Copyright © 2019 The Brattle Group, Inc.

Regional Energy Markets and FlexibilityPREPARED FOR

National Hydropower Association’s Waterpower Week in Washington

PREPARED BY

Judy ChangJohannes Pfeifenberger

April 1, 2019

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Content

How are the ISOs/RTOs are responding to grid flexibility and resiliency in integrating renewables?

What are some of the proposed market design changes that are being considered in the regional energy markets?

– Transformative changes of the electricity industry

– Shift toward more clean energy in wholesale markets

– Increasing need for and value of flexibility and storage

– Shifting revenue mix in evolving wholesale power markets

– Value of hydropower and storage

– Main take-aways

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Transformative Changes of the Electricity Industry

– Declining costs of solar and wind resources will increasingly dominate the power grid with low-marginal-cost generation

– Low natural gas prices place significant downward pressure on coal and nuclear plants

– Reduced growth in traditional electricity consumption, even in the age of “internet of things”

– Increased customer preferences for conservation and clean energy– Restrictions on environmental impact related to air emissions, water usage,

waste disposal, and land use for all power plants – Technological advances that allow customers and electric utilities to better

monitor and control electricity usage– Increasing electrification of transportation and heating

These are significant changes that utilities, grid operators, generators, and regulators have to manage

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Accelerated Shifts Toward Clean Energy

Example from the Midwest: recently announced clean energy goals suggest a shift towards renewable supply, beyond state-level requirements

Utility Goal or AnnouncementNIPSCO Eliminate coal-fired generation within 10 years

AmerenMissouri

Reduce carbon emissions 80% by 2050, and increaseinvestments in wind (700 megawatts by 2020) and solar capacity (50 MW by 2025)

Duke Energy Reduce carbon emissions 40% by 2030 by investing in cleaner electricity generation

AEPCut carbon emissions 80% from 2000 levels by 2050through investments in energy efficiency, renewable resources, and other cleaner energy investments.

Xcel Energy Carbon free by 2050

First Energy Reduce carbon emissions at least 90% from 2005 levels by 2045

WEC Reduce carbon emissions by 40% by 2030 and 80% by 2050

MidAmerican Energy Reach 100% renewables in the early 2020s

ND: 10%x 2015

MN:26.5% x 2025 (IOUs)

31.5% x 2020 (Xcel)

MI: 15%x 2021

WI: 10% 2015

MO:15%x 2021

IA: 105 MW

IN: 10% x 2025

IL: 25%x 2026

OH: 12.5%x 2026

SD: 10%x 2015

MISO Zones and State Renewable Portfolio Standards

Recently-Announced Utility Clean Energy Goals

Sources: DSIRE, Renewable Portfolio Standards; MISO using Velocity Suite, ABB Inc.

Sources: Company Websites; NIPSCO, Ameren, Duke, AEP, Excel, First Energy, WEC, MidAmerican

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Changes in Energy Market Prices

– Energy prices fluctuate between greater price ranges as supply mix evolves• Variability of prices

increase• Net load volatility

increases: higher prices during net load peak, lower prices or negative during periods of high renewables generation

• Flexible resources can effectively respond to the signals

• Energy price fluctuations would likely be higher taking into account transmission constraints

Illustrative Day-ahead Price Duration Curves ($/MWh)

Future YearNear Year

More negative priced hours in the future

Higher prices during most

hours

Greater price fluctuation

Source: The Brattle Group.

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Energy Markets with Large Clean,Low-Marginal-Cost Generation

Ontario experience: very low or negative prices with a 90% clean and low-marginal-cost fleet; only 1/3 of all hours priced above $15/MWh!

Energy prices have fallen 79% with low gas prices and decarbonization

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1 2

Need for Clean-Energy Products in Regional Markets

Out-of-market

payments could

dominate the cost of power

Future 2: Competitive clean-energy markets to harness competition and innovation

For wholesale markets to stay relevant, clean energy product markets are the “missing link” to align with customers and policy makers’ preferences.

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Impact of Resource Mix Change on Flexibility Needs

– The growing level of renewables increases net load variability, uncertainty, and ramping, requiring more flexibility from the system

– The increase in renewables pushes down minimum net load levels, which puts pressure on dispatchablegenerators to operate at lower levels or go offline

Example of Load Net of Wind and Solar Output Average of All Hours in July (MW)

2

1

2

Wind and solar day-ahead forecast error (uncertainty) exceed load forecast error in percentage terms11

Day-ahead and Real-Time Load, Wind, and SolarIllustrative three-day period (% of max day-ahead)2

1

Net load peak moves from

5:30pm to 8pm

Illustrative Example shows:

Source: The Brattle Group.

