Priorities for Reforming Resource Accreditation in New England

 
Priorities for Reforming Resource
Accreditation and the Resource Adequacy
Framework in New England
 
 
PRESENTED BY
Sam Newell
Kathleen Spees
John Higham
 
 
 
SPONSORED BY
Massachusetts Attorney
General’s Office
 
PRESENTED TO
NEPOOL Markets Committee
 
 
SEPTEMBER 14, 2022
 
brattle.com | 1
 
Introduction
 
Comments today derive from two Brattle
reports for MA AGO
 
See full reports at: 
Capacity Resource
Accreditation for New England’s Clean Energy
Transition
 
brattle.com | 2
 
 
Accreditation is only one part of ISO-NE’s resource adequacy framework, whose goal is
to ensure adequate supply cost effectively
 
The resource adequacy construct has five components:
Setting of a 
reliability standard 
(i.e., 0.1 LOLE)
Probabilistic 
analysis of the risks 
of having insufficient supply available to meet demand
Leveraging the analysis to set 
required reserve margins 
(RMs) to meet the reliability standard
Leveraging the analysis to 
accredit resources 
for their contributions (and conforming the RM
requirements themselves to the aggregate accreditation of the modeled adequate fleet)
Holding 
capacity auctions
 to commit the most cost-effective set of resources to meet the
required RMs (more or less, along the demand curve)
 
 
Accreditation is only one part of ISO-NE’s RA Framework
 
brattle.com | 3
 
 
In New England, winter cold snaps present the greatest risks of shortage
ISO-NE management emphasizes this topic
OFSA and subsequent analyses illustrate risks
Summer reserve margins remain high
Intermittent resources are still a small fraction of total supply
Winter resource adequacy and availability 
should be addressed in the resource adequacy
framework (even if also addressed through other means)
To support necessary and cost-effective resource investments/retentions
To support necessary and cost-effective fuel arrangements, maintenance, and operational
improvements among resources
This is more than just a gas pipeline and LNG problem for the states to solve
 
The Primacy of Winter Risks in New England
 
brattle.com | 4
 
 
ISO-NE’s current framework does not sufficiently address
winter supply risks and could make them worse
Current modeling barely captures winter risks and may still
not after the current initiative unless ISO-NE prioritizes it
Until winter risks are fully incorporated into requirements
and accreditation, there is no assurance of winter adequacy
And resource accreditations may be distorted in ways that
could worsen the problem
A summer-focused risk analysis with limited winter fuel modeling
over-credits non-firm gas resources
This can distort the fleet toward non-firm gas and away from LNG,
oil, nuclear, renewable and other resources that can help
This could worsen winter risks
If the current Resource Capacity Accreditation initiative
derates wind, solar, and storage without sufficiently
addressing winter risks, that could further shift the resource
mix toward over-rated non-firm gas
Continuing a (summer-focused) annual framework distracts
from and obscures the real problem
 
The Need for Broad Reform, not just Accreditation
 
 
Needed reforms:
Improve modeling of winter risks
That will enable more accurate RA requirements
and accreditations (esp. if implemented along
with other accreditation principles discussed on
later slides)
The resulting needs and capabilities/obligations
can best by served through seasonal
(winter/summer) requirements and auctions
 
Brattle.com | 5
 
Accreditation Principles
 
Accurate accreditation is needed to
verify adequate total
 
supply to meet
reliability objectives
Accurate accreditation can establish
RA-neutral exchange rates among resources
to govern resource substitutions and signal
economically efficient investment
Accreditation may also
incentivize resource performance
 
 
ACCREDITATION PRINCIPLES
 
brattle.com | 6
 
 
Marginal capacity accreditation can ensure all accredited MW are equivalent
 w.r.t. marginal substitutions of
resources in the pre-auction and investment timeframes.
 
Marginal Accreditation—if Applied Accurately across ALL Resource
Types—Best Supports RA-Neutral Exchange Rates
 
 
Marginal accreditation supports efficient investment 
and retirement, per economic and optimization
theory, by properly compensates resources for their value when risk/value is greatest…
 
…but only if the accreditation accurately captures the value of all resource types
 
Marginal accreditation supports reliable substitutions
 
of resources between the time of the study
setting of requirements and accreditations (with an assumed fleet) and the auction (whose
composition may differ)…
…but only if the accreditation captures the value for all resource types
 
As for arguments that marginal accreditation is unfair: it is 
as fair as an ideal energy-only market and other markets
Energy-only rewards capacity when supplies are tight (e.g., a high-PV system will depress daytime prices for all resources, even those built “first”).
Recognizes that in a world where meeting demand at a particular time is easy (e.g., summer afternoons in a high-PV system), additional capacity at
that time provides little additional value, even if we value reliability equally in all periods.
Just like any market to reward marginal value; and at equilibrium, the price equals long-run marginal costs (LRMC) incl. capital costs.
Note that this does not exploit suppliers’ sunk costs. It still pays the full LRMC in equilibrium. The reason revenues decline is that suppliers keep
adding capacity, presumably because the LRMC of such capacity has fallen, net of energy and environmental value.
 
