 4: Comparative Cost Implications Section 1: Introduction 5 6 Today’s Focus Address a stakeholder question: Why does the ISO propose to settle DA reserve awards as options on RT energy, rather than as a forward sale of RT reserves? We’ll compare the two designs, and explain the reasons for the ISO’s proposed approach. We will use the terms: ‘DA energy options’ to describe the ISO’s proposed design ‘DA forward reserves’ to describe the alternative design, where deviations from DA reserve awards settle at the RT reserve price 7 Today’s Takeaways Unlike DA energy, the reserve market designs of the nine ISOs/RTOs are not standardized (presently) For the two designs compared today, neither is more complex for the ISO to implement The ISO’s proposed design (DA energy options) provides stronger incentives to arrange fuel, and better addresses the region’s fuel security concerns The alternative design (DA forward reserves) provides weaker incentives to arrange fuel, and does not fully address the region’s fuel security concerns Note: ‘Arranging fuel’ refers to the ability to produce energy when needed, not about ‘fuel’ as a stockpile Section 2: DA Energy Options versus DA forward reserves Design Comparison Basics 8 9 The crucial design difference is the DA reserve award settlement (‘close-out’) rule DA energy options (proposed design) - the underlying product is a call option on RT energy DA reserve awards are closed-out at the RT energy price less the option strike price, when positive DA forward reserves (alternative design) – the underlying product is a RT