Draft extended reserve selection methodology Extended Reserve Manager Consultation briefing 31 October 2016 – Wellington 3 November 2016 – Auckland

NZX is the Extended Reserve Manager The Code requires the extended reserve manager to: Create and consult on an extended reserve selection methodology. Run a selection process every 5 years to select extended reserve: Create and consult on the extended reserve procurement schedule. [Proposed Code]: Produce periodic performance reports to monitor AUFLS block performance during the 5 years of operations.

Selection methodology (SM) development Process to date Draft SM consultation Selection methodology (SM) development Selection process 1st Workshop 2nd Workshop 3rd Workshop Briefing Consultation paper Draft selection methodology Example procurement schedule Data specification Initial data request Trial dataset During the Selection Methodology development phase we have: held 3 industry workshops. produced an initial data specification; and received and analysed data provided voluntarily by you Feedback from these workshops has helped us develop the Selection Methodology and associated analytical tools We are now in the formal consultation phase and we are currently consulting on the Selection Methodology and providing this briefing today. To help inform your consideration of the SM we have also included in the consultation pack an example PS based on the trial data set and a revised data specification.

Methodology purpose To select extended reserve to meet technical requirements and Code principles TRS requirements: Extended reserve is AUFLS No IL Size of 4 AUFLS blocks Time – at all times Speed – prefer faster, df/dt on block 4 Quality levels Code principles: Balance between extended reserve providers and system operator Procure cost-effectively considering cost of providing AUFLS and customer interruption cost Balance between certainty and flexibility Quality levels is TRS clause 16. Grid voltage test. Code principles are in 8.54H

Assessing AUFLS block performance Sum of armed demand unit load in AUFLS block Sum of North Island GXP load for each trading period To explain graphically what the selection tool aims to achieve for each AUFLS block across the North Island. The sum of the selected and armed demand unit load across the North Island must fit within the AUFLS block thresholds. Here is the performance result for AUFLS block 1 of the example procurement schedule.

Selection process Selection tool Inputs: Selection result: Demand units Relays, customers, 4-year historic load profiles Standard costs Constraints, parameters North Island GXP reference loads Selection result: Procurement schedule Selected for block number Armed Armed flexible On standby Selection tool The full list of inputs and constraints and parameters is in section 5.2 of the consultation paper. The information goes into a mixed integer linear programme, which is an iterative process to progressively select a group of demand units for each AUFLS block that collectively meet the AUFLS block technical requirements – the 10-10-6-6 – for as many trading periods in the observed data as possible, for the lowest overall selection cost. PS – example is the csv file provided in Appendix B, template is in the methodology in Schedule 5.

Categories of selected demand units 127 77 59 58 61 25 23 26 27 Block 1 Block 2 Block 3 Block 4 Armed (662 MW) Flexible armed (204 MW) Flexible standby (95 MW) 572 demand units (DU) (961 MW) 321 DU’s 81 DU’s 170 DU’s Flexible solve The procurement schedule is a static document produced once at the conclusion of the selection process. Taking the numbers selected in the Example Procurement Schedule: 572 demand units were selected, collectively representing 961 MW. This is 35% of the North Island load. These demand units are put into three categories: armed (dark blue), flexible armed (light blue), and flexible standby (pink). During the 5-year operational period, the extended reserve manager proposes to collect the unit load information only on all of these selected demand units each quarter. The extended reserve manager will sum up the unit load files for every trading period and compare it to the overall North Island offtake for that trading period to get a measure of AUFLS block performance. We also propose to run a flexible solve. The flexible solve takes the data from the latest 24 months and considers whether the aggregate AUFLS block performance can be improved by arming any standby units, or disarming any flexible armed units. During operations ERM adjusts flexible armed / standby

Overview of the draft selection methodology Who What When How Terms Payment I’d like to walk you through the draft methodology. The body has 14 clauses. The layout of the body of the methodology is in this order. Who must provide information into a selection process What information When How the extended reserve manager selects demand units Terms and conditions that selected providers must abide by Payment that selected providers will receive

Who is required to provide information Clauses 3 and 4 Who What When How Terms Payment North Island only Distribution companies Directly connected consumers Not very small parties We are proposing that very small asset owners, whose total average annual offtake is less than a megawatt, not be required to provide demand unit information. We’ve put in a threshold on efficiency grounds.