 
ACCREDITATION PRINCIPLES
 
brattle.com | 7
 
 
Different resource types have very
different 
patterns of (un)availability
during risky periods
, especially if their
unavailability is causing the risk
 
Patterns of unavailability are driven by
both 
exogenous factors 
and
management factors
 
Most resources are affected by both, to
different degrees and in different ways
 
This suggests for all resources:
Consideration of operating characteristics
against a broad range of exogenous
conditions
Ability to capture the effect of extreme
conditions on each resource types’ value
Observation of actual performance
 
Achieving Accurate, RA-Neutral Exchange Rates Requires Accounting for
Different Risks Across Resource Types, and Individual Performance
 
brattle.com | 7
 
Non-firm
Gas
 
 
ACCREDITATION PRINCIPLES
APPROACH: INDIVIDUAL AVAILABILITY, AND
MODELED CLASS-WIDE MARGINAL ELCC
ELCC calculated by probabilistically modeling resources’ reliability
contributions by simulating distribution of weather years and
outages; but still adjusting for observed individual performance
in tight hours, as in MISO’s thermal approach or PJM’s final factor
HYBRID EMPIRICISM + MODELING
 
brattle.com | 8
 
Empiricism and Modeling Approaches Are Both Needed
ADVANTAGES
Accounts for 
weather-driven performance 
over a
broad distribution of weather patterns
Enables
 risk weighting 
for expected reliability value
LIMITATIONS
Electricity systems are complex, and modeling is
imperfect.
Challenging to model thermal resource performance
under stress conditions not recently or often observed
Sensitive to modeling judgements
ADVANTAGES
Simple
 and 
transparent
, based on 
real-world data
Recent data most indicative of current resource
management/age/conditions
Incentivizes 
resource performance
LIMITATIONS
Not risk-weighted, 
biases accreditation upward for resources
that are less available in the tightest conditions
Tradeoff between using few hours (more reflective of shortage
conditions) vs. more hours (more forgiving of “bad luck”)
Tradeoff between having more years of data (broader
distribution of weather) vs. just
 recent years (reflects current
asset conditions
)
APPROACH: INDIVIDUAL AVAILABILITY DURING
TIGHT INTERVALS IN RECENT YEARS
Each resource’s average observed availability during 
intervals with
lowest supply cushion during previous ~3 years
APPROACH: MARGINAL ELCC
Probabilistically simulates resources’ contributions to
reliability over broad distribution of weather years
EMPIRICISM
MODELING
ADVANTAGES
Combines 
recent real-world data
 with broadest 
distribution of
modeled 
weather-driven performance
 (with data-driven
and/or fundamental modeling of how resources with
specified characteristics perform under such conditions)
Enables
 risk-weighting
 
for expected contribution to reliability
LIMITATIONS
Conditions vary, data is limited, and modeling is imperfect.
Challenging to capture “management factors”
 esp. to  model
thermal resources under stress conditions not recently
observed
Sensitive to modeling judgements
 
 
IMPLEMENTATION
 
Brattle.com | 9
 
Why a Seasonal Framework is Needed (on Top of Better Risk Analysis
and Accreditation Process)
 
If assessed risks are primarily in winter, setting
annual
 requirements and accreditations could
have unintended consequences
Summer-focused resources will be heavily de-
rated, increasing their cost per accredited MW,
so they may not clear, perhaps leading to
summer shortages that the risk analysis missed
Those risks (or any other summer risks not
modeled) might not be covered because:
Accreditations underemphasize summer
Total CSOs will be less than peak load
This occurs when using marginal MRI because
total CSOs = simulated load when shortages occur,
which is in the winter at 2/3 summer peak
This could lead to awkward uncovered situation (see
right) and/or having to scale up CSOs beyond some
resources’ capabilities, through the balancing ratio
 
 
IMPLEMENTATION
 
Separating the framework into two seasons avoids having
total CSO < peak load
Allocation of Net CONE and price caps between seasons fits perfectly
into the MRI framework, where WTP per unit of avoided EUE is the
same across seasons
 
Brattle.com | 10
 
Summary of Priorities
 
Improve modeling to capture winter risks
Adopt a 
seasonal capacity market 
to address winter reliability threats
Enhance accreditation for 
all resources
, including thermal plants
Pursue 
marginal value-based accreditation 
to provide resource-adequacy-neutral exchange
rate and incentives for efficient investment (but only if applied to all resources)
Develop “hybrid”
 
concept that combines probabilistic 
modeling
 and 
empirical 
approaches
Plan to 
iteratively refine 
the approaches
 
 
KEY TAKEAWAYS
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Presentation by Sam Newell, Kathleen Spees, and John Higham sponsored by Massachusetts Attorney General's Office on reforming resource accreditation and the resource adequacy framework in New England. The discussion focuses on the primacy of winter risks, the need for broad reform beyond accreditation, and addressing supply risks to ensure winter adequacy.


