FCM 101: 06 - Offer Review Trigger Price

OCTOBER 20–23, 2014|NORTHAMPTON, MA
Offer Review Trigger Price
Forward Capacity Market (FCM 101)
Anthony Leroux
ASSOCIATE ANALYST
MARKET MONITORING
Goal
The goal of this training is to provide information explaining
the offer review trigger price (ORTP) and new resource offer
floor price.
The focus is on providing sufficient documentation for
challenging the ORTP assigned to the new capacity resource.
All project-specific questions should be directed to and discussed
separately with the Internal Market Monitor (IMM)
email: [email protected]
2
Objectives
At the completion of this training, you will be able to:
•
Define the concept of offer review trigger prices (ORTPs)
•
Describe the implementation of ORTPs and new resource
offer floor price
•
Explain data submission requirements
•
Describe the IMM Cost Review process
•
Describe participation of new supply offers in the auction
3
Changes for FCA 9
1. Proposed pay-for-performance (PFP) changes
• Project sponsors will consider the financial impact of PFP on their
specific resources
• New capacity resources expecting to earn a high percentage of
PFP revenues will, all other things being equal, be able to enter
the capacity market at lower capacity prices, and vice versa
• Key assumptions regarding estimates of PFP revenues/costs must
be provided, including expected number of scarcity hours, the
capacity balancing ratio and the expected performance of the
resource during scarcity hours in each commitment period
2. Implementation of a demand curve with revised starting price
3. Imports
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Topics
• Why mitigation in the FCM?
• Offer review trigger price/offer floor prices
• Challenging the assigned ORTP
• Net CONE & IMM Cost Workbook
• IMM Offer Review Process
• Resource QDN & communication
• Auction participation
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WHY MITIGATION IN THE FCM?
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FERC’s View on Capacity Market Mitigation
“Constraining the ability of sellers and buyers with the
incentive and ability to exercise market power is critical to
ensuring that centralized capacity markets achieve resource
adequacy at just and reasonable rates.”
(Centralized Capacity Market Design Elements, Commission Staff Report, AD13-7-000,
August 23, 2013)
FERC
FEDERAL ENERGY
REGULATORY COMMISSION
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Why is Mitigation Necessary in the
Capacity Market?
• IMM’s responsibility according to the Tariff
– Review bids from existing resources
– Review offers from new resources
– Report on auction results and capacity market performance, such
as is the FCM sending appropriate investment signals
• Two types of market power mitigation in the capacity market
1. Supply-side market power mitigation for existing resources
2. Buyer-side market power mitigation for new resources
• Objective is to strike a reasonable balance between underand over-mitigation of resources while ensuring the market
is operating competitively
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Considerations for Existing Resources
Seller-Side Market Power Mitigation
• Address concerns that sellers of capacity may have the ability and incentive
to increase prices above competitive levels through economic withholding
• Restrict resources from leaving the market at a cost higher than
their going forward cost
• IMM only reviews delist bids above a certain threshold
• Rule presumes that delist bids below this threshold are not attempts
to raise the clearing price through economic withholding
• Current rules presumes that all resources have the ability to
exercise market power
• Under proposed ISO pay-for-performance (PFP) rules only resources
belonging to a pivotal supplier are subject to mitigation
– Participant is pivotal when its existing capacity resources are required
to meet the demand for capacity (more on this tomorrow)
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Considerations for New Resources
Buyer-Side Market Power Mitigation
• Addresses concerns that buyers of capacity may have the ability and
incentive to suppress prices below competitive levels through subsidizing
new entry
• Prevents new resources from entering the market at prices below
their costs
• Minimum offer price review (MOPR) construct establishes technologyspecific benchmark prices known as offer review trigger prices (ORTP)
• Only offers below the relevant benchmark price are reviewed by the IMM
• Rule presumes that new supply offers above the threshold are not attempts
to suppress the clearing price
• After a new resource clears an auction it is no longer subject to
buyer-side mitigation
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OFFER REVIEW TRIGGER PRICE/
OFFER FLOOR PRICES
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ORTP and New Resource Offer Floor Price
What are ORTPs?