What information must be provided Clauses 5, 6 and Schedule 1, data specification Who What When How Terms Payment Information in demand units Quantity requirement Accuracy – data specification Advise if commercially sensitive The information must be presented in demand units. A demand unit means an AUFLS system Separately controllable load with a relay that can be set to a frequency and tripped as per the system operator’s requirements Quantity requirement is defined in Schedule 1 – will come back to that in more detail a bit later The extended reserve manager will rely on the accuracy of the data submitted, and our assumption is it follows the data specification. At the start of a selection process, which would happen every 5 years, asset owners must advise if any information that may be published by the extended reserve manager in the procurement schedule is commercially sensitive.

When the information is due Clause 7 Who What When How Terms Payment At the start of a selection process the extended reserve manager will notify when information is due Proposed minimum timeframes: 40 business days to provide (ERM data review) 2. 10 business days to revise Clause 7 sets out the minimum times for when information is due for a full selection process. The extended reserve manager will issue a Data Request for an Extended Reserve Selection Process signalling the start of a full selection process. The minimum timeframes that the extended reserve manager will set for asset owners to provide information into a selection process. We have written it this way to provide some certainty for asset owners that the timeframe will not be any less than this amount of time. We know that advance warning is important, for managers to organise resourcing to do this very occasional data collection process. In the workshop 10 people said they needed 3 months and 2 more said more than 3 months. We will have a business process to advise the industry as early as possible, i.e. about 6 months out. The 5-year operational period is set in the Code so we will be able to check with the Authority when the next selection process will occur some months before it is set.

When the information is due Clause 7 and Schedule 1 Who What When How Terms Payment For the first selection process: 14 Feb – 14 Apr 2017 – data provision (42 business days) 15 April – 5 May 2017 – ERM review (15 business days) 2. 5 May – 19 May 2017 – revision (10 business days) Late May – RUN SELECTION TOOL This is what these dates look like potentially for the first data collection process, providing this consultation concludes as per our plan. June – System operator reviews result 27 June – 14 July 2017 – draft procurement schedule consultation (15 days) Sept 2017 – Authority approval and publish The dependency for starting the first selection process is obtaining Authority approval post consultation for the selection methodology. We are targeting the beginning of February for that approval.

How the selection is made Clauses 8-12, Schedules 3, 4, 6 Who What When How Terms Payment Follow TRS and Code to: Select armed demand units to best fit the 4 AUFLS blocks for least cost Select standby demand units Historic data as a proxy for future Aim to make best selection So at the high level, the methodology follows the TRS and the Code to: Select armed demand units that in aggregate best fit the 4 AUFLS blocks for least cost across the North Island Select standby demand units, at least 10% per AUFLS block, to provide flexibility to respond to changes during the 5-year operational period. The methodology proposes to use historic data – 4 years – as a proxy for the next 5 years of operational time Clauses 8 to 12 lay out the basis on which extended reserve is selected. Schedule 3 provides us with input values for the cost of relays and customer classes The calculations in schedule 6 determine how input relay costs are calculated. Schedule 4 is the mathematical heart - sets out the model formulation for the methodology. You may have noticed appendix E of the consultation paper. Clause 9 states historic data will be used and sampled. Upon the system operator’s recommendation we also propose to add another Part to Schedule 4 to describe in more detail the sampling and stopping criteria. As we received this feedback just before consultation we have put a draft Part 6 into the consultation paper in section 5.2 and in Appendix E.

How the selection is made Schedule 5 Who What When How Terms Payment Example procurement schedule: Template in Schedule 5 System operator technical review Brief consultation Authority approval Q19-21: Example procurement schedule Anything commercially sensitive, must advise during data provision Propose to consult for 2 weeks Procurement schedule feedback is technical and limited in scope As the Code requires the procurement schedule to be produced in accordance with the methodology, we have no grounds to accept substitution of demand units or counter-proposals.

Terms for extended reserve providers Clause 13, Schedule 2 Data specification, ERM calendar Who What When How Terms Payment Methodology Schedule 2 – Terms and conditions Procurement notice SERO – statement of extended reserve obligations For those parties who are selected to provide specific demand units, Schedule 2 of the methodology sets out the terms and conditions that the providers must adhere to during operations.