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Regional Markets’ Efforts to Enhance Flexibility

Increased regulation

requirements; exploring new

ramping product

Price cap at $9,000/MWh, scarcity pricing, reforming AS products, improved storage integration

5-min intertie scheduling, unbundled AS, new

ramping product, scarcity pricing, footprint

expansion of energy imbalance market (EIM)

10-minute ramping product, scarcity

pricing, dispatchableintermittent

resources

Capacity performance incentives, AS co-

optimization, scarcity pricing, DR integration

Updated scarcity pricing to align with neighboring systems, coordinated

intertie scheduling with ISO-NE and PJM

Capacity performance incentives, scarcity pricing,

additional “replacement reserve” AS product, DR

integration

Stakeholder initiative to explore flexibility

enhancements in E&AS and capacity markets (work stream pursued

alongside capacity market implementation)

All North American markets are implementing broad flexibility enhancements, a subset of which is reported here.

Market Renewal; enhancing operational

flexibility;

brattle.com | 9Sources: Wang et al. (2016), “Ramp Capability Modeling in MISO Dispatch and Pricing,” FERC Technical Conference on Increasing Real-Time and Day-Ahead Market Efficiency through Improved Software, June 2016.

An example of MISO’s ramp productNet Load

Procurement of ramp-up at 8:10… Time

…Ramp Up: Ensures ability to meet expected net load (plus an unexpectedramp uncertainty margin) at 8:20(No ramp-down is needed in this interval)

Forecasted Net Load

Net Load Uncertainty

Ramping capability procured in the current interval ensures the ability to meet expected plus unexpected ramping needs in future intervals. MISO and CAISO have both introduced a ramp product. SPP is in the process of proposing one.

• Ramp up: Holds back sufficient “headroom” to meet load in upcoming intervals & avoid scarcity events

• Ramp down: Mitigates the potential for minimum generation events (zero quantity procured in this example)

Illustrative Example of Ramping Needs with High Renewables

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MISO has implemented several flexibility enhancementsto help absorb wind intermittency, including:

MISO Ancillary Service Products

Sources: MISO (2014), “Level 200, Energy and Operating Reserve Markets”, April 2014.MISO (2016), “ Ramp Capability Product Development”, December 2016.MISO (2017), “ Improved Contingency Reserve Demand Curve that reflects VOLL”, June 2017.MISO (2017), “Short-Term Capacity Pricing and Reliability Requirements, June 2017.

Ramp Capacity Products (Implemented in 2016)

New Reserve Product (Under Consideration)

10 Minute Up or Down Ramping Capability

30 Minute Response Time

New Ancillary Services for

Flexibility

Original Ancillary Services

MISO Ancillary Service Products– 2010: Day-ahead headroom constraints• Added headroom constraints in unit commitment

and dispatch software to reserve ramp capacity

• As an out-of-market constraint, it introduced problems including make-whole payments, price suppression, and lack of transparency

– 2016: Up and down ramp products• The development of up and down ramp capacity

products ensures that each 5-minute interval meets energy requirement, plus holds back sufficient ramp capability for the subsequent 10 minutes

• The maximum price (i.e., penalty factor for falling short of ramping capability) is $5/MWh

– Current efforts:• Improve the shortage pricing by revising the

operating reserve demand curve

• Expand ancillary services with an additional 30-minute reserve product

Example of MISO’s Multiple Flexibility Enhancements

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Value of Pumped Storage in Providing Flexibility

– Pumped storage’s operations can shift considerably based on net load shapes, for example, in a solar-heavy region:• Storage shifts its charging from

night to mid-day• Storage shifts discharging from

late afternoon to evening peaks

– As renewable deployment increases, pumped storage tends to operate at higher charging and generating capabilities

Illustrative Storage Dispatch (MW)

Charging

Generating

Pump shifts to mid-day

Generation more concentratedin the evening ramp period

Future 1Future 2

Current

Source: The Brattle Group.

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Revenue Sources will Shift from Energy to Other “Products”

Products Value Market Implications

Average Energy ▀ Lower energy prices during low-load and on average in most hours will most strongly affect baseload and dominant variable resources

Scarcity Pricing ▀ But higher peak prices, driven by volatility, scarcity pricing, and demand response/storage; rewards fast-response resources

Flexibility & Reserves ▀ Need for greater quantities and new types of flexibility products▀ Higher ramping needs reward flexibility

Capacity

▀ Value may go up or down▀ Down if additional clean energy contributes to excess supply for a

period, or if new capacity sellers are attracted by other value streams▀ Up if new fossil plants are needed for capacity, but only a small

portion of their capital costs can be recovered from other markets

Clean Attributes▀ Some form of CO2 pricing and/or clean energy payments introduced

to meet policy and/or customer demand▀ Value must be large enough to attract new clean resources

