DAM Design Issues - Participants & Obligations May 12, 2003 Market Evolution Program

DAM Design Issues - Participants & Obligations

May 12, 2003

Market Evolution Program

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Agenda

Working Group Administrative Items

Paying Loads HOEP for energy not consumed

Importers and Exporters

Decommitting Units Selected Day Ahead

Offer or Cost Based Start-up/Shut-down Costs

Drivers for Physical Resources To Show-up In Real-time

Self-Scheduling Resources

Physical Bilateral Contracts

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Purpose of These Slides

These slides are meant to support a discussion of the various financial strategies that might be employed by market participants in a Day Ahead Market and their potential implications for design requirements.

The specific design of the Day Ahead Market is an ongoing exercise between the IMO and its stakeholders. In no way are these slides meant to construe any design features of the Day Ahead Market.

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Paying Loads HOEP For Energy Not Consumed

Discussion Point

Loads have proposed that energy not consumed has same value as energy produced

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Importers And Exporters

Voluntary?

Day-ahead market

• financial commitment for energy bought/sold

Unit-commitment

• consider energy in unit-commitment?

Ramp Capacity/Transfer Capabilities

Inter-Jurisdictional Coordination

Transmission Rights

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Decommitting Units

Basis for decommitting resources in New York

NYISO can decommit a Day-Ahead committed resource that is no longer economic (e.g. during over-generation conditions in which all generators are at minimums and additional reductions are required, or when previously committed peaking resources are no longer needed to meet requirements). (Reference: NYISO Operating Procedures, Sect. 4.2.9)

Obligation of NYISO for decommitted resources

In the event a Day-Ahead committed resource is subsequently decommitted by the NYISO, that resource will be guaranteed full recovery of its start-up and minimum generation costs for its position in the Day-Ahead market.

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Offer or Cost Based Startup/Shutdown Costs

DAM WG preference leaning towards Offer Based

Market driven vs. Rule driven

Supports more open and liquid market

Cost based would introduce overhead associated with audit & compliance

NYISO (offer based) looks at historical performance -- may consider need for mitigation procedures

Shutdown costs still need to be evaluated in terms of:

• components of shutdown or fixed costs

• dispatchable loads held whole for costs

• multi-part bid components

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Drivers For DA Committed Resources in Real-time

Unit Commitment Day Ahead

Financial commitment

Real-time revenue opportunities

Promotes price certainty - resources not showing up drive prices up

Operational certainty

In NYISO -- ICAP semi-annual auction is based on real performance

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DAM Solution Impacts on Real-time

Changing offers after financial or unit commitment

Impact on real-time scheduling and pricing

Pricing methodology - 5 minute/HOEP

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Intermittent & Self Scheduling Generators

Participate like any other generator?

Offer strategy DAM vs. RT -- e.g., negative MMCP?

Loads perception -- SSG’s are the same as non-dispatchable loads?

Other Participants Offers/Bids Not Tied To Physical Resources

Voluntary?

Generators buying in DAM

Loads selling in DAM

Other ‘financial’ participants

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Aspects of bilateral contracts:

Terms and Terminology

Liquidity and the Choices to be Made

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Bilateral Contracts


Out-of-market Bilateral Contracts

•Recognized in today’s “Market Rules”

•Facilitates the removal of bilateral energy transactions from the IMO-administered real-time market

•Not tied to physical scheduling

•Does not have to match physical quantities

•No IMO rule-making jurisdiction

•Variety of over-the-counter products

Currently, bilateral contracts may or may not be revealed to the IMO - at the choice of the market participants involved. When they are they are referred to as “physical bilateral contracts”

Currently, bilateral contracts may or may not be revealed to the IMO - at the choice of the market participants involved. When they are they are referred to as “physical bilateral contracts”

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Total Bilateral Contract Terms

Contractual Terms Delivered to the IMO as

part of Physical Bilateral Contract Data

Out-of-market Contractual Terms

•Quantity

•Location

•Buying and Selling Market Participants

•Duration

•Assignment of hourly uplift components

•Price

•Financial Security

•Payment and Default

•Assignment of other settlement amounts

•Agency Agreements...etc.

