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The IESO's Market Renewal Program Will Unlock a More Efficient and Stable Grid

The IESO's Market Renewal Program Will Unlock a More Efficient and Stable Grid

Written by: Dara Nafissi, Director of Business Development at Edgecom Energy

The IESO has embarked on a years-long journey to redesign the electricity market in Ontario through the Market Renewal Program. This redesign aims to deliver a more stable and reliable electricity supply at a better price for end-users. This write up aims to further summarize the concepts introduced as part of Ontario’s IESO Market Renewal Initiative and discuss how new business models will be enabled by implementing different aspects of this initiative. Comprehensive references are accessible on the IESO's website.

The electricity market is a highly regulated sector in many jurisdictions, including Ontario. The IESO launched the current structure for the wholesale market in 2002. In 2016 the IESO introduced the “Market Renewal Program” which includes high-level objectives for improving the electricity system's efficiency and reliability. Over the past 5 years, the IESO has developed the program to cover two high-level areas: Energy, and Capacity.

The Promise: Solving both Capacity and Energy Issues

For Capacity, the “Capacity Auction” was launched in December 2020 for the first time, replacing the former Demand Response Auction.

For Energy, 3 projects have been designed:

  1. Single Schedule Market (SSM)
  2. Day-Ahead Market (DAM)
  3. Enhanced Real-Time Unit Commitment (ERUC)

(Source: IESO)

These three projects work hand-in-hand to deliver the desired benefits of improved efficiency and lower costs. SSM substitutes the current two-schedule market with a single schedule mechanism for determining dispatch orders and prices. DAM aims to create financial obligations through a day-ahead market (The current day-ahead market is not financially binding). ERUC will be implemented to address issues arising from enforcing DAM requirements, mainly for Non-quick Start (NQS) resources. NQS resources need specific treatment to be dispatched. Making sure that they can be dispatched properly through market mechanism is critical for maintaining the reliability of energy supply.

(Source: IESO)

The Problems with Current Market Mechanisms

A Single Schedule Market eliminates the need for excessive out of market payments resulting from grid constraints. The market mechanism needs to determine which resources get dispatched at what time and at what price. The current market design solves the supply and demand bids in two distinct ways; the first is the unconstrained algorithm. The algorithm does not consider the grid constraints and only determines the Market Clearing Price that forms Ontario Hourly Electricity Price (HOEP). The second algorithm accounts for grid constraints and specifies which resources should get dispatched to avoid congestion on transmission lines. If a resource should be dispatched due to congestion, but the price it bid is higher than Market Clearing Price, the difference will be paid through “Out of Market Payments.”

This approach has created several significant problems. First, HOEP does not reflect the real price of electricity.  These out of market payments will be charged back to consumers in ways that does not reflect the location or time that the energy is being used. This prevents viable business cases for transmission or generation capacity improvement for congested areas to be developed because of this unnecessary subsidization. More importantly, these out of market payments create an opportunity to game the market mechanism. This was reflected in several investigations, including Ontario Energy Board’s Market Surveillance Panel Report in 2016 2.

HOEP does not reflect the real price of electricity.

Market Renewal's Promise

Once Market Renewal is fully implemented, the market price at each time and each location will better reflect the real value of the electricity being generated and consumed. The implementation of Market Renewal creates many opportunities for new business models to be designed and delivered to all stakeholders.

As the IESO implements these changes, doors will open for a variety of Distributed Energy Resources (DERs) to participate more actively in the market. The high-level design of these DER’s is already being planned out by the IESO as outlined in this late 2019 white paper 3. These changes will heavily rely on effective data management from collecting the right data to analyzing it to communicating the right signals and insights. The underlying idea is if the correct price signals are gathered and communicated with market participants, their collective decisions will improve the whole process' efficiency and outcome, the good old ‘efficient markets hypothesis.’

Once Market Renewal is fully implemented, the market price at each time and each location will better reflect the real value of the electricity being generated and consumed.

As market regulations change and more data becomes available, it is imperative for all market participants to improve their data science capabilities. New interfaces with the market should be developed for connecting and integrating operations with the massive volumes of data being created. Also, several applications should be developed to generate more value out of the newly available data.

The market renewal program will create an environment in which energy service providers of all types can help end-users, utility companies, and generators improve their operations. Once fully integrated, the market renewal will be a win-win for everyone in Ontario.

References:

1. PDF Download- OEB Congestion Payments inOntario’s WholesaleElectricity Market: An Argument for Market Reform

2. PDF Download - IESO Innovation and Sector EvolutionWhite Paper Series - PART 1 – CONCEPTUAL MODELS FOR DER PARTICIPATION

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