Background

What is a settlement floor price?

In the detailed design, the IESO proposed the introduction of a settlement floor price for locational prices. This element of pricing followed a technical session held in early 2020 to talk with stakeholders about the concept, and received input prior to building this concept into the detailed design.

The concept means that the IESO will not settle injections or withdrawals from the market at a price less than -$100/MWh. While market participants can continue to submit offers at prices as low as -$2000/MWh to manage their operations, locational market clearing prices would be limited by the floor price. 

What problem is the design trying to solve?

Locational prices can be excessively negative in areas of frequent oversupply from contracted or rate-regulated generation. Most observers of the market would agree that these locational prices are not accurate reflections of the incremental cost of supply (or marginal costs), which under surplus conditions is the suppliers’ “willingness to pay” to keep producing.

Financial incentives can distort generator offer prices under conditions of oversupply. Producers may submit very negative (e.g., -$500/MWh, -$1500/MWh) offers with the intention of obtaining a particular dispatch. If the market were to clear at those prices, producers are not likely to pay the local price under times of surplus (because of those financial incentives).

While an individual participant may be financially indifferent, this outcome has more significant implications for the rest of the market. Exports from a local area (e.g., Northwest) with negative prices would earn a windfall gain, being paid up to -$2000/MWh. Similarly, dispatchable or price responsive loads in that area could also receive windfall gains. Further, these outcomes exacerbate costs into the Global Adjustment. Fundamentally, these market outcomes occurring would be to the detriment of Ontario ratepayers, with no broad market benefit.

Does this problem exist now?

Excessively negative shadow prices in the Northwest are observed under the current two-schedule system. However, these prices are not used for settlement of the market, thus the distortion created by out-of-market incentives is tolerable. The introduction of the Single Schedule Market will use locational prices for settlement, thus a solution to address the distortion is required.

The past introduction of offer floor prices for wind, solar and flexible nuclear generation have already addressed the similar issue of contractual incentives distorting the Hourly Ontario Energy Price (HOEP) downwards during periods of oversupply. These offer floors do not address pricing issues related to local oversupply in the North, where hydro is typically the marginal resource. The IESO looked at alternatives to this solution, including the potential to introduce an offer floor price for hydro. However, the complexities surrounding water management make creating an offer price floor a difficult task that could also have adverse effects on system reliability. Given these considerations the IESO decided instead to pursue the proposed concept.

Market participant impacts

In general, the primary benefit of this concept accrues to Ontario ratepayers at large, as they will not be exposed to exacerbated Global Adjustment costs due to the relationship between generation contracts, or regulated prices and the market price.

The settlement floor price will not impact the efficiency, or the economics, of the dispatch order.

Further, the settlement floor price still provides an efficient price signal to customers, and to the trading community, to respond during periods of oversupply.