September 10, 2013 | NEPOOL markets committee

1. September 10, 2013 | NEPOOL markets committee ISO New England - market development Summary of NCPC Design Changes for “Out of Merit” Credits Since the August 9, 2013 Markets Committee Presentation NCPC Payments Jon Lowell

2. Preface This document is a complete summary of the proposed NCPC design for credits related to out-of-merit operation, as of September 10, 2013. Changes to the design from what was presented at the July 10, 2013 meeting , and the date the change was presented, are indicated as: • “New Slide” • “Updated Slide” Minor changes to text are shown in red. Deleted text is shown in light orange with a wavy underline. New Slide – mm/dd/yy Updated – mm/dd/yy

3. Significant Changes Since August 9, 2013 MC Meeting • Startup and No Load costs are now included in the DA NCPC credit calculation. No change to how Startup and No Load costs are treated in the RT NCPC credit. (slide 4) • Credits for Fast Start resources are now calculated hourly. Profitable hours are not used to offset unprofitable hours. (slide 5) • Costs and revenues associated with energy up to EcoMin in self-scheduled hours in RT are excluded from the RT NCPC credit calculation. (slide 6) • The “Claw-Forward” Credit – profits after Min Run Time has expired are not “clawed forward” to offset losses during the Min Run Time period. (slides 7-9)

4. 1 New Slide 9/10/13 DA NCPC Credit including Start-Up andNo-Load offer (non-Fast Start generator) • Hourly cost includes total offer cost for Energy, Start-Up and No-Load • Start-Up fee is apportioned over commitments containing min run time • NCPC credit is: MAX[0, Sum(Cost) – Sum(Revenue)] • Summation of cost and revenue is for all contiguous cleared hours

5. 2 New Slide 9/10/13 RT Commitment NCPC Credit (for Fast Startgenerator) • ISO RT commitment of Fast Start initiates with dispatch order to start for min run time and each subsequent hour dispatched is a new commitment • Start-Up fee is apportioned over hours of initial min run time commitment • NCPC credit is: MAX[0, Cost – Revenue] each hour • Fast Start credit is determined for each hour dispatched

6. 3 New Slide 9/10/13 RT Commitment NCPC hourly cost andrevenue for self-schedule commitment • RT self-schedule is offer of Start-Up = $0, No-Load = $0, Energy@EcoMin = $0/MWh, and Energy above EcoMin at prices in Supply Offer • For RT self-schedule hour, NCPC calculation of hourly revenue excludes energy payments for output up to EcoMin

7. Updated – 9/10/13 RT Commitment NCPC Credit Determination • RT Commitment NCPC credits are determined in two parts, calculated separately: • A credit for the Min Run Time (MRT) hours • A credit for the post-MRT hours • The credit for the MRT hours ensures a resource is no worse off for starting at the ISO requested commitment start time versus a delayed start • A resource that is unprofitable in the early hours could otherwise improve its financial position by delaying its start time • This credit eliminates “claw forward” of later profits • The credit for the post-MRT hours ensures a resource is no worse off for continuing to operate until de-committed by the ISO. • This credit eliminates “claw back” of earlier profits

8. 4 New Slide 9/10/13 RT Commitment NCPC Credit in Min Run Time with multiple commitments (for non-Fast Start generator) Example slide 1 of 2 • NCPC credit is: MAX[0, Sum(Cost) – Sum(Revenue)] • Summation of cost and revenue for min run time hours in each commitment • Revenue during startup is apportioned to hours of min run time (not shown) • This credit improves incentive to start when ordered: an unprofitable commitment is not subsidized by later profitable commitments

9. 4 New Slide 9/10/13 RT Commitment NCPC Credit after Min Run Time(for non-Fast Start generator) Example slide 2 of 2 • NCPC credit is: MAX[0,Maximum Profit_POST-MRT] – Final Profit_POST-MRT • Maximum Profit = maximum cumulative profit after minimum run time expires • Final Profit = cumulative profit for all hours after minimum run time • This credit improves incentive to continue following dispatch after resource would choose to shutdown: maximum operating profit is preserved

10. NCPC DESIGN Changes Aspects of the NCPC Payments design that have been modified since the August 9, 2013 Markets Committee meeting

11. Effective Offers and Self-Scheduling – Day-Ahead Updated – 9/10/13 • For purposes of NCPC credit evaluation, a self-schedule request by a participant in DA is considered to be an offer of: • Start-Up Fee = $0/start • No Load Fee = $0/hour • Energy cost up to EcoMin @ floor price ($-150/MWh) • Energy cost above EcoMin @ prices in energy offer

12. New Slide – 9/10/13 Effective Offers and Self-Scheduling – Real-Time • In RT, resources are only committed by the ISO for reliability, not economics. • An offline resource that needs/wants to run in RT cannot get online by simply lowering its offer price to its RT cost • A RT self-schedule is the only way to ensure commitment in RT • Valuing EcoMin energy at $-150 is a significant penalty in this situation • For NCPC purposes, a RT self-schedule will be evaluated as follows: • Energy cost up to EcoMin @ $0/MWh • Revenues for energy up to EcoMin excluded from calculation of RT Commitment NCPC credit

