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Market Evolution Program

Regulatory Affairs Standing Committee Meeting

September 11, 2003

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Market Evolution Program agenda

Long Term Resource Adequacy

Day Ahead Market

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Long-Term Resource Adequacy Overview

Today’s Discussion:

Recap from May 14 RASC meeting

Description of Paths

Recommendations from Feasibility Assessment

Long-Term Resource Adequacy Working Group Update

Next Steps

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Long-Term Resource Adequacy

Recap from May 14 RASC meeting:

Long-Term Resource Adequacy Working Group Feasibility Assessment (June 2003)

• LTRA Objectives

• LTRA Evaluation Criteria

• Barriers to Investment

• LTRA Paths and Options

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Long-Term Resource Adequacy Paths

Path A: Complete the initial market design and structures without an explicit Resource Adequacy Requirement (RAR)• Rely on results of improved energy and ancillary service markets alone (e.g.

Pricing Team work, day-ahead market, multi-interval optimization, etc.)

Path B: Create Load Serving Entities (LSE) and assign a RAR to these entities• LSEs required to contract forward capacity requirements through bilateral

contracts (different to bilateral contracts for energy)• IMO could administer a resource adequacy auction market (similar to NYISO

and PJM) as a complementary element to LSE capacity contracts

Path C: Allow a central agency to procure adequate resources and allocate the resource acquisition costs to loads• IMO administers a resource adequacy auction market and secures forward

capacity on behalf of loads (NYISO, PJM and ISO NE are developing)• As a mechanism of last resort (different to above), a government agency (e.g.

OEFC) could contract forward capacity

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Recommendations from Feasibility Assessment

Fundamental recommendations relating to policy decisions:

1) Barriers to investment must be addressed to better ensure market entry to address long-term resource adequacy

2) The ‘market buyer’ must be defined (in particular, for small default electricity consumers)

3) Improvements to the current IMO-administered market design should be implemented, irrespective of the option to address long-term

resource adequacy

4) Given the decision of who the market ‘buyer’ is, the ability and magnitude of spot prices to clear under shortage or near-

shortage conditions must be addressed

5) The appropriate level of reliability must be decided

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Recommendations from Feasibility Assessment

Timeframe for making decisions:

6) An option to address long-term resource adequacy needs to be recommended no later than the end of this year

• In order to address potential inadequate future supply

• Recognizing sufficient lead-time required to develop new resources

• Provide potential investors with required signals

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LTRAWG Update

LTRAWG is in the final stages of completing a Strawman that builds on the recommendations and work from the Feasibility Assessment

LTRAWG has acknowledged that the 3 Paths may not be mutually exclusive

LTRAWG is examining what aspects of each Path could be workable and designed to work together within an integrated manner

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Market Evolution Program agenda

Long Term Resource Adequacy

Day Ahead Market• DAM Chronology• DAM Features and Benefits• DAM Issues• Next Steps

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Day Ahead Market - Reprise

January - commence work on Day Ahead Market (DAM) Feb 18 MAC - established Day Ahead Market Working Group (DAMWG)

• ~ 28 members from all industry sectors (generators, loads, transmitter, distributors, marketers, OEB and OEFC)

• meet every ~10 days - 22 meetings this year April - recommend development of a comprehensive DAM that performs

2 functions...• Market - allow participants to buy and sell energy and sell operating

reserve and lock-in prices and quantities day-ahead• Reliability - process to commit resources to meet forecast demand

• preferred by DAM WG members

• more closely aligned with DAMs in neighbouring markets May 14 - Regulatory Affairs Standing Committee update

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Day Ahead Market - Progress since May 14 RASC

late May - DAM hi-level design summary released (strawman r1)

June 11 MAC - MAC members provide consensus on recommendation to continue develop comprehensive DAM design

June and July - hi-level design concepts prepared and discussed

mid-August - DAM hi-level design released (strawman r2)• DAM WG devoted 2 full days to its review

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Market Evolution Program agenda

Long Term Resource Adequacy

Day Ahead Market• DAM Chronology• DAM Features and Benefits• DAM Issues• Next Steps

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Day Ahead Market - Features Participation: Participants with physical resources Importers and Exporters Virtual buyers and sellers - parties without physical resources

• ‘virtual’ offer (bid) to sell (buy) in the DAM also implies an obligation to buy (sell) back in the real-time market (RTM) at RTM prices

Three-part offers/bids: Separate fixed and variable components of energy offer/bid

Multi-pass dispatch and commitment engine: DAM schedules are financially binding and consistent with

transmission constraints Optimized solution...