•
•
Generic benchmark prices by technology
type representing low end estimate of
net cost of new entry (net CONE)
(i.e., the estimated break-even revenue
contribution required from the
capacity market)
If a project sponsor wishes to submit an
offer that is lower than the ORTP:
–
–
–
$$
Assigned ORTP
is the default
offer floor
price for the
project
Requested resource offer floor price
must be submitted by the new
qualification deadline
Sufficient supporting documentation
justifying the requested lower price
must be provided
IMM will evaluate the request/information
and issue its determination on price
MR 1. Section III.A.21.1
default offer
floor price
$
If the auction price
falls below the ORTP,
the project is removed
from the auction
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ORTP and New Resource Offer Floor Price
What is a new resource offer
floor price?
• A project-specific floor price –
the lowest price at which a new
capacity resource can remain in
the auction
$$
New Resource
Offer Floor
Price
• If a project sponsor does not
request a resource offer floor
price below the relevant ORTP,
then the resource offer floor price
= ORTP for the technology type
MR 1. Section III.A.21.2
project-specific
floor price
$
If the auction price
falls below the new
resource offer
floor price, the
project is removed
from the auction
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Proposed ORTPs and CONE Values for FCA9
Home > Markets and Operations > Markets Data and Information > Forward Capacity Market
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ORTPs for FCA 9
Generation Resources
Technology Type
Offer Review Trigger Price ($/kW-month)
Combustion turbine
$13.42
Combined cycle gas turbine
$8.87
On-shore wind
$10.32
Other Resources
All other technology types**
Forward Capacity Auction starting price
** Starting Price = $17.728/kW- month in Demand Curve Filing ER14-1639-000
MR 1. Section III.A.21.1.1
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ORTPs for FCA 9
Demand Resources – Commercial and Industrial
Technology Type
Offer Review Trigger Price ($/kW-month)
Load management and/or previously
installed distributed generation
New distributed generation
$1.15
based on generation technology type
Energy efficiency
$0.00
Demand Resources – Residential
Technology Type
Offer Review Trigger Price ($/kW-month)
Load Management
$7.09
Previously installed distributed generation
$1.15
New distributed generation
based on generation technology type
Energy efficiency
$0.00
MR 1. Section III.A.21.1.1
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ORTPs for FCA9
• New imports
– New import capacity ORTP shall be $0.00/kW-month, unless
– Backed by a new external resource and associated with an investment
in transmission increasing the import capacity to New England ––
then ORTP equals technology type
• Resource composed of assets having different technology types
– ORTP for the resource equals weighted average of individual
asset ORTPs
– Project sponsor must provide sufficient documentation for IMM
to determine weighted average ORTP
Example:
ORTP for a resource comprised of 90% load management
and 10% new combustion turbine distributed generation
= (0.90 x $1.145) + (0.10 x $13.424) = $2.373/kW-month
MR 1. Section III.A.21.1.1
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CHALLENGING THE ASSIGNED ORTP
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Challenging the Assigned ORTP Value
Requirements
Project sponsors requesting to submit offers in the FCA
below the applicable ORTP must include in the new capacity
qualification package:
• Lowest price at which the resource requests to offer capacity
(the resource offer floor price)
• Completed IMM Cost Workbook or own internal capital
budgeting model
• Other relevant supporting documentation
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Submitting a Resource Offer Floor Price
FCTS
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Submitting a Resource Offer Floor Price
Enter Resource Offer Floor Price
FCTS
Upload Cost Justification
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Successful Resource Offer
Floor Price Request
FCTS
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NET CONE & IMM COST WORKBOOK
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Net CONE
• Revenue contribution required from the capacity market
for a project to break-even
• IMM price estimate, ORTP and FCA offer floor price are
used interchangeably with net CONE
• Net CONE = PV (Long run avg. cost - Expected Net Revenues)
– Evaluate all relevant financial estimates, including pro-forma financials
(net revenues, cash flows, etc.)