13. Effective Offers and Self-Scheduling Updated – 9/10/13 • When a participant submits an intra-hour request to dispatch at a specific output level: • energy cost up to the requested level is an energy offer at the floor price for the entire hour • Startup Cost = $0 (no impact unless this was a startup hour) • No Load Cost = $0

14. New Slide – 9/10/13 NCPC Settlement Periods – Fast-Start Resources • For Fast Start resources, the credits for DA NCPC, RT Commitment NCPC, and RT Dispatch NCPC are evaluated separately for each hour • No transfer of profit/loss between hours

15. Day-Ahead NCPC Credit Determination Updated – 9/10/13 • Eligible Quantity: total day-ahead scheduled output • Hourly cost: the Eligible Quantity cost determined using Effective Offers for commitment and dispatch cost • Hourly revenue: (Eligible Quantity x DA LMP) • Startup and No Load will be considered in DA Credit • Startup cost amortized over the commitment period • NCPC credit = MAX [0, ∑(Hourly Cost) - ∑(Hourly Revenue)] • summation includes all hours in the Settlement Period • Best alternative is to break-even ($0)

16. Eligible Resources for Real-Time NCPC Updated – 9/10/13 • All resources that are online and operating in response to ISO commitment or dispatch (up and down) instructions • Requires the resource to have a Supply Offer in the real-time market and to be able to respond to ISO dispatch instructions

17. New Slide – 9/10/13 RT Commitment NCPC Credit Determination • RT Commitment NCPC credits are determined in two parts, calculated separately: • A credit for the Min Run Time (MRT) hours • A credit for the post-MRT hours • The credit for the MRT hours ensures a resource is no worse off for starting at the ISO requested commitment start time versus a delayed start • A resource that is unprofitable in the early hours could otherwise improve its financial position by delaying its start time • The credit for the post-MRT hours ensures a resource is no worse off for continuing to operate until de-committed by the ISO.

18. Updated – 9/10/13 RT Commitment NCPC Credit Determination During Min Run Time (“Claw-Forward” Credit) • Eligible quantity: hourly energy amount for cost and revenue = MIN (revenue metering, economic dispatch point) • Hourly cost: Energy Cost + Start-up fee + No Load fee • eligible quantity energy cost is determined using the Effective Offers for Commitment and Dispatch Costs • portion of Start-Up fee from Effective Offer equal to one hour’s share of the fee amortized over Commitment Decision duration • No-Load fee from the Effective Offer • Hourly revenue: (Eligible Quantity x RT LMP) • Credit for the MRT hours: Max[ 0, (total hourly cost – total hourly revenue)for the MRT period ]

19. RT Commitment NCPC Credit Determination Following Min Run Time Updated – 9/10/13 • Eligible quantity: hourly energy amount for cost and revenue = MIN (revenue metering, economic dispatch point) • Hourly cost: Energy Cost + Start-up fee + No Load fee • eligible quantity energy cost is determined using the Effective Offers for Commitment and Dispatch Costs • portion of Start-Up fee from Effective Offer equal to one hour’s share of the fee amortized over Commitment Decision duration • No-Load fee from the Effective Offer • Hourly revenue: (Eligible Quantity x RT LMP) • Best alternative is to break-even ($0) or shutdown at max cumulative profit (>$0) • Hourly profit = Hourly Revenue – Hourly Cost • NCPC credit = MAX [0, Maximum Profit] – Final Profit over the period after MRT • Maximum Profit = maximum total profit (sum of hourly profits for the post-MRT hours) possible by choosing to shutdown at any hour after minimum run time has expired • Final Profit = sum of hourly profits over the post-MRT Period

20. Updated – 9/10/13 Settlement Period for RT Commitment NCPC • Each contiguous block of committed hours (i.e., real-time online operation between times of startup and shutdown) is evaluated separately for RT Commitment NCPC credit • May include one or more commitment decisions • Hourly profit = Hourly Revenue – Hourly Cost • NCPC credit = MAX [0, Maximum Profit] – Final Profit ] • Maximum Profit = maximum total profit (sum of hourly profits) possible by choosing to shutdown at any hour after minimum run time has expired • Final Profit = sum of hourly profits over the Settlement Period The above text was relocated to the earlier slide describing Post-MRT RT Commitment NCPC Credit

21. Anticipated Stakeholder schedule Calculation of hourly DA NCPC Credits and RT NCPC Credits for the purpose of cost allocation

22. NCPC Payments - Future Schedule • September – tariff language review • September 24th – Posturing deisgn, and further tariff review • October – MC vote • November – PC vote • November/December – FERC filing • Q4 2014 – NCPC rules become effective coincident with the Energy Market Offer Flexibility rules