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  1. Priorities for Reforming Resource Accreditation and the Resource Adequacy Framework in New England PRESENTED BY Sam Newell Kathleen Spees John Higham SPONSORED BY Massachusetts Attorney General s Office PRESENTED TO NEPOOL Markets Committee SEPTEMBER 14, 2022

  2. Introduction Comments today derive from two Brattle reports for MA AGO See full reports at: Capacity Resource Accreditation for New England s Clean Energy Transition brattle.com | 1

  3. Accreditation is only one part of ISO-NEs RA Framework Accreditation is only one part of ISO-NE s resource adequacy framework, whose goal is to ensure adequate supply cost effectively The resource adequacy construct has five components: Setting of a reliability standard (i.e., 0.1 LOLE) Probabilistic analysis of the risks of having insufficient supply available to meet demand Leveraging the analysis to set required reserve margins (RMs) to meet the reliability standard Leveraging the analysis to accredit resources for their contributions (and conforming the RM requirements themselves to the aggregate accreditation of the modeled adequate fleet) Holding capacity auctions to commit the most cost-effective set of resources to meet the required RMs (more or less, along the demand curve) brattle.com | 2

  4. The Primacy of Winter Risks in New England In New England, winter cold snaps present the greatest risks of shortage ISO-NE management emphasizes this topic OFSA and subsequent analyses illustrate risks Summer reserve margins remain high Intermittent resources are still a small fraction of total supply Winter resource adequacy and availability should be addressed in the resource adequacy framework (even if also addressed through other means) To support necessary and cost-effective resource investments/retentions To support necessary and cost-effective fuel arrangements, maintenance, and operational improvements among resources This is more than just a gas pipeline and LNG problem for the states to solve brattle.com | 3

  5. The Need for Broad Reform, not just Accreditation ISO-NE s current framework does not sufficiently address winter supply risks and could make them worse Needed reforms: Improve modeling of winter risks Current modeling barely captures winter risks and may still not after the current initiative unless ISO-NE prioritizes it That will enable more accurate RA requirements and accreditations (esp. if implemented along with other accreditation principles discussed on later slides) Until winter risks are fully incorporated into requirements and accreditation, there is no assurance of winter adequacy And resource accreditations may be distorted in ways that could worsen the problem A summer-focused risk analysis with limited winter fuel modeling over-credits non-firm gas resources This can distort the fleet toward non-firm gas and away from LNG, oil, nuclear, renewable and other resources that can help This could worsen winter risks The resulting needs and capabilities/obligations can best by served through seasonal (winter/summer) requirements and auctions If the current Resource Capacity Accreditation initiative derates wind, solar, and storage without sufficiently addressing winter risks, that could further shift the resource mix toward over-rated non-firm gas Continuing a (summer-focused) annual framework distracts from and obscures the real problem brattle.com | 4

  6. ACCREDITATION PRINCIPLES Accreditation Principles Accurate accreditation is needed to verify adequate total supply to meet reliability objectives Verify Adequate Total Supply Accurate accreditation can establish RA-neutral exchange rates among resources to govern resource substitutions and signal economically efficient investment Accreditation may also incentivize resource performance Signal Reliability-Neutral Resource Substitutions and Economically Efficient Investment Incentivize Resource Performance Brattle.com | 5

  7. Marginal Accreditationif Applied Accurately across ALL Resource Types Best Supports RA-Neutral Exchange Rates Marginal capacity accreditation can ensure all accredited MW are equivalent w.r.t. marginal substitutions of resources in the pre-auction and investment timeframes. Marginal accreditation supports reliable substitutionsof resources between the time of the study setting of requirements and accreditations (with an assumed fleet) and the auction (whose composition may differ) Reliable Substitutions but only if the accreditation captures the value for all resource types Marginal accreditation supports efficient investment and retirement, per economic and optimization theory, by properly compensates resources for their value when risk/value is greatest Adequate and Efficient Investment but only if the accreditation accurately captures the value of all resource types As for arguments that marginal accreditation is unfair: it is as fair as an ideal energy-only market and other markets Energy-only rewards capacity when supplies are tight (e.g., a high-PV system will depress daytime prices for all resources, even those built first ). Recognizes that in a world where meeting demand at a particular time is easy (e.g., summer afternoons in a high-PV system), additional capacity at that time provides little additional value, even if we value reliability equally in all periods. Just like any market to reward marginal value; and at equilibrium, the price equals long-run marginal costs (LRMC) incl. capital costs. Note that this does not exploit suppliers sunk costs. It still pays the full LRMC in equilibrium. The reason revenues decline is that suppliers keep adding capacity, presumably because the LRMC of such capacity has fallen, net of energy and environmental value. brattle.com | 6

