Demand Curve Shape. Candidate Curves and Performance. Adequacy & Demand Curve Work Group P R E P A R E D F O R P R E P A R E D B Y

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1 Demand Curve Shape Candidate Curves and Performance P R E P A R E D F O R Adequacy & Demand Curve Work Group P R E P A R E D B Y Kathleen Spees Judy Chang Johannes Pfeifenberger David Luke Oates Peter Cahill Elliott Metzler N o v e m b e r 2 9, D r a f t M a t e r i a l s f o r D i s c u s s i o n Copyright 2017 The Brattle Group, Inc.

2 Agenda Overview Candidate Curves Robustness Testing Takeaways and Next Steps 1 brattle.com

3 Overview This presentation responds to comments received during the 11/1 working group meeting. Based on this feedback we worked with AESO staff to develop three candidate curves for consideration by the working group We tested these curves for robustness based on the demand curve principles established by the working group, specifically: Performance in terms of reliability, price volatility, risk of excess capacity above the reliability requirement, and exposure to the exercise of market power Robustness to uncertainties in Net CONE AESO and Brattle view all of the three curves as workable for Alberta s market, but they reflect different tradeoffs in each dimension of performance We hope to receive remaining comments or issues on the candidate curves from the working group today These candidate curves will be revisited once working assumptions are further confirmed (reliability requirement, Net CONE) in brattle.com

4 Agenda Overview Candidate Curves Robustness Testing Takeaways and Next Steps 3 brattle.com

5 Candidate Curves Performance of Three Candidate Curves The work group made several recommendations including moving toward a steeper curve compared to preliminary analyses Brattle and AESO staff developed three candidate curves in line with work group input for consideration All curves meet the reliability standard, but have other performance tradeoffs Minimum Acceptable: 800 MWh/year EUE Candidate Curve Results Target: 100 MWh/year EUE Cap at 1.9 Net CONE Cap at 1.75 Net CONE Cap at 1.6 Net CONE Cap at 1.5 Net CONE (Prior Base) % of Reliability Requirement Reserve Margin (% UCAP) UCAP MW ICAP MW 4 brattle.com

6 Candidate Curves Summary of Performance Tradeoffs The AESO and Brattle view these three candidate curves as being in the workable range of well-performing curves, but selecting one requires balancing tradeoffs Steeper Curves Higher cap, lower foot quantity 1.9 Net CONE Price Cap Recommended Range 1.6 Net CONE Price Cap Flatter Curves Lower cap, higher foot quantity Advantages: More robust to a wide range of market conditions Less reliability risk from underestimated Net CONE Less risk of excess capacity above the reliability requirement Advantages: Lower price volatility Less exposure to exercise of market power & need for strict mitigation 5 brattle.com

7 Candidate Curves Recommended Range of Parameters Minimum Acceptable: 800 MWh/year EUE Price Cap: Higher price cap increases price volatility, but decreases excess capacity above the reliability requirement Minimum on Cap: Reduces susceptibility to capacity below the reliability requirement Convexity: More convexity (prior curves) required a wider foot to maintain reliability. A steeper and linear curve allows for bringing in the foot Target: 100 MWh/year EUE Cap at 1.9 Net CONE Cap at 1.75 Net CONE Cap at 1.6 Net CONE Cap at 1.5 Net CONE (Prior Base) % of Reliability Requirement Reserve Margin (% UCAP) UCAP MW ICAP MW Foot Position: Wider foot reduces price volatility, but increases risk of excess capacity above the reliability requirement in long market conditions Price Cap Min Price Cap 1.5 Net CONE 0 Gross CONE 1.07 Foot Position Reliability Requirement Convexity Linear Range of Parameters Considered Candidate Curves 2.0 Net CONE 1.0 Gross CONE 1.88 Reliability Requirement More Convexity (Prior Curves) 6 brattle.com

8 Agenda Overview Candidate Curves Robustness Testing Takeaways and Next Steps 7 brattle.com

9 Robustness Testing Performance with High and Low Net CONE All curves continue to perform well with high Net CONE, but volatility increases most with a higher price cap High Net CONE Sensitivity Curves with a minimum cap prevent collapse with Low CONE, mitigating reliability erosion Low Net CONE Sensitivity Excess above reliability requirement reduced with lower minimum cap & steeper curves 8 brattle.com

