Locational Forward Reserves Market

1. Locational Forward Reserves Market NEPOOL Markets Committee December 1, 2004 Marc D. Montalvo ISO-NE Markets Development

2. Outline • System and Zonal Requirements • Offer and Price Caps • LFRM and LICAP Price Netting

3. LFRM System and Zonal Requirements • The ISO will evaluate historic operating contingencies and related Operating Reserve requirements for the system and each Reserve Zone in order to determine the LFRM requirements for the system and each Zone. • The Requirements will be adjusted, as needed, to reflect any future expected system changes that may impact the historically-based requirements. • LFRM Requirements will be determined consistent with the system Operating Reserve criteria defined in NEPOOL Operating Procedure No. 8 and the local Operating Reserve criteria defined in NEPOOL Operating Procedure No. 19. • As with the current Forward Reserve Market, the ISO will provide to the Participants notice of the methodology and the modeling assumptions used to determine the proposed requirements at least 20 business days prior to a LFRM Auction.

4. Pool-Wide Forward Reserve Requirements • System Requirements Established according to OP8 • 10 Minute Non-Spinning Reserve -- 50% of first contingency loss • 30 Minute Operating Reserve -- 50% of second contingency loss • Rest-of-Pool Minimum Purchase Requirement

5. Rest-of-Pool Minimum Purchase Requirement • Per OP8, System operating reserves must be distributed across the NEPOOL Control Area. • Rest-of-Pool Minimum Purchase Requirement will establish a minimum amount of TMNSR to be supplied by resources outside of the import constrained zones.

6. Locational Reserve Requirements • Locational Reserve Requirements are established according to OP19. • Locational reserve requirements reflect the need for additional 30 minute Operating Reserves to provide 2nd contingency coverage in import constrained zones.

7. Historical Daily Zonal Reserve Requirement Calculation • The total amount of locational reserve (LRR) required to the second contingency (2nd gen or 2nd line) in each reserve zone is calculated as follows LRR = MAX(2ndGEN, 2ndLIN,0)   Where   2ndGEN = LOAD – GEN + CONTG – N-2GEN – 30ACT   2ndLIN = LOAD – GEN – N-2LIN – 30ACT

8. Zonal Requirement Calculation: Variable Definitions 1.Forecast daily peak load (LOAD); 2. Total minimum capacity commitments required to satisfy 1st contingency coverage (GEN); 3. Second generation contingency (CONTG); 4. Second generation contingency proxy limit (N-2GEN); 5. Second line contingency proxy limit (N-2LIN); 6. Non-generation based 30 minute actions, e.g., OP4 actions, load swap, TO authorized load shedding (30ACT).

9. Zonal Requirement Methodology: Approach • The goal is to establish locational reserve requirements that maintain or induce the optimal amount of investment in fast-start resources by zone. • The target requirements will be established in accordance with NPCC and NEPOOL reliability and operating criteria. • ISO will evaluate the cost of existing resources to determine the economic tradeoff point between using existing RMR resources to provide reserves and replacing these resources with new fast-start resources. • The the target requirement will be established as a function of the values corresponding to this economic tradeoff point.

10. Zonal Requirement Methodology: Data Analysis • The requirements will be established on a seasonal on-peak and off-peak basis. • The historical requirements will be split into summer and winter bins and ranked. • Absent an expected change in the configuration of the transmission system or disposition of major generating resources, the on-peak LFRM Target Requirement will be established relative to the percentile level corresponding to the economic tradeoff point for the zone and the Maximum Requirement to the 95th percentile for the season in question. • The off-peak LFRM requirement will be set to zero.

11. LFRM Requirements • System Requirement = (TMNSR + TMOR) x R • Rest-of-Pool Requirement = (TMNSR) x R • Zonal Reserve Requirement = %-ile [Local TMOR] x R • R is an adjustment for historical resource unavailability. The current value is 1.33. We propose a value of 1.2 for the first LFRM auction. • %-tile is established per the analysis described above.

12. Sample LFRM Requirements

13. LFRM Offer and Price Caps • All offers will be capped. • Maximum (Penalty) Prices will be established for each zone and product. • Caps will be set as a function of the cost of an incremental resource capable of providing the desired service in the location. For example, an aero-derivative CT. Caps will most likely range between $10/kW-month and $13/kW-month.

14. LFRM and LICAP Price Netting • A resource’s monthly LICAP payment will be netted against its revenues from the forward reserve market. • The goal is to compensate LFRM resources for the incremental value of the reserve capability that they provide. • For example, assume that the LFRM price is $10/kW-month and the LICAP price is $7.50/kW-month. The incremental value of the LFRM resource is $2.50/kW-month. Ignoring performance penalties, an LFRM resource would receive a net payment of $2.50/kW-month from the LFRM market.

15. Net Payment Formula • For a LFRM resource that is also a LICAP resource, the net payment received for the forward reserve service provided is Pmnt(R). • In the general case, Pmnt(R) = max[MP(R) – MP(CICAP), 0] – LFRM performance penalties • MP(R) is the applicable LFRM clearing price • MP(CICAP) is the monthly capacity clearing price • LFRM performance penalties are the failure to reserve or activate penalties

16. Questions