Resource Cost Working Group September 7, 2016 WMS Update

1. Resource Cost Working Group September 7, 2016 WMS Update

2. Settlement of Switchable Generation Resources (SWGRs) • RCWG discussed potential costs and benefits for Settlement Option 1 - Optional Switch and Option 2 - Required Switch

3. Significant Capital Costs for RMR Contracts 3.14.1 Reliability Must Run ERCOT may execute RMR Agreements for no less than one month and no more than one year, with one exception. ERCOT may execute an RMR Agreement for a term longer than 12 months if the Resource Entity must make a significant capital expenditure to meet environmental regulations or to ensure availability to continue operating the RMR Unit so as to make an RMR Agreement in excess of 12 months appropriate, in ERCOT’s opinion. The term of a multi-year RMR Agreement must take into account the appropriate RMR exit strategy discussed in Section 3.14.1.4, Exit Strategy from an RMR Agreement. In the event ERCOT chooses to contract for an RMR Unit for longer than one year, ERCOT shall annually re-evaluate the need for the RMR Unit under the criteria set forth in paragraph (b) above. If ERCOT determines the RMR Unit is no longer needed, ERCOT shall enter into exit negotiations with the contract signatories to attempt to exit the contract early. However, ERCOT shall not enter into such negotiations until a Market Notice is issued providing the anticipated RMR exit time frame. The RMR standard Agreement is included in Section 22, Attachment B, Standard Form Reliability Must-Run Agreement. ERCOT shall post each RMR Agreement in its entirety, including amendments or modifications thereto, within five Business Days of execution on the MIS Secure Area. RCWG discussion • Require Board approval for an RMR contract with a term longer than 12 months or capital expenditures greater than $3M • Develop NPRR based on above?

4. Long-Term Solution to Coal Index Price • RCWG continuing work on NPRR and VCMRR for Coal Fuel Index Price and Emission Costs • “CFIP” Coal Fuel Index Price: “Delivered to ERCOT” index price based on PRB 8400 coal plus rail transportation • $0/MMBtu fuel adder for coal and lignite • Provide more timely calculation of Emission Costs • ERCOT presented options for calculating emission costs • RCWG to draft a separate NPRR/VCMRR for Emission Costs, due to implementation costs • Interim fuel price solution for coal and lignite Resources sunsets 6/1/18 (VCMRR014)

5. Fuel Cost Components in the Fuel Adder Prior RCWG discussion points: • Should the fuel adder include only “incremental” and “variable” costs, to be consistent with the other components of verifiable cost and market power mitigation? • Does the existing VCM language allow inclusion of fixed cost components? • Should Resources be able to recover their costs for providing the fuel supply, transportation and related services required to make the Resource available to the market? • Does including fixed-cost components result in the market bearing the risk and/or cost for Resource fuel contracts? • Should margins from any 3rd party volumes be included in the fuel adder? • Should market participants have visibility to the range of approved actual fuel adders?

6. Fuel Cost Components in the Fuel Adder Guidance from Nodal Protocols 5.6.1 (3) These unit-specific verifiable costs may include and are limited to the following average incremental costs:… 5.6.1 (5) These unit-specific verifiable costs may not include: (a) Fixed costs, which are any cost that is incurred regardless of whether the unit is deployed or not; and (b) Costs for which the QSE or Resource Entity cannot provide sufficient documentation for ERCOT to verify the costs.

7. Fuel Cost Components in the Fuel Adder Section 3 of the VCM under Additional Rules for Submitting Fuel Costs