  8. Achieving Accurate, RA-Neutral Exchange Rates Requires Accounting for Different Risks Across Resource Types, and Individual Performance Drivers of Unavailability Affecting Resource Adequacy Value Different resource types have very different patterns of (un)availability during risky periods, especially if their unavailability is causing the risk Gas w/some firm fuel High Patterns of unavailability are driven by both exogenous factors and management factors Non-firm Gas Oil Dependence on Factors under Management Control (may depend on fuel characteristics; performance may be observed as in tightest periods) Hybrids Battery Storage Most resources are affected by both, to different degrees and in different ways DR Wind PV This suggests for all resources: Consideration of operating characteristics against a broad range of exogenous conditions Low Low High Ability to capture the effect of extreme conditions on each resource types value Dependence on Exogenous Factors (e.g., weather, time of day; can be studied by observing and/or modeling many years of weather in how availability coincides with shortage risk) Observation of actual performance brattle.com | 7 brattle.com | 7

  9. Empiricism and Modeling Approaches Are Both Needed EMPIRICISM HYBRID EMPIRICISM + MODELING MODELING APPROACH: INDIVIDUAL AVAILABILITY, AND MODELED CLASS-WIDE MARGINAL ELCC APPROACH: INDIVIDUAL AVAILABILITY DURING TIGHT INTERVALS IN RECENT YEARS APPROACH: MARGINAL ELCC ELCC calculated by probabilistically modeling resources reliability contributions by simulating distribution of weather years and outages; but still adjusting for observed individual performance in tight hours, as in MISO s thermal approach or PJM s final factor Probabilistically simulates resources contributions to reliability over broad distribution of weather years Each resource s average observed availability during intervals with lowest supply cushion during previous ~3 years ADVANTAGES ADVANTAGES ADVANTAGES Combines recent real-world data with broadest distribution of modeled weather-driven performance (with data-driven and/or fundamental modeling of how resources with specified characteristics perform under such conditions) Simple and transparent, based on real-world data Accounts for weather-driven performance over a broad distribution of weather patterns Recent data most indicative of current resource management/age/conditions Enables risk weighting for expected reliability value Incentivizes resource performance Enables risk-weighting for expected contribution to reliability LIMITATIONS LIMITATIONS LIMITATIONS Not risk-weighted, biases accreditation upward for resources that are less available in the tightest conditions Electricity systems are complex, and modeling is imperfect. Conditions vary, data is limited, and modeling is imperfect. Challenging to capture management factors esp. to model thermal resources under stress conditions not recently observed Tradeoff between using few hours (more reflective of shortage conditions) vs. more hours (more forgiving of bad luck ) Challenging to model thermal resource performance under stress conditions not recently or often observed Tradeoff between having more years of data (broader distribution of weather) vs. just recent years (reflects current asset conditions) Sensitive to modeling judgements Sensitive to modeling judgements brattle.com | 8

  10. IMPLEMENTATION Why a Seasonal Framework is Needed (on Top of Better Risk Analysis and Accreditation Process) If assessed risks are primarily in winter, setting annual requirements and accreditations could have unintended consequences Summer-focused resources will be heavily de- rated, increasing their cost per accredited MW, so they may not clear, perhaps leading to summer shortages that the risk analysis missed Those risks (or any other summer risks not modeled) might not be covered because: Accreditations underemphasize summer Total CSOs will be less than peak load Separating the framework into two seasons avoids having total CSO < peak load This occurs when using marginal MRI because total CSOs = simulated load when shortages occur, which is in the winter at 2/3 summer peak Allocation of Net CONE and price caps between seasons fits perfectly into the MRI framework, where WTP per unit of avoided EUE is the same across seasons This could lead to awkward uncovered situation (see right) and/or having to scale up CSOs beyond some resources capabilities, through the balancing ratio Brattle.com | 9

  11. KEY TAKEAWAYS Summary of Priorities Improve modeling to capture winter risks Adopt a seasonal capacity market to address winter reliability threats Enhance accreditation for all resources, including thermal plants Pursue marginal value-based accreditation to provide resource-adequacy-neutral exchange rate and incentives for efficient investment (but only if applied to all resources) Develop hybrid concept that combines probabilistic modeling and empirical approaches Plan to iteratively refine the approaches Brattle.com | 10

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