July 8, 2019| Markets committee

1. July 8, 2019| Markets committee Chris Geissler 413.535.4367 cgeissler@iso-ne.com Impact on entry/exit decisions and FCA outcomes Energy Security Improvements

2. ESI may incent resources to take actions that improve their ability to deliver incremental energy in real-time These actions are considered in the impact analysis E.g., sign a contract for gas, increase quantity of oil held in tank Such resources may sell the DA ancillary services introduced by ESI ESI may also impact entry/exit decisions of resources that contribute to energy security Not explicitly considered in the impact analysis Remainder of this presentation discusses the potential qualitative effects of this mechanism ESI may improve the region’s energy security through multiple mechanisms

3. ESI’s impact on entry/exit decisions and FCA outcomes

4. When participating in the FCA, a resource’s competitive bid will consider its expected net revenues from the energy and ancillary service markets As this net revenue increases, the ‘missing money’ that must be recovered via the FCM to continue operating decreases Holding all else equal, if a resource’s net revenue increases, it would be expected to submit a lower bid price in the FCA This lower price increases the likelihood that it acquires a CSO and continues operating Entry and exit decisions are informed by capacity awards

5. Sale of new day ahead ancillary services ESI provides a new revenue stream via sale of these products [+] Impacts on energy prices Day ahead co-optimization may lead ancillary service prices to cascade into energy price, thereby increasing the day ahead energy price paid to generators [+] If ESI incents resources to take actions to improve energy security, ESI could reduce likelihood/size of positive real-time price spikes that may otherwise occur because of limited available energy [-] Costs of taking actions to improve energy security Such costs are netted against incremental revenues [-] [+] represents an increase it net revenues, whereas [-] represents a decrease in net revenues ESI is likely to impact net revenues through several mechanisms

6. ESI’s heterogeneous impact on net revenues may re-order FCA supply curve Resources most likely to ‘move down’ supply curve because of ESI are those that expect largest increase in net revenues from the proposal Resources may therefore ‘move down’ the supply curve if they expect to: Sell the new ancillary service Sell day ahead energy when the corresponding price incorporates an adder for the new ancillary service Incur low costs to provide the new ancillary services This is demonstrated with a simple numerical example (next) ESI may shift resource mix towards those that improve energy security

7. Consider two peaking resources, R1 and R2, that submit nonrational bids to sell capacity in the FCA Compare FCA outcomes under two cases: business as usual (BAU) and ESI R1 Must recover more missing money than R2 under BAU to continue operation With ESI, makes fuel arrangements and earn positive net revenues from selling new ancillary service R2 With ESI, does not make fuel arrangements or sell new ancillary service because corresponding costs exceed incremental revenues Expects same net revenues under BAU and ESI Example 1: Setup

8. R1’s bid price does not include any net revenues from ESI, and it therefore must recover more missing money in FCA than R2 R1 is not awarded a CSO and chooses to exit, whereas R2 is awarded a CSO and continues operating FCA procures capacity from the resource that contributes less to energy security Example 1: FCM clearing under BAU

9. R2’s net revenues and bid price are unchanged from BAU R1’s bid price decreases to reflect additional net revenues it expects under ESI R1’s bid price is now lower than R2’s and it is awarded a CSO, whereas R2 is not ESI therefore leads the FCA to procure capacity from the resource that contributes more significantly to energy security Example 1: FCM clearing under ESI

10. Under BAU, R2 continues to operate while R1 exits the market Under ESI, R1 reduces its bid price to account for the expected net revenues from selling DA ancillary services, and this leads it to displace R2 This improves the region’s energy security, as R1 makes fuel arrangements under ESI that allow it to provide energy on call during stressed conditions, whereas R2 would not make such arrangements if it continued operating Example 1: Takeaways

11. In example 1, the introduction of ESI decreases the FCA clearing price relative to BAU This outcome is dependent on numerous factors, including: R1 is larger than R2 R2’s bid price does not change between BAU and ESI As a result, when R1 displaces R2 under ESI, the total quantity of capacity sold increases However, any number of reasonable changes to the example’s assumptions could lead the FCA price to increase under ESI Illustrate one such change (next) ESI’s impact on broader FCA outcomes, including prices, is harder to determine

12. R1’s bid price again does not include any net revenues from ESI As a result, R1 is not awarded a CSO and chooses to exit, whereas R2 is awarded a CSO and continues operating Observe: R1 is now assumed to be smaller than R2 Example 2: FCM clearing under BAU

13. R2’s bid price is unchanged from BAU R1’s bid price decreases to reflect additional net revenues under ESI R1’s bid price is now lower than R2’s, and it is awarded a CSOwhile R2 is not Because R2 is bigger than R1 and both resources are lumpy, reduces the total quantity of capacity sold Capacity clearing price increases Example 2: FCM clearing under ESI

14. In each example, R1 displaces R2 when ESI is introduced Generally, expect the introduction of ESI to lead to a resource mix that improves energy security However, the magnitude of this effect, and the impact of ESI on FCA prices depends on various factors, including: The extent to which resources that are marginal or ‘nearly marginal’ under BAU increase/decrease their FCA bid prices under ESI The degree to which resources that sell capacity under ESI provide more energy security than those they displace Resource lumpiness Generalizing the examples

15. The impact analysis does not directly consider how ESI would impact resource entry and exit decisions, or FCA outcomes Would require a model that estimates the expected missing money under BAU and ESI for all potential resources, build capacity supply curves, and determine entry/exit decisions Entry/exit decisions would determine resource mix used in production cost model for delivery period It is not feasible to build such a model before the 10/15 filing deadline Rather, each scenario considered will evaluate outcomes under BAU and ESI using a static set of resources If ESI impacts entry/exit decisions and leads to a set of resource that improve energy security relative to BAU, the impact analysis may understate its reliability benefits Interaction between impact analysis and FCA outcomes