– Project capital cost projections (capital structure, cost of debt, etc.)
MR 1. Section III.A.21.2
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Net CONE
MR 1. Section III.A.21.1.2
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IMM User Guide and Cost Workbook
Home > Markets and Operations > Markets Data and Information > Forward Capacity Market
26
General Guidelines
Guidelines for completing the
IMM Cost Workbook:
• Relevant inputs are assumptions
used to support the decision to
invest in or to construct the project
• Assumptions should be supported
by internal financial and technical
reports used in the evaluation of
the project
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Requirement Comparison: Generation versus Demand Response
Project Assumptions
Time Horizon
Project Overview
Investment Characteristics
Revenues
Cost
Treatment of Multiple
Resource types
Generation
Demand Response
• Any underlying assumptions
• Any underlying assumptions
• 20 year (typical)
• Measure life of the resource
•
•
•
•
•
•
•
•
•
•
Generation source
Generator capacity
Capacity factor
Heat rate
Location
• Project investment
• Financial Assumptions, including tax rates
• Depreciation Schedule
• Energy Revenues
• Ancillary Services
• Other credits, as applicable to project
• Fuel
• Variable Operating & Maintenance
• Fixed Costs
N/A
Resource type
Capacity
Capacity factor over life
Heat rate, if applicable
Location
• Project investment
• Financial Assumptions, including tax rates
• Depreciation Schedule
• Non-capacity payments from ISO administered
markets
• Avoided Energy Cost
• Ancillary Services
• Other credits, as applicable to project
• Fuel, if applicable to project resource
• Variable Operating & Maintenance
• Incentive payments
• Equipment cost
• Marketing, selling & administrative to acquire
resource
If the resource is comprised of multiple technology
types, the offer floor price will be based on a
weighted average of the technologies’ floor prices
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IMM Cost Workbook
Structure
Worksheet
Purpose
Instructions
Guide to model development
Project Inputs
Project-specific data
Project Assumptions
Brief project explanations and reference
to supporting files
Tables
Do not edit: for model functionality only
DCF
Discounted cash flow analysis
Input
Worksheets
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Capital Budgeting Model
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Project Assumptions Worksheet
Enter detail on key input
assumptions and include
references to all supporting
documents/files included in
the qualification package.
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Project Inputs Worksheet
Example including $ values provided for illustrative purposes
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Project Inputs Worksheet, continued
Example including $ values provided for illustrative purposes
Back
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Project Inputs Worksheet, continued
Example including $ values provided for illustrative purposes
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Discounted Cash Flow Worksheet (DCF)
Calculates the required Capacity
Revenue that results in a NPV of zero
based in data in the Inputs Worksheet
NPV = 0
Example including $ values provided for illustrative purposes
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Project Inputs Worksheet – Final Result
This is the
requested resource
offer floor price
Example including $ values provided for illustrative purposes
Inflation
Rate
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Supporting Documentation Examples
•
Internal investment business case documentation, feasibility studies,
screening tools, etc.
•
Market revenues and costs: sources and assumptions behind power
and commodity price forecasts
•
Capacity Factor: wind studies, details of market simulation models
•
Capital costs: breakdown of the estimated project’s capital cost by
components (e.g., turbine, SCR, gas compressor, construction, engineering
and procurement, development and permitting, etc.)
•
Financing costs: cost of debt and equity assumptions for the project
(e.g., internal WACC, hurdle rate used in the investment decision process)
•
Participants are required to identify all out-of-market revenues* for the
project. An example of this is solar renewable energy credits (RECs). RECs are
state-specific and are not able to be used to satisfy compliance requirements
throughout the ISO New England Control Area.
