The IESO’s New Market Power Mitigation (MPM) Framework

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What is MPM?

The IESO recently released the much anticipated Market Power Mitigation (“MPM”) detailed design document for its Market Renewal Program. Market power mitigation is a common feature found in most other North American competitive electricity markets. It is intended to curb potential or actual market power that certain electricity suppliers could wield given their location on the transmission grid. Specifically, suppliers could exercise market power where there is congestion on the transmission line or intertie in the geographical area that the participant supplies electricity.

Who does MPM apply to?

MPM is intended to apply to suppliers that participate in either the IESO-administered energy market or the IESO-administered operating reserve market, or both. MPM is not intended to apply to non-dispatchable loads or price-responsive loads, i.e. non-dispatchable loads that elect in the renewed market to participate as price-responsive loads.[1]

The IESO will publish annually the following types of identified constraint areas for the energy market[2], informed by the IESO’s historical data from the previous year and prospective analysis predicting where congestion is expected to continue:

  1. Narrow Constrained Areas (“NCA”) – areas where congestion is expected to be relatively frequent over a long duration. The applicable threshold is if the IESO expects the area to be constrained in more than 4% of the hours in the following year in either the day-ahead market (“DAM”) or the real-time market (“RTM”).
  2. Dynamic Constrained Areas (“DCA”) – areas where congestion is expected to bind relatively frequently but not for a long enough duration to warrant the designation of NCA. The applicable threshold is 15% of hours, including where caused by an outage or binding import constraint, in a continuous 5-day period in either the DAM or RTM.
  3. Broad Constrained Areas (“BCA”) – areas where any time one or more resources outside an NCA or DCA are scheduled with a congestion component greater than $25/MWh. It also exists anytime a non-quick start resource receiving a make-whole payment outside an NCA or DCA is committed where it has a positive congestion component on a binding or active constraint.

Prior to the go-live date of the renewed market (still scheduled for March 2023), the IESO will directly notify any relevant market participants that they are located in any one of the above identified constrained areas. This information will not be made public.

How does MPM work?

For intervals during which congestion creates restricted competition, MPM will be exercised by ex-ante or ex-post analysis of participant dispatch data and offer prices. More specifically, the IESO will perform “conduct and impact” testing of relevant participants to evaluate:

  • ex-ante validation of non-financial dispatch data (e.g. ramp rates and minimum generation block run-time);
  • ex-ante mitigation for economic withholding affecting energy and operating reserve prices (e.g. a supplier offering in lower than would be expected under unrestricted competition, ostensibly for the purpose of increasing the spread between day-ahead and real-time prices);
  • settlement mitigation of out-of-market make-whole payments (e.g. generator cost guarantee payments);
  • ex-post mitigation for physical withholding affecting energy and operating reserve prices (e.g. a supplier withholding available supply during the DAM to sell at a higher price during RTM, thereby driving up real-time prices); and
  • ex-post mitigation for economic withholding affecting prices or make-whole payments on uncompetitive interties.

Ex-ante validation and ex-ante mitigation

The IESO will determine if MPM has occurred by first applying conduct testing to determine whether a participant’s offers or bids are within the parameters or the “reference levels” and “reference quantities” established beforehand with the participant.

Reference levels will be established at the resource level for both financial and non-financial data, representing the IESO’s estimates of dispatch data in conditions of unrestricted competition. Similarly, reference quantities will be established, representing the IESO’s estimate of the quantity a resource is expected to offer in conditions of unrestricted competition.

Participants that fail conduct testing will then be subject to impact testing to determine if their conduct resulted in economically inefficient price-setting. Where participants fail ex-ante impact testing, the IESO will determine the set of resources that will have dispatch data substituted with reference levels for the purpose of determining schedules, prices and make-whole payments. The IESO will then apply mitigation by substituting participant dispatch data values that failed the conduct test with the corresponding reference level values.[3]

Ex-post mitigation

The ex-post mitigation process will also involve conduct and impact tests for the mitigation of physical withholding (or economic withholding on uneconomic interties). The conduct test will determine if offered quantities were lower than the applicable reference quantities. The impact test will determine if energy or operating reserve prices would be lower had the reference quantity instead been offered. The ex-post application of conduct and impact testing for offers on uncompetitive interties is similar to that applied ex-ante for other energy and operating reserve offers, described above.

Ex-post mitigation will be applied to relevant participants by levying a charge (aka penalty) equal to 1.5x the difference in settlement payments based on as-offered versus applicable reference levels/quantities multiplied by a market-wide MPM “persistence multiplier” of 1, 2 or 3 depending on the number of physical withholding instances by the participant within an 18-month period.

A participant will be found to have exercised market power if its offers are in excess of established thresholds of its pre-established reference levels/quantities. Examples include:

Non-financial (energy market)

  • Submitted Minimum Generation Block Run Time is more than the lesser of 100% or 3 hours above the reference level
  • Submitted energy ramp rate offered is lower than 50% of the reference level
  • Submitted maximum number of starts per day is 50% lower than the reference level or lower than 1

Financial (energy market NCAs and DCAs)

  • Offer price is greater then either 50% or $25/MWh above reference level value (note: offers below $25/MWh are excluded from economic withholding tests)
  • Start-up offer is greater than 25% above reference level
  • Energy local marginal price (“LMP”) in the as-offered pricing pass of the relevant calculation engine is either 50% higher than or $25/MWh above the energy LMP from the reference level pricing pass

Financial (energy market BCAs)

  • Offer price is greater than either 200% or $100/MWh above reference level value (note: offers below $25/MWh are excluded from economic withholding tests)
  • Start-up offer is greater than 100% above reference level
  • Speed no-load offer is greater than 100% above reference level

As competition is more restricted, conduct and impact thresholds become narrower. As such, the thresholds for the operating market are equal to or narrower than that for the energy market.

What’s happening next?

The establishment of reference levels and reference quantities will be the product of a stakeholder engagement process that the IESO intends to commence in late August/September 2020.

Approximately 2 weeks prior to the commencement of that pending stakeholder engagement, the IESO intends to publish “workbooks” setting out the IESO’s proposed cost components to be included in the calculation of reference levels and quantities per fuel type. As part of the stakeholder engagement, the IESO will also be initiating meetings with each fuel type group to discuss the proposed cost components.

There is anticipated to be much debate between the IESO and participants as to what are appropriate cost components that should be taken into account in establishing static and non-static reference levels/quantities.

Our team at McCarthy Tétrault continues to closely follow the development of the IESO’s new MPM framework. If you would like more information about the IESO’s new MPM framework, we are here to help. Please contact Reena Goyal or any other member of the Power Group at McCarthy Tétrault with any questions or for assistance.

 

[1] The IESO also does not intend to apply its proposed MPM framework to dispatchable loads and hourly demand response resources who typically pay to consume electricity. However, the IESO expressly leaves open the possibility for a design amendment to the MPM framework in the even that demand-side participants receive payments for reducing or avoiding consumption.

[2] The IESO will also be assessing for potential market power in the energy market that could be exercised due to restricted competition arising from (i) reasons other than local transmission constraints that apply at province-wide; and (ii) reliability constraints applied by the IESO; as well as assessing for local and global market power in the operating reserve market.

[3] Where participants fail ex-ante conduct testing but pass ex-ante impact testing, the ex-ante conduct test results will still be used by the settlement process to determine the impact to make-whole payments, if any.

 

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