When a physical bilateral contract is delivered to the IMO, it will have contractual terms that are seen by the IMO and additional terms that do not need to be revealed to the IMO.

When a physical bilateral contract is delivered to the IMO, it will have contractual terms that are seen by the IMO and additional terms that do not need to be revealed to the IMO.

Together, these terms constitute the entire contract

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Liquidity and the Choice to Be Made

•Whether or not the IMO would continue to support physical bilateral contracts after the opening of a Day Ahead Market is a vitally important decision to be made as part of the DAM high-level design.

•Continued support of physical bilateral contracts has an important impact on the DAM in many different areas including:

•Relative Liquidity between the DAM and the Real-time market;

•Flexibility in regards to risk/return strategies;

•Prudential Support;

•Gaming opportunities, etc.

•What FORM physical bilateral contracts might take is a set of more detailed decisions that would follow the initial, high-level design decision.

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Real-time MarketReal-time Market

Today... ...Tomorrow

Physical Bilateral

Contracts


CHOICE 1


Physical Bilateral

Contracts

CHOICE 2

DAMDAM DAMDAM


Physical Bilateral

Contracts

CHOICE 4

DAMDAM

Physical Bilateral

Contracts


CHOICE 3

DAMDAM

Physical Bilateral

Contracts

•At the highest level, there are 4 possible choices regarding the IMO’s recognition of PBC’s once the DAM is implemented

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CHOICE 1

DAMDAM

Choice 1 - Features:

•No PBC’s recognized by the IMO in either market

•Market Participants free to contract for their needs through out-of-market arrangements

Choice 1 - Possible Rationale:

•Everything that can be accomplished by PBC’s can also be done through out-of-market contracts

•possibly encourages the long-term development of a more robust over-the-counter market

Choice 1 - Possible Liquidity Bias:

•Neutral between both markets.

•Any bias between the two markets would be created by out-of-market contracting activity outside the scope of DAM design

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•A lot like today: Market Participants would continue to be able to submit physical bilateral contract data in the real-time energy market

•No PBC’s recognized by the IMO in the DAM market

•Possible modification to data submission timelines


•Do not disturb current business practices

•Would still offer market participants to fully insulate their energy transaction from prices in either IMO-administered market


•Likely towards the real-time market.

•Buying and Selling Market Participants (i.e. parties to a PBC) would likely refrain from taking a position in the DAM in order to ensure their real-time PBC’s are perfectly hedged against real-time prices


Physical Bilateral

Contracts

CHOICE 2

DAMDAM

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•No PBC’s recognized by the IMO in the R.T. market

•For most PBC uses, the ultimate financial outcome would be IDENTICAL to Choice 2.


•Bring more liquidity to the DAM

•Depending on contract features choice 3 doesn’t have to disturb the financial outcomes already present in the market today.

•More risk/return choices for market participants using the DAM


•Likely towards the DAM.

•Buying and Selling Market Participants (i.e. parties to a PBC) would be inclined to take a position in the DAM in order to ensure their PBC’s are perfectly hedged against DAM prices


CHOICE 3

DAMDAM

Physical Bilateral

Contracts

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•PBC’s recognized by the IMO in BOTH markets

•For most PBC uses, the ultimate financial outcome would be IDENTICAL to Choices 2 and 3.

•Possible modification to data submission timelines in order to avoid gaming opportunities


•More risk/return choices for market participants using the DAM or the real-time market


•Neutral or slightly biased towards the R.T. market because of existing PBC activity in the R.T. market


Physical Bilateral

Contracts

CHOICE 4

DAMDAM

Physical Bilateral

Contracts

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Summary

•In their most basic form, bilateral contracts provide a basic financial outcome for the buying and selling market participant: namely, the transaction of energy at an agreed price that is not necessarily subject to the market price (be it day-ahead or real-time).

•None of the 4 choices prevent this basic financial outcome.

•The choices do however, affect:

• the relative liquidity of the DAM and Real-time markets (in a voluntary context)

• where the liquidity of the bilateral contracts market may gravitate towards

• the complexity of the new DAM design

• the risk/return choices that market participants will have with respect to the DAM

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End of Slides

Documents

DAM Design Issues - Participants & Obligations May 12, 2003 Market Evolution Program