1. The EA’s 2-Hub FTR Market Roger Miller and Grant Read Presented to EPOC 2011 by Roger Miller

2. Disclaimer The Authority has just started an RFP process for the FTR manager, which runs till 31 st October RFP is on www.gets.govt.nz Running a fair, open, competitive tender process Information must be given to all potential bidders My presentation will be placed on the Authority’s website Any relevant Q & A’s will be posted on GETS Specific questions can be emailed to tenders@ea.govt.nz Any discrepancy with tender documents or Code amendment - those documents take precedence NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

3. Overview 1. Hubs versus nodes Why use hubs and how do they work? 2. “All inclusive” FTRs Why use full price difference vs loss exclusive definition 3. Option vs Obligation FTRs Why we need options in a “tidal flow” situation 4. Simplified Grid Model for 2 hub FTR 5. Partitioning the Rental Pool for 2 hub FTR Appendix - Loss and Reserve Issues (if time?) NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

4. 1. Hubs versus nodes Why use hubs and how do they work? NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

5. Hubs Hubs are a grouping of one or more nodes Nodes within a hub may have specified weights Settled on the weighted average nodal price FTR hub injections split into component nodal injections for feasibility testing and rental calculation Trading between a few major hubs reduces market power concerns Initial FTR “hubs” aligned with ASX futures reference nodes – BEN2201 and OTA2201 May need to “expand” hubs slightly to handle flows NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

6. 2. “All inclusive” FTRs Why use full price difference vs loss exclusive definition? NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

7. BEN-OTA Monthly Price Components NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

8. BEN-OTA Monthly Loss Factors NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012. Dry/South Flow Wet/North Flow

9. “All inclusive” FTRs Why use full price difference vs loss exclusive definition? Losses account for a large part of the price differential (especially during HVDC South Flow) Size and direction of loss price differential depends on generation pattern (unpredictable) Integrates with futures platform (ASX) better Simpler for participants to understand and value NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

10. 3. Option vs Obligation FTRs Why we need options in a “tidal flow” situation NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

11. Obligations - What are they? Price Difference Payout  Pure swap  Positive or negative value  Symmetrical  Linear  Simple optimisation problem Holder receives payment Holder must pay NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012. Price Difference Payout  Pure swap  Positive or negative value  Symmetrical  Linear  Simple optimisation problem Holder receives payment Holder must pay NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

12. Options - What are they? Price Difference Payout  Asymmetrical  Non-negative value  Non-Linear  More complex optimisation problem Holder receives payment No requirement for holder to pay NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

13. Why we need option FTRs Direction of transmission flows depends on generation pattern (unpredictable) Direction of price differentials depends on direction of transmission flows Inter-island HVDC flow direction particularly important in NZ Depends on (SI) hydro inflows (seasonal pattern but unpredictable from year to year) (“Tidal Flow”) Less important for regions with little generation (e.g. Upper SI, Auckland? – flow always northward) NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

14. Examples NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012. Price S-N Option N-S Option Short/ Importing Long/ Exporting

15. Exercise patterns Number of exercise patterns = number of permutations of hub orderings by price = n! (assuming options between all hubs, which may not be necessary) For 2 hubs there are just 2 patterns: S-N, N-S NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

16. Ob/Op Constraints S-N Op + S-N Ob – N-S Ob ≤ S-N Capacity N-S Op + N-S Ob – S-N Ob ≤ N-S Capacity NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

17. P S-N Ob = P S-N Op – P N-S Op P N-S Ob = P N-S Op – P S-N Op P S-N Ob = – P N-S Ob Obligation/Option relationship Price Difference Payout S-N Option -ve N-S Option Applies to: Auction clearing prices Payouts Ex-post scaling may distort these relationships S-N Obligation NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

18. 4. Simplified Grid Model for 2 hub FTR

19. NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012. Simplified Grid Model For 2 hubs Traditional approach is to ensure FTRs are simultaneously feasible on forecast FTR grid For 2 hubs FTRs add or subtract algebraically Establish a maximum flow in each direction FTR grid reduces to a 2 node + 1 line model Ben-Ota Max Ota-Ben Max OtahuhuBenmore

20. NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012. 5. Partitioning the rental pool Flow based decomposition for 2 hubs

21. Motivation Ring fence intra-island rents for a possible future intra-island locational price risk solution Not yet decided what this should be (if anything) Avoid cross subsiding the inter-island FTR Maintain consistent inter-island FTR rental stream if future FTRs hubs or some other intra-island solution are implemented NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

22. Different approach used for: HVDC rents AC rents HVDC - just collect all rent between Benmore and Haywards HVDC terminals = Price received Flow received – Price sent Flow sent NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

23. Approach for AC system rents Rents are generated by branch capacities, loss tranche limits, branch (“equation”) constraints, mixed constraints (if any) Rent generated by constraint c = σ c RHS c where σ c is the constraint shadow price For each constraint we need to collect rent of σ c AssignedCapacity c where AssignedCapacity c is the maximum LHS constraint loading implied by any feasible FTR flow pattern Note that if the FTR flow pattern is feasible then AssignedCapacity c ≤ RHS c for all c For 2 hubs only need to consider 2 extreme flow patterns: BEN- OTA Max; and OTA-BEN Max NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

24. Allowing for differences between the FTR Grid and the “On the Day” grid Extreme injection patterns based on an over-estimated grid (no outages, no contingencies) Use shift factors to deduce branch/constraint loadings on the “On the Day” grid for each extreme injection pattern Shift factors avoid having to solve a full load flow for each injection pattern for each trading period Still collect rent on constraints in series with “On the Day” bottlenecks Simplified by using lossless shift factors and lossless injection patterns NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012.

25. FTR Injection Patterns Feasible flow pattern is unbalanced (lossy) Approximate by a balanced (lossless) pattern Lossless flow ≥ Lossy flow on each branch (over estimate) NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012. FTR sinkFTR sourceFTR flow Unbalanced flows reduce progressively from source to sink due to losses leaking out at the end of each branch Balanced flow approximation Positive injection at source Negative injection at sink

26. NB: This presentation relates to the approved FTR Code Amendment, which comes into force on 1 Oct 2011. It is currently intended to be implemented from Oct 2012. branch flow Assigned Branch Capacity Actual Flow P r LF 1 P r LF 2 P r LF marg Cap 1 Cap 2 Ass Cap 2 AssCap 1 SP 1 SP 2 Loss Rentals SPD uses a piece-wise linear loss approximation LF j is loss factor of the j th tranche LF marg is loss factor of the marginal tranche Cap j is capacity of the j th tranche AssCap j is assigned capacity of the j th tranche P r is price at scheduled flow receiving end node SP j is shadow price of the j th tranche = P r (LF marg - LF j ) Loss rent collected P r LF marg Marginal Loss Factor x spot price

27. The End