Adjacent Customer & Distribution Markets

▀ Technology and consumer-driver demand for adjacent products and services (smart home, electric vehicles)

▀ Participation may overlap with wholesale, clean, and retail/distribution markets

Interties & Geographic Diversification

▀ Increasing value of larger, more diverse regional markets ▀ Greater value of trade/diversification across market seams through

inter-regional grids

Markets designed for a clean, low-marginal-cost resource mix will need to focus more on flexibility and clean-energy products

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Product Markets Mobilize Competition from a Wider Range of Resources

Hydro resources are well positioned to compete in the emerging products-based wholesale power markets

Legend Technical Capability to Provide Service Well Suited (1.0) Neutral (0.5)X Not / Poorly Suited (0)

Resources/Technologies (Existing and New)

Products NuclearRoR

HydroHydro w/ Storage Coal CC CT Wind Solar

Battery Storage DR EE Imports

DA Energy 10

RT Energy (5 min) 9

Regulation X X 7.5

Spinning Reserves X X X X 6.5

Non-Spinning Reserves X X X X X X 5

Load following / Flexibility X 7.5

Capacity / Res. Adequacy 10

Clean Energy X 9

Reactive / Voltage Support X X 8.5

Black Start X X X X X 6

Number of Competing

Technologies

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Key Takeaways

–Existing hydro resources are valuable and are well-positioned to compete in a markets-based wholesale power industry

–Wholesale power market regulations and designs will need to evolve with changing system needs – particularly to compensate resources that provide the needed flexibility

–New hydro resources will need to articulate their value proposition in a low-marginal cost wholesale market

–Additional product markets will be needed to compensate existing and new resources:• Clean energy resources• Flexibility products

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PRESENTED BY

Judy ChangPrincipal, Boston+1.617-864-7900Judy.chang@brattle.com

Ms. Judy Chang is an energy economist and policy expert with a background in electrical engineering, and has over 20 years of experience in advising energy companies on regulatory and financial issues, with a focus on power sector investment decisions in clean energy, electric transmission, and energy storage. Ms. Chang has submitted expert testimonies to the U.S. Federal Energy Regulatory Commission, and U.S. state and Canadian provincial regulatory authorities on topics related to resource planning, power purchase and sale agreements, and transmission planning, access, and pricing. She has authored numerous reports and articles on the economic issues associated with generation and transmission investments, clean energy development, energy storage investments, and systems planning. In addition, she has led teams of energy company executives and board members in comprehensive organizational strategic and business planning.

Ms. Chang holds a Bachelor of Science in Electrical Engineering and Computer Science from University of California, Davis and a Master of Public Policy from Harvard Kennedy School. She co-manages the power sector practice at Brattle and is the founding board member of the New England Women in Energy and the Environment.

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About The Brattle Group

The Brattle Group provides consulting and expert testimony in economics, finance, andregulation to corporations, law firms, and governmental agencies worldwide.

We combine in-depth industry experience and rigorous analyses to help clients answercomplex economic and financial questions in litigation and regulation, developstrategies for changing markets, and make critical business decisions.

Our services to the electric power industry include:▀ Climate Change Policy and Planning▀ Cost of Capital ▀ Demand Forecasting Methodology▀ Demand Response and Energy

Efficiency ▀ Electricity Market Modeling▀ Energy Asset Valuation▀ Energy Contract Litigation▀ Environmental Compliance▀ Fuel and Power Procurement▀ Incentive Regulation

▀ Rate Design and Cost Allocation▀ Regulatory Strategy and Litigation

Support▀ Renewables▀ Resource Planning▀ Retail Access and Restructuring▀ Risk Management▀ Market-Based Rates▀ Market Design and Competitive Analysis▀ Mergers and Acquisitions▀ Transmission

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Brattle’s bSTORE Storage Modeling Platform

www.brattle.com/storage

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bSTORE Application for Hydro E&AS Market Optimization

Optimal Bidding and Dispatch

Markets SequenceCo-optimize Day-Ahead and Real-Time participation

Product SelectionCo-optimize revenues from Energy and Ancillary Services

Market UncertaintyImperfect foresight, develop strategies with recourse

Price ImpactsLocational market response to change in plant operations

Market ConstraintsAccount for RTO Rules and Software limitations

Resource ConstraintsQuantify impacts of Plant & Environmental constraints

TransmissionFull network model supports nodal simulations

Module Features▀ Mixed Integer Programming

(MIP) solver as used by RTOs▀ Rolling-horizon simulation

with look-ahead optimization▀ Sequential model of DA, RT

and other decision cycles with feedback loops

▀ Scenario-based & heuristic-based uncertainty modeling

▀ Hydro modeling− Generation constraints− Reservoir constraints − Cascaded plants w/ delays− Value of water: calculate

(long-horizon problems) or specify (short-horizon)

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