To:                  ISO New England
From:             NESCOE
Date:               April 25, 2019
Subject:          Impact Analysis for Long-Term Energy Inventory Security Proposal

At the April 9, 2019 Markets Committee meeting, ISO-NE asked for input on the impact analysis it plans to undertake on its Long-term Energy Security Proposal.  ISO-NE stated that it plans to provide quantitative analysis focused on its latest design criteria including the three new ancillary service products.[1] ISO-NE asked for scenarios states would like ISO-NE to run in its analysis model.  This memo provides an updated list and additional details regarding those scenarios from our December 3, 2018 memo.[2]

Please recall that a year ago, NESCOE indicated that we “need more rigorous analysis of uncertainties and their likelihood to understand fully the risk reflected in the scenarios in order to develop cost-effective mitigation strategies and to prioritize potential approaches.”[3]  We understand ISO-NE’s concerns about the level and indicative quality of available data to inform credible analyses of the probability of future unfavorable outcomes.  However, it remains the important for ISO-NE to construct analysis that, to the maximum extent possible, indicates quantitatively what benefits proposed solutions will provide in terms of improved levels of service.

To that end, the analysis should be conducted, and the results presented, in a manner that enables states and stakeholders to evaluate to the extent possible the energy security contributions of ISO-NE’s proposed electricity market reforms.  For example, presenting market impacts by resource type, as granularly as possible under the information policy (e.g., by fuel type, then by vintage or other proxy for heat rate, etc.) will help estimate financial incentives for mitigating energy security risk on various segments of the region’s resource portfolio.  While NESCOE continues to be focused on the proposal’s total costs, whether market participants’ incentives will align with pursuing actual measures that provide regional energy security at the lowest cost while not compromising environmental quality is an important part of the overall design consideration.

NESCOE appreciates that ISO-NE will “analyze the expected performance of the energy market (including operating reserves) and will use this information to provide a qualitative analysis of the effects on the Forward Capacity Market (FCM) and the Forward Reserve Market (FRM).”[4]  Lastly, the impact analysis should provide as much qualitative information as possible, including whether and to what extent other markets, such as the FRM, will be affected and to what extent.

The revised list of state-requested scenarios is shown in Table 1 below. Table 2 provides proposed assumption descriptions for each of the components in the scenario details.

Table 1 is intended to continue discussion with ISO-NE and market participants on how best to analyze the proposed market reforms.  At this time, the scenarios described below relate primarily to ISO-NE’s long-term proposals to change the energy markets by: (1) transitioning to a multi-day ahead energy and reserves market (“M-DAM”) and (2) establishing new ancillary services that will also be included and co-optimized with energy in the M-DAM: (a) replacement energy reserves (“RER”), (b) generation contingency reserves (“GCR”), and (c) and energy imbalance reserves (“EIR”).  These are referred to as “market reforms” in Table 1.

In addition to scenarios designed to examine the performance of the proposed market-based solution over a range of potential future conditions, the table also includes scenarios intended to test the performance of the proposed market design: during extraordinary fuel price conditions, with smaller incentives for energy inventory security (e.g., half the quantity of RER and EIR), partial implementation of the proposed reforms (No GCR), sensitivity to load forecast error, the level and timing of participation in the M-DAM, and the level of M-DAM reserve strike prices.

Table 1:  Revised List of State Scenarios for Impact Analysis

Table 2 below provides proposed assumption descriptions for each of the components in the scenario details column above. NESCOE appreciates ISO-NE’s assistance with further refining the proposed assumption descriptions into an acceptable format for the impact analysis model.

Table 2:  Proposed Assumption Descriptions