Download Demand Curve

Capacity Auction in Ontario:
Demand Curve
October 1, 2014
Demand Curve
• Elements in demand curve category are important for
establishing boundaries for the amount of capacity the
market is willing to purchase and the price the market is
willing to pay
• These elements include:
– Profile of Downward Sloping Demand Curve
– Net Cost of New Entry
– Target Capacity Requirement
– Maximum Auction Clearing Price
– Min/Max Cleared Capacity Limits
• Each element impacts the slope and positioning of the
demand curve, influencing auction prices
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Demand Curve
• Downward curve allows
more or less capacity to
be purchased relative to
the target, depending on
the cost of supply
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Demand Curve
• Downward slope
reduces price volatility if
supply offered is slightly
below or above target
• Vertical demand curve
would clear at zero or at
shortage prices for very
small changes in offered
capacity
Auction
does not
clear
Auction
clears at
floor
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Profile of Downward Sloping
Demand Curve
Objective: Profile of downward sloping demand curve
must meet reliability objectives and manage price volatility
• Demand curve will be downward sloping, but its slope is
impacted by choices on the other elements within Demand
Curve category
• Profile of downward sloping demand curve can be
straight through target or kinked
• Willingness to pay incrementally more for capacity when
below target, less when above target
What are the considerations for having a different slope
above and below the target capacity requirement?
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Net Cost of New Entry
(Net CONE)
Objective: To establish a consistent and transparent
estimate of Net CONE for positioning the demand curve
against target capacity
• CONE will be associated with the estimated cost of
building a peaking power plant
• Requires designation of a generic reference unit,
assessment of its gross costs and net market revenues
• Too low Net CONE could discourage efficient entry. Too
high Net CONE could over-compensate cleared capacity
What factors should be considered when determining the
components of Net CONE?
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Target Capacity Requirement
Objective: Communicate the quantity of capacity that is
targeted to be procured in the upcoming capacity auction
• Determine the effective capacity needed to meet forecast
net peak demand and reserve margin to satisfy
reliability standards
• Any individual auction may clear above or below the
target, but on average should clear at the target
– 1 in 10 Loss of Load Equivalent reliability standard
– Reserve margin a function of system largest contingency
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Maximum Clearing Price
Objective: Establish the maximum price that capacity could
reasonably cost
• Price cap that the capacity auction could clear, reflecting
upper bound of cost of capacity
– Max price will be set as proportion of CONE as is done in other
jurisdictions; i.e. 150% Net CONE, 100% Gross CONE
• Setting of Net CONE requires estimates of reference unit,
and its cost and net revenues. Individual projects will
differ on these inputs and may have higher net cost
What are the factors that could lead to higher net costs for a
project that are greater than Net CONE?
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Min/Max Cleared Capacity Limits
Objective: Determine the range of capacity that is allowed
to clear an auction
• The maximum and minimum capacity above and below
the target quantity that the auction will clear
– Minimum is the least amount of capacity the ISO ‘s will clear for a
single auction below target, typically set to meet 1 in 5 reliability
standard
– Maximum reflects the most auction will clear above target
• Still need to clear at target on average to meet 1 in 10
standard
• Width of Max – Min influences steepness of Demand
Curve
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