Terms for extended reserve providers Clause 13, Schedule 2 Data specification, ERM calendar Who What When How Terms Payment Extended reserve providers must: Follow technical requirements Prepare selected demand units Provide in accordance with good electricity industry practice Provide load information each quarter Arm or disarm flexible units on request At a high level, providers must… We have a couple of issues to highlight a little later on. The central clause relating to providing demand units is clause 5 of Schedule 2.

Payment for provision Who What When How Terms Payment Clause 14 and Schedule 6 Who What When How Terms Payment Extended reserve providers to be paid standard costs as used in selection process: AUFLS provision (capex and opex) Customer interruption – when armed (opex) Finally, in clause 14 and in Schedule 6 we set out that extended reserve providers are to be paid, and how the dollars are calculated.

Key points to highlight Inputs Key points to highlight Selection Operations

Inputs – Proposed quantity requirement Schedule 1 – clauses 1 and 3 Quantity Accuracy IL Relay costs At least 60% offtake – more is better Exercise discretion to submit suitable demand units Demand units with 100% public health & safety customers not eligible 4 historic years = robust result Minimum viable unit = 1 year At least 60% - We provide analysis to show that the more that is submitted, the lower the overall selection cost. Not set at 100% for 2 reasons: 1. To provide asset owners with discretion to apply their knowledge to avoid unsuitable loads that the selection process cannot differentiate between on the basis of cost criteria 2. In recognition that asset owners do have other obligations and even some distribution companies struggle to make 60%. We present some debate over selection of public health and safety customers. These customers are generally regarded as more sensitive. The selection result moves these to block 4. Demand units with 100% public health and safety customers are not eligible because these customers are more at risk 4 years for each demand unit – to provide a robust and defensible selection result 1 year minimum – workshop feedback that if the minimum is 2 years then some suitable demand units cannot be submitted

60% 31% 30% 70% IL 9% IL Required 60% + more if suitable Party A has c.9% of IL in its network. It is required to submit 60% of non-IL load, and has the option of submitting more from the other 31% of non-IL load. 60% 31% 30% 70% IL Required 60% but… Party B offers 70% of its load as IL. It is required to submit 60% of non-IL load to the ERM. As it has only 30% non-IL load, it must submit all the remaining load.

Inputs – Information accuracy guidance Schedule 1, clause 2 and data specification Quantity Accuracy IL Relay costs Selection process depends on data being accurate and consistent More guidance: Customer class allocation Allocating to public health and safety Method for estimating missing data Treatment of interruptible load (IL) What most affects the selection process is the unit load profile and the customer class allocation. Analysing the trial dataset also, we can see fairly easily that different approaches were taken to estimating customer class allocation, particularly for allocating to public health and safety.

Inputs – Proposed method of subtracting IL Data specification Quantity Accuracy IL Relay costs AUFLS has to dance around IL Aiming to balance better accuracy against amount of effort, noting the size of “problem” Subtracting an IL profile is more accurate than maximum contracted MW If IL contract is >120kW, subtract curtailable (available) IL profile The TRS requires us all to do a dance around interruptible load when selecting AUFLS. We must not double-count it. We are aiming for a balance between accuracy and time, bearing in mind the relative size and impact of the potential inaccuracy introduced. During the trial data process we requested that a single value, the maximum contracted amount, be subtracted. This is a bit blunt and doesn’t very well represent the actual quantity of IL that might trip in any trading period. In the trial data, IL was reported subtracted equivalent to about 9% of the submitted load 8 distributors subtracted 195 MW In the example procurement schedule, 107 MW of IL was on the selected demand units, 70 of that on one party.

Inputs – Proposed method of subtracting IL Data specification Quantity Accuracy IL Relay costs Proposed method: Determine curtailable IL load profile for the most recent year Subtract this “reference” IL profile from each historic year If IL is sitting across several demand units, estimate quantity on each demand unit first.

