Ameren Expresses Concern With Unfilled Hedges For Capacity For Default Service Customers, Warns Of Potential For Higher Prices For Default Service Customers

October 9, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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Ameren Illinois has raised concern at the Illinois Commerce Commission with the levels of hedged capacity for default service electric customers which are lower than the hedging targets in the Illinois Power Agency's procurement plan

Ameren noted that under the current procurement plan, the plan sets a capacity hedging goal of 50% for the 2020-2021 delivery year and (through the end of 2019) a 25% hedge for the 2021-2022 delivery year, to be achieved by the end of the two procurements during 2019 (both of which have already occurred)

However, Ameren said that, after the 2019 procurements, the actual hedged percentage for capacity for the 2020-2021 delivery year is 27%, compared to a goal of 50%. For the 2021-2022 delivery year, the actual hedged percentage for capacity is 12%, compared to a goal of 25%.

"The reasons for the hedging shortfall were not made public by the IPA or its Procurement Administrator," Ameren said in comments to the ICC

"Given the uncertainty associated with the volatility of the clearing price in the annual MISO capacity auction, Ameren Illinois has a history of supporting the risk mitigation benefits of a balanced approach to capacity hedging (e.g., 50% hedged through IPA procurements and 50% through the MISO capacity auction). MISO capacity auctions have the potential to range in price from near $0 per MW-Day to the Cost of New Entry (CONE), which is projected to be $255 per MW-Day for the 2020-2021 Delivery Year. The clearing price associated with each MISO capacity auction is the intersection of the vertical demand curve and the supply offer curve and countless factors impact this clearing price," Ameren noted

Ameren listed various factors which impact the clearing price and said, "Given these and other complexities associated with the MISO capacity auction, it becomes virtually impossible to predict the clearing price with any reasonable degree of accuracy."

"Ameren Illinois has spent considerable time reviewing publicly available MISO data regarding prior capacity auction results and it is our conclusion the clearing prices have a tendency to be inexpensive, unless the vertical demand curve approaches a steep part of the supply offer curve, at which point the price has the potential to increase exponentially. And once the demand curve intersects the steep part of the supply offer curve, small changes in demand or supply can dramatically change the clearing price (either higher or lower). Market participants and interested stakeholders have termed this phenomenon 'falling off a cliff' or 'going over a knife's edge'. Because of this pricing uncertainty and the risk to eligible retail customers, it is our opinion that a strategy of hedging 50% of the capacity requirement and clearing the remaining 50% in the MISO capacity auction appropriately balances the goals of low and stable supply prices for eligible retail customers," Ameren said

Ameren said that while MISO capacity auction prices have been low over the last several years, "the impact of the dramatic increase in price for 2015-2016 is worth revisiting."

"During 2015-2016, the IPA Plan procured 0% hedges, thus leaving 100% of the capacity requirements to be cleared as a 'price taker' through the MISO capacity auction. The auction subsequently cleared at an unprecedented price of $150 per MW-Day (~$126 per MW-Day after netting out the impact of zonal delivery benefits) and this resulted in a ~27% increase in the supply price for eligible retail customers compared to the prior year. This added ~$80 million of unexpected costs, which translated into a bill increase of ~$100 per year for a typical residential customer," Ameren said

"While Ameren Illinois cannot predict the clearing price for the 2020-2021 MISO capacity auction with any reasonable degree of accuracy, we are concerned that entering the MISO capacity auction with a ~27% hedge level for the 2020-2021 Delivery Year creates a risk of much higher costs for eligible retail customers should the auction price rise significantly. We are also concerned about the ~12% hedging level for the 2021-2022 Delivery Year, but acknowledge that the IPA has two additional procurements proposed for 2020 with a goal to a reach a 50% hedging level prior to the 2021 MISO capacity auction," Ameren said

Ameren suggested that the ICC could order incremental bilateral procurements of capacity before the next MISO capacity auction for the 2020-21 delivery year

"Should the Commission determine that the capacity shortfall for the 2020-2021 Delivery Year creates undue risk for Ameren Illinois eligible retail customers, there may still be time for the IPA to procure additional quantities of capacity for 2020-2021. The Commission could Order the IPA to pursue the remaining quantities of capacity for the 2020-2021 Delivery Year, while also incorporating the latest information obtained from MISO and an updated capacity forecast from Ameren Illinois. Our understanding is that the MISO capacity auction for 2020- 2021 is currently scheduled for the last week of March 2020. Backing up from that date, Ameren Illinois' expected deadline to demonstrate to MISO that we have received all capacity procured by the IPA would be no later than early March 2020. Therefore, we would anticipate that any incremental capacity contracts would need to be executed no later than February 2020," Ameren said

Docket No. 19-0951

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