Standard Market Design (SMD) in New England Federal Energy Regulation Commission Conference on Standard Market Design January 22, 2002 David LaPlante Vice President, Markets Development ISO New England Inc.

2 Presentation Topics ISO-NE selection of Standard Market Design SMD description –Initial implementation –Planned enhancements SMD and smaller market participants

3 What is SMD? PJMs current market design (Locational Marginal Pricing, Multi-Settlement) with the following enhancements: –Spinning reserve market –Electronic Dispatch signals sent directly to all generators every five minutes –Marginal losses included in prices –Automated market mitigation procedures –Dispatch of Hydro-electric units with offers and self-schedules –Detailed business processes for SMD operation –Auction all financial transmission rights

4 Why SMD in New England? Decision made in early 2001 based upon: –Schedule for New England custom CMS/MSS design showed: CMSQ12003 CMS/MSSQ12004 at Best –New, unproven/untested market design –Final budget of $100 - $120 Million –Expiration of retail standard offers at year-end 2003

5 Why ISO-NE Switched to SMD Full implementation of locational marginal pricing and multi- settlement one year earlier and at lower cost Reduced risk of market problems upon implementation –Proven market design Reduced risk of implementation problems –Use of existing software for day-ahead market, real-time market and external transactions Step toward convergence of northeast markets Provides long-term benefits in market design and software development

6 Standard Market Design Features Market participation voluntary Provides ability for participants with physical supply to self-supply their requirements and self-schedule resources opt out of the market Anticipate 75-80% reliance on bilateral marketplace for energy needs to continue

7 SMD Enhancements Spinning reserve market –Needed in New England because of need to back down thermal units to provide reserves Electronic dispatch signals sent every 5-minutes –ISO-NE dispatches all generation directly Marginal losses included in prices –Dispatch in NE includes penalty factors, for losses must be included in prices Automated market mitigation procedures –Extend current ISO-NE mitigation into SMD

8 SMD Enhancements: Hydro Generation Options in the Day Ahead Market A.Self-schedule generation and offer prices for any additional water B.Submit all available water and associated prices for dispatch by ISO C.Combination of A and B. These produce financially binding hourly schedules

9 Hydro Options - A Picture Day-ahead Schedule $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 Prices for incremental output Available capacity Output MW

10 A.Fixed day-ahead schedule coupled with owner option to increase/decrease output via self-schedule - Allows owner to respond to market conditions B.Fixed day-ahead schedule with economic dispatch priced below it - Allows owner to respond to market conditions stay below maximum dispatch C.Full economic dispatch based upon offer prices SMD Enhancements: Hydro Generation Options in the Real-Time Market

11 SMD Enhancements - Business Processes Market rules define market for market participants ISO-NE has developed detailed set of internal business processes on how to run market internally These are being validated with PJM Once complete, we will make them available to all for SMD implementation at no cost

12 SMD Enhancements - Financial Transmission Rights Auctions All financial transmission rights will be auctioned off Revenue from those auctions allocated to load Assures those who value them most highly will get load Semi-annual/annual auctions

13 SMD and Smaller Market Participants New England has many small (10 MW to ~ 100 MW) public power utilities Two joint action agencies have been formed to support their participants in the wholesale markets These agencies provide the technical and managerial support for the municipals The allocation of financial transmission rights to those utilities is an outstanding issue

14 Future Enhancements to SMD(V2.0) New York ISO and ISO-NE have agreed to enhancements to SMD based on review of best practices –Hourly bidding –Co-optimizing energy with regulation and spinning reserves –Off-line reserve markets

15 Reasons for Enhancements Hourly bidding –Improves ability of generators to schedule limited energy resources; both hydro and interruptible gas Co-optimization of energy and reserves in real-time –Improves efficiency of real-time dispatch and may allow more complete utilization of transmission system Off-line reserve market options under review –Longer-term option-like market –Day-ahead with associated real-time Market

16 Developing a Standard Market Design The bulk of the standard has to be absolute However, some portion should be open to innovation and evolution –Allows vendors to distinguish products and compete

17 Applying this Theory to a Standard for Electricity Markets Candidate features for standardization: –Locational Pricing –Day-Ahead Market –Real-Time Market –Financial Transmission Rights –External Transaction Scheduling Rules Candidate Features for Innovation: –Ancillary service market design, including co-optimization –ICAP product and market for it