Inputs – level of standard costs Clauses 8-12, Schedules 3, 4, 5 Quantity Accuracy IL Relay costs Standard costs for AUFLS provision: Set through Beca survey Significant costs only – some costs dropped Costs of meeting technical requirements Customer interruption costs: Level of public health and safety cost Q1-3: AUFLS provision costs Schedule 3 Part 3: Standard set of relay costs, set through Beca survey General rationale: simplicity balanced against accuracy: include costs that are significant enough and that don’t have unwanted outcomes NOT INCLUDED: fast response incentive, flexible service cost, implementation cost. Are they sufficient to cover a significant portion of your expected costs? Q4-5: Customer interruption cost Schedule 3 Part 1: Expected interruption hours Schedule 3 Part 2: Standard customer class categories and costs Feedback requested specifically for public health and safety cost

Propose 60% selection cap Clause 8(c) Selection cost $ / yr The selection cap is the upper limit set on the percentage of offtake selected from any one provider. Having any cap reduces the cost-effectiveness of selection. The Code requires a cost-effective selection. The cap limits the tool from selecting some demand units with a suitable load profile that are cheaper than other demand units. You can see from this graph that, using the nice big 76% North Island load trial dataset, that the lower the selection cap on parties, the higher the overall cost. We consider there are two good reasons for having a cap: The cap provides certainty. No matter what percentage of your offtake you submit, you will be selected only up to the cap. It acknowledges that there are practical limits to the quantity of suitable load available from any one provider. We have discussed this cap at workshops and we have had verbal feedback that people prefer a lower cap. We are interested in getting evidence-based feedback on what is a practical limit for this cap. Selection cap applied (% of asset owner offtake)

Terms – Provide information every quarter Schedule 2 clauses 8, 9 Delivery Block settings Withdrawal Payment rationale Provide unit load information on selected demand units quarterly because: New scheme – prudent risk management Regular opportunity to assess aggregate AUFLS block performance

Terms – Deliver as submitted Schedule 2, clause 4 Providers to deliver as submitted: New or existing relay Faster responding demand units Relays with SCADA remote control Proposed selection requirements: New relays – uf and df/dt All relays – configure & test to multiple AUFLS blocks settings Delivery Block settings Withdrawal Payment rationale The information that asset owners submit into the selection process will be relied upon for selection and for payment. So if a demand unit is submitted as requiring a new relay, it is expected that a new relay will be installed. Relays with SCADA remote control are regarded as easily flexible-capable and will be considered for flexible reserve. We propose 2 selection requirements All new relays to have both df/dt and under frequency functionality. This is so that we can consider all new relays for AUFLS block 4 All relays to be configured and tested to as many AUFLS block settings as they can hold and qualify for

Set relays to multiple AUFLS block settings Schedule 2, clauses 4(a), 5(e), Schedule 1 Delivery Block settings Withdrawal Payment rationale Proposed because: More cost-effective to do all at once Second selection process: testing cost is only applied to those AUFLS blocks that a demand unit is not configured and tested for Operations backstop: possible to switch demand units between AUFLS blocks if necessary Q25: Configure and test for all AUFLS blocks Proposed that all relays are configured and tested for all AUFLS blocks (or as many as older relays can hold/supply) This was not discussed in workshops so more detailed questions are asked on cost, feasibility, switching between blocks during operations. On the face of it, it seems sensible and more cost-effective. The most tricky aspect from the extended reserve manager’s perspective is managing information flows. But we haven’t heard from distributors. Are there hidden costs, are there other aspects that we haven’t considered.

Terms – provision & withdrawal of demand units Schedule 2, clauses 5, 6 and 7 Delivery Block settings Provision Payment rationale Provide at all times, restoring any temporary loss as soon as practicable ‘Permanent loss of capability’ due to network reconfiguration may occur Any other reasons? Clause 5 of Schedule 2 sets out the central requirements regarding provision of demand units. Must be armed on start date Must endeavour in accordance with good electricity industry practice to provide AUFLS at all times, restoring any temporary loss as soon as practicable

Payment – rationale Delivery Block settings Withdrawal Payment To equitably spread the burden of AUFLS provision across all consumers Appropriate compensation Appropriate incentives We propose that extended reserve providers are paid for their services. On balance we consider that one of the 3 arguments put forward by the Authority is persuasive, and this is to equitably spread the burden of AUFLS provision across all consumers. We don’t consider the argument is compelling. Our final recommendation to the Authority will include consideration of the incentives and behaviour that is driven in the presence or absence of payments. Another argument is payment could provide incentives for distributors to enhance their AUFLS services – for example, by offering a payment for providing relays that respond in less than 250 milliseconds, or possibly for flexible service. Our view is the level of payment would have to be quite high to be a real incentive. But we do depend on asset owners to tell us whether a modest payment for flexible service or for providing faster relays does incentivize you to respond differently.

Questions Thank you ermanager@nzx.com 04 498 0057 Who What When How Terms Payment Questions ermanager@nzx.com 04 498 0057