* Out-of-Market Revenues are defined in MR 1. Section III.A.21.2 (b)(i))
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IMM OFFER REVIEW PROCESS
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Perspective
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Overview of Timeline for FCA10
Mid June to early September
May 2015
IMM posts latest
user guide and
cost workbook on
ISO website
Consultation with participants –
email/meetings. Focus will be on
clarifying questions.
6/16/15 New Capacity Qualification Deadline
Submission of proposed resource offer floor
price with all supporting documentation
*Open invitation for participant to meet
with IMM staff to present and discuss
proposed offer floor price submission
from mid-June to mid-July
April
May
June
July
Mid-June to
mid-July
IMM initial
screening of
submissions
August
By mid-July
Clarifying
questions
issued to
participants
* To arrange meeting, please email [email protected]
September
9/25/2015
IMM issues qualification
determination notifications
(QDN) for new supply offers
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IMM Evaluation Process
• Resource-specific inputs entered into the Capital Budgeting Model
(a.k.a., IMM cost workbook) that was used to determine ORTP
– Determines the IMM’s capacity price estimate for the project
– Proposed offer floor price is compared to IMM capacity price estimate
• Is the proposed resource offer floor price consistent with the IMM
capacity price estimate?
– Yes - Accepted: Proposed resource offer floor price goes to auction
– No - Denied: Offer floor price is set to the IMM capacity price estimate
– No - Denied: If after consultation, the project sponsor does not provide
sufficient documentation and information for IMM to complete its
analysis, the resource offer floor price will be set equal to the
relevant ORTP
MR 1. Section III.A.21.2
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RESOURCE QDN & COMMUNICATION
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Obtaining the QDN from the IMM
FCTS
Qualification determination notification (QDN) can be found via
the FCTS, in the tab labeled Floor Offer Price
– Project sponsors will be notified of their OFFER DETERMINATION
status (Accepted/Denied).
– Active Offer Floor Price and the source
NOTE: This is separate process from the Proposal Qualification
Determination Notification found on the “Summary” tab for the
project from the System Planning group.
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Obtaining the IMM’s QDN
FCTS
IMM QDN
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Project Sponsor Options Post QDN
• If the market participant does not agree with the IMM
determined resource offer floor price:
– Market participant must file with the Commission within 15 days
of the ISO’s submission of the informational filing (filing date for
FCA 9 is 11/4/14).
• FERC actions:
– If within 75-days after the ISO submission of the informational filing
the Commission issues an order modifying one or more of the
ISO’s determinations, the FCA will be conducted using the
Commission ordered modifications.
MR 1. Section III.13.8.1
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AUCTION PARTICIPATION
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Ninth FCA: Auction Price Points with Regard to New Qualification
Round 1
Round 2
Round 3
Round 4
Round 5
Round 6
Start of Round = $17.728 - Starting point of the auction
End of Round = $9.000
Start of Round = $9.000
End of Round = $7.500
Start of Round = $7.500
End of Round = $5.500
Start of Round = $5.500
End of Round = $3.750
Resources in the
auction will have:
Resource Specific
Offer Floor Price.
Specific price
determines the
point at which
the resource is
removed from
the auction.
Start of Round = $3.750
End of Round = $1.000
Start of Round = $1.000
End of Round = $0.000 – Floor Price
MR 1 Section III.13.1.1.2.2.3 & Section III.A.21
NOTE: Round $ are for illustrative
purposes and do not represent actual $
or number of auction rounds
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Summary of New Supply Offers and their
Participation in the Auction
Actions affecting participation in the auction
In order for a new supply offer to remain in the auction, the
participant MUST submit an offer in EVERY round of the auction
• If a resource fails to submit an offer in a round of the auction, the new
resource supply offer is removed from the auction
• Once the auction reaches the final resource specific offer floor price, the
resource is removed from the auction
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IMM FCM Contact Details
E-mail Market Monitoring FCA Participant Communications:
[email protected]
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