Potential Effectiveness of the Demand Curve Approach for Mitigation - - PowerPoint PPT Presentation

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Potential Effectiveness of the Demand Curve Approach for Mitigation - - PowerPoint PPT Presentation

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California Independent System Operator Corporation Potential Effectiveness of the Demand Curve Approach for Mitigation of Local Market Power in Capacity Markets Eric Hildebrandt, Ph.D Department of Market Monitoring California Independent

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California Independent System Operator Corporation

Potential Effectiveness of the Demand Curve Approach for Mitigation of Local Market Power in Capacity Markets

Eric Hildebrandt, Ph.D Department of Market Monitoring California Independent System Operator

CRRI Advanced Workshop in Regulation and Competition 21th Annual Western Conference Monterey, California June 19, 2009

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California Independent System Operator Corporation

Background

  • CPUC and CAISO leading ongoing effort to consider

centralized capacity market in California.

  • Local market power mitigation key part of any

centralized capacity market design in CA.

– Ownership of supply within major local pockets in California highly concentrated (e.g., 2 major suppliers).

  • Two major approaches proposed:

– Demand curve approach (NYISO-style) – Direct bid/price mitigation (similar to PJM, ISO-NE)

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California Independent System Operator Corporation

Demand Curve Approach

  • Relatively high bid cap on suppliers

– e.g., 160% of the Net Cost of New Entry (CONE)

  • Administratively set demand curve used to establish “demand elasticity”

$0 $25 $50 $75 $100 $125 $150 $175 $200 $225 Local Area Capacity (MW) $/kW-Year $116 Net CONE (NYC) $92 Net CONE (NYCA) $70 Net CONE (LI) 100% of Area Requirement Net Cone for NYC 160% Net Cone for NYC 118% of Area Requirement

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California Independent System Operator Corporation

Analysis of Demand Curve Approach: Methodology

  • Shape of administrative demand curve based on NYISO

demand curve for New York City area

  • Data on local area capacity requirements and available supply

based on CAISO 2007 and 2008 CAISO Local Capacity Area (LCA) studies

  • The major LCAs examined:

– San Diego – Western LA Basin (sub-area of LA Basin LCR) – San Francisco Bay Area

  • Two approaches for modeling market power:

– Pivotal Supplier (Unilateral model) – Cournot Equilibrium (Duopolistic reaction function model)

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California Independent System Operator Corporation

San Francisco Bay Area: Local Area Requirements and Supply

Bay Area Capacity Requirement 4,688 MW Bay Area Supply Calpine 2,573 MW (41% of supply) Mirant 2,347 MW (38% of supply) PG&E 613 MW (10% of supply) Other 681 MW (11% of supply) Total 6,215 MW (132% of requirement)

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California Independent System Operator Corporation

Supply and Demand Balance (Bay Area)

2,000 4,000 6,000 8,000 10,000 12,000 Load Supply MW Calpine Capacity Mirant Capacity Other Suppliers Maximum Net Import

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California Independent System Operator Corporation

Profit Maximimizing Level of Sales by Largest Supplier under Unilateral Model of Market Power

$0 $25 $50 $75 $100 $125 $150 $175 $200 1000 2000 3000 4000 5000 6000 MCQ (MW) MCP ($/kW-Year) Residual Supply Sales by Largest Supplier Net CONE Witholding by Largest Supplier Price Cap MCP

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California Independent System Operator Corporation

Reaction Functions of Largest Two Suppliers in Bay Area

500 1,000 1,500 2,000 2,500 500 1,000 1,500 2,000 2,500 Mirant Reaction Function (MW Sold) Calpine Reaction Function (MW Sold Calpine Mirant Under Cournot equilibrium, two suppliers sell combined total of about 2,800 MW @ $145 Price Cap

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California Independent System Operator Corporation

Profit Maximimizing Level of Sales by Largest Suppliers under Duopolistic Model of Market Power

$0 $25 $50 $75 $100 $125 $150 $175 $200 1000 2000 3000 4000 5000 6000 MCQ (MW) MCP ($/kW-Year) Residual Supply Calpine & Mirant Sales (Duopolistic Solution) Net CONE Witholding Price Cap MCP

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California Independent System Operator Corporation

Reaction Functions of Largest Two Suppliers with Addition of 350 MW of Residual Supply

500 1,000 1,500 2,000 2,500 500 1,000 1,500 2,000 2,500 Mirant Reaction Function (MW Sold) Calpine Reaction Function (MW Sold Calpine Mirant Under Cournot equilibrium, two suppliers each sell about 1,260 MW @ $138/kW/yr

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California Independent System Operator Corporation

Comparative Analysis of Potential Local Market Power Using Unilateral and Cournot Approaches

Market Shares Unilateral Approach Cournot Approach Supply Margin Calpine Mirant MCP % Net CONE MCP % Net CONE 2008 LCA Study 132% 41% 38% $98 106% $145 158% 100 MW of New Supply 135% 39% 37% $92 100% $145 158% 350 MW of New Supply 140% 38% 36% $78 85% $138 150% 825 MW of New Supply 150% 35% 33% $53 57% $120 131% 1,300 MW of New Supply 160% 33% 31% $27 30% $103 112% 1,610 MW of New Supply 167% 32% 30% $ 0 0% $ 92 100% 1,775 MW of New Supply 170% 31% 30% $ 0 0% $ 86 93%

  • Under unilateral model, addition of 100 MW would lower MCP to

100% Net Cone.