10 Robustness Testing Performance with Error in Net CONE Estimate Steeper curves mitigate excess above reliability requirement if Net CONE is overestimated Administrative Net CONE Overestimated by 20% Minimum on price cap mitigates potential for poor reliability w/o significant excess capacity risk Administrative Net CONE Underestimated by 20% Sensitivity 9 brattle.com

11 Robustness Testing Exposure to Exercise of Market Power Flatter curves with lower price caps have the advantage of mitigating the incentive and ability to exercise market power Alberta s relatively small and concentrated supply stack suggests a flatter curve may be preferable, but this will be taken up more comprehensively in the market mechanics group Minimum Acceptable: 800 MWh/year EUE High Price Region Low Price Region Target: 100 MWh/year EUE Cap at 1.9 Net CONE Cap at 1.75 Net CONE Cap at 1.6 Net CONE % of Reliability Requirement Reserve Margin (% UCAP) UCAP MW ICAP MW Price Impact of Withholding 350 MW Before Accounting for the Mitigating Effect of Supply-Side Competition Curve High-Price Region Low-Price Region Cap at 1.6 Net CONE $70/MW-day $46/MW-day Cap at 1.75 Net CONE $92/MW-day $62/MW-day Cap at 1.9 Net CONE $116/MW-day $77/MW-day Note: Price impacts shown here are based solely on the demand curve and therefore represent the maximum impacts. The shape of the supply curve could mitigate these impacts. 10 brattle.com

12 Agenda Overview Candidate Curves Robustness Testing Takeaways and Next Steps 11 brattle.com

13 Takeaways from Analysis to Date The demand curve tests and stakeholder discussions conducted since October 10 th have led to several takeaways about the drivers of capacity market performance: Performance Driver Demand Curve Steepness Price Cap Supply Curve Takeaway Steeper curves are more robust to a wide range of market conditions, have less reliability risk from underestimated Net CONE, and less risk of excess capacity above the reliability requirement Flatter curves have lower price volatility and less exposure to exercise of market power & need for strict mitigation A curve based on the marginal reliability value is too steep to achieve reliability Higher price caps can allow for steeper curves (with associated pros and cons) With the recommended range of curves, reliability performance is maintained in instances of high Net CONE or overestimation of administrative Net CONE Without a minimum on the price cap, reliability will erode in instances of low Net CONE or underestimation of administrative Net CONE Curves with a minimum price cap (as a % of Gross CONE) are resilient to reliability erosion in cases of low Net CONE or underestimation of administrative Net CONE Larger shock sizes require a wider demand curve in order to maintain reliability Performance incentive regimes and supply curve shapes more generally have little impact on the performance of demand curves (even though they can have a significant impact on the supply curve) 12 brattle.com

14 Next Steps Timing SAM Sept-Dec 2017 Jan-Mar 2018 Apr-Jun 2018 Scope Oct 4 Web/Phone Meeting Gather feedback from workgroup on scope Oct 10 In-Person Meeting: Discuss preliminary analysis of potential demand curve shapes Review Alberta-specific considerations affecting price volatility and desirable curve width/parameters Expand on and complement introduction of demand curve concepts/principles by providing information on modeling approach, impacts of key parameters and principles, preliminary suggestions about the workable range of demand curve parameters Nov 1 Meeting: Discuss materials prepared in response to workgroup questions, requested sensitivity analysis, and requested demand curve alternatives Nov 29 Meeting (Today): Discuss candidate curves and gather feedback Outline outstanding uncertainties/questions to be reviewed; gather stakeholder input on necessary refinements to candidate curves Make final adjustments to demand curve based on final design decisions and defined reliability requirement Provide final presentation to stakeholders on selected demand curve and recommendations to be included in report Recommendations Report/Testimony: Prepare final recommendations report and deliver to AESO. Document the defined objectives, principles, workgroup process, and dissention. Include final recommended Demand Curve 13 brattle.com

15 Contact Information KATHLEEN SPEES Principal Boston, MA JUDY CHANG Principal and Director Boston, MA DAVID LUKE OATES Associate Boston, MA JOHANNES PFEIFENBERGER Principal Boston, MA The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc. 14 brattle.com

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