• over 24-hour period (hourly granularity)

• amongst three-part offer/bid components

• energy and operating reserve markets solved simultaneously

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Day Ahead Market - Features Pricing• DAM WG conclusion - a day-ahead market under a uniform pricing regime

would be costly to implement and maintain, complex and confusing, and is not recommended.

• Strawman positions:

• Nodal pricing should be implemented in the DAM to reflect the actual cost of serving load at each location

• Suppliers and selected customers subjected to nodal prices

• selected customers include appropriately metered loads that opt to pay nodal price and dispatchable loads

• Remaining (most) loads would pay a ‘uniform’ price - weighted average of nodal prices

• A system of internal transmission rights will allow participants to hedge nodal price differences

• Note - requires that nodal pricing also be applied to the real-time market to maintain pricing consistency between markets

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Day Ahead Market - Benefits

DAM provides an improved point of convergence for forward products DAM prices are transparent and predictable

• DAM less volatile than RTM• greater liquidity in DAM• nodal pricing assigns value to congestion efficiently• DAM prices converge to RTM prices

DAM allows participants to reduce exposure to real-time volatility price certainty - participants have financial commitment for

quantities bought/sold in DAM operational certainty - DAM results allow participants to make

critical operating decisions in advance of real-time

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Day Ahead Market - Benefits

DAM improves reliability

Allows for direct participation of loads in market• additional opportunity for demand side responses - allows

price-sensitive loads to participate in market without being dispatchable on 5-minute basis

Improved commitment process for all resources (generators and loads)

Intertie transactions implemented and priced day-ahead• moves transactions to DAM from real-time market • reduces uncertainty associated with intertie trading• should reduce the number of failed intertie transactions and

IOG payments in real-time market

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Market Evolution Program agenda

Long Term Resource Adequacy

Day Ahead Market• DAM Chronology• DAM Features and Benefits• DAM Issues• Next Steps

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Day Ahead Market - Issues

For a DAM to be effective:

Pricing Issues must be addressed... Both the RTM and DAM prices need to represent the actual

costs of serving loads as reflected by competitive market prices.

Each of the mechanisms that currently distort market prices must be corrected.

Structural Issues must be addressed... Buy-side - ‘market-buyers’ required for default supply

customers Supply-side - market power issues need to be addressed

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Market Evolution Program agenda

Long Term Resource Adequacy

Day Ahead Market• DAM Chronology• DAM Features and Benefits• DAM Issues• Next Steps

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Day Ahead Market - Next Steps

In the coming months... Complete final elements of high-level design Complete significant parts of the detailed design Begin writing market rules

Expecting significant interaction with and contributions from stakeholders: DAM WG MAC - October 8 RASC, MOSC, ITSC ad hoc meetings with stakeholder groups

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-- END --

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Supplemental Slide 1 - ‘Market-Buyer’ proposals

A number of industry organizations and stakeholders have recently put forth proposals to increase load participation in the market, particularly for default supply customers...

EDA - Beyond Bill 210 Contemplates an aggregator that will facilitate a contract-based

approach to default supply All consumers, large or small, should have option of entering in to fixed

price contracts or taking spot price The security of long term contracts will provide incentives for investment

in new sources of supply

AMPCO - DAM Position Paper OEB should allow LDCs to procure SSS energy through the DAM Dispatchable load participation will be enhanced by providing similar

reciprocal treatment, as for generators, for commitment costs, and market payments for demand reduction

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Supplemental Slide 2 - ‘Market-Buyer’ proposals

Toronto Board of Trade - A Healthy Electricity Market SSS should introduce default suppliers, selected through a competitive

bidding process, to provide multi-year fixed price supply Change should be implemented immediately;

• in the short-term to reduce subsidy to finance price freeze,

• in the long-term will provide stable prices for transition to eliminating price-cap in 2006

Customer education at all levels is required to restore confidence in a market-based electricity system -- OEB should take leadership role

Enhances investment in new sources of supply