– Supply = 135% of local capacity requirement

  • Under duopolistic model, addition of 1,610 MW would be needed

to lower MCP to 100% Net Cone.

– Supply = 167% of local capacity requirement

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California Independent System Operator Corporation

Comparative Analysis of Potential Local Market Power Using Unilateral and Cournot Approaches

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 130% 135% 140% 145% 150% 155% 160% 165% 170% 175% Supply (Percent of LCA Requirement) Capacity Market MCP ($/kW/year)

MCP - Cournot Model MCP - Unilateral Model

Net Cost of New Entry ($92)

2008 LCA Study Conditions

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California Independent System Operator Corporation

Conclusions

  • NYISO-style demand curve approach unlikely to be effective at

mitigating local market power within CAISO’s major load pockets (LCAs)

  • Unilateral models of market power likely to dramatically

underestimate degree of local market power.

  • Even if significant new capacity by “residual suppliers” could

be added in these areas, this would probably be economically inefficient – Very high supply margins in excess of actual capacity requirements would be needed to mitigate local market power of existing suppliers.

  • Direct bid/price mitigation such as that used in PJM and ISO-

NE likely to be more effective and economically efficient.

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California Independent System Operator Corporation

Additional Materials

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California Independent System Operator Corporation

Western LA Basin: Local Capacity Requirements and Supply

Local Capacity Requirements and Available Supply Western LA Basin Sub-Area Sub-Area Area Requirement 3,788 MW (2007 LCA Study) Sub-Area Supply Williams (Bear Stearns) 2,019 MW (45% of sub-area supply) Other Suppliers 2,376 MW (55% of sub-area supply) Total Sub Area 4,432 MW (117% of sub-area requirement)

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California Independent System Operator Corporation

Western LA Basin – Base Case

$0 $25 $50 $75 $100 $125 $150 $175 $200 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 MW $/kW-Year

Profit Maximizing Sales by Major Supplier Withholding MCP Residual Supply Net CONE

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California Independent System Operator Corporation

Western LA Basin – Scenario Analysis

Table 1. Potential Impact of New Supply on Capacity Market Results Western LA Basin

Capacity Market Outcomes Scenario Scenario Assumptions (New Supply) Supply as % of LCA Requirement Supply Owned by Largest Supplier MCP ($/kW/yr) MCP as %

  • f Net

CONE MCQ (% of Req.) 2007 LCR none 117% 45% $138 150% 91% 1 300 MW 125% 42% $118 128% 95% 2 500 MW 130% 41% $104 114% 98% 3 680 MW 135% 39% $92 100% 100% 4 870 MW 140% 38% $79 86% 102%

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California Independent System Operator Corporation

San Diego LCR: Local Capacity Requirements and Supply

Table 1. Local Capacity Requirements and Available Supply San Diego Area San Diego Area Requirement 2,957 MW San Diego Area Supply NRG 1,133 MW (38% of supply) Dynegy 702 MW (24% of supply) SDG&E 777 MW (26% of supply) Other Suppliers 335 MW (12% of supply) Total Sub Area 2,959 MW (~100% of requirement)

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California Independent System Operator Corporation

San Diego LCR – Scenario Analysis

Table 1. Potential Impact of New Supply on Capacity Market Results San Diego Area

Capacity Market Outcomes Scenario Scenario Assumption (New Supply) Supply as % of LCA Requirement Supply Owned by Largest Supplier MCP ($/kW/yr) MCP as %

  • f Net

CONE MCQ (% of Req.) 2008 LCR Study None 100% 38% $143 156% 90% 1 300 MW 110% 35% $118 128% 95% 2 600 MW 120% 32% $92 100% 100% 3 890 MW 130% 29% $67 73% 105%

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California Independent System Operator Corporation

Direct Bid/Price Mitigation Approach

  • Existing Suppliers subject to price impact test if:

– Bid >60% of net CONE, and

  • Controls >20% of capacity in local area or
  • Is individually pivotal in local area
  • Price Impact Test

– Auction first run with participant’s bid, and then with net Avoidable Cost Rate (Net ACR) – If use of unmitigated market bid increases capacity market price >5%, then mitigated bid (Net ACR) used in final auction

  • Physical withholding prevented in local market by provisions

that allow “de-listed” capacity to count toward local area requirement.

  • Overall market price cap of 140% of Net Cone mitigates

potential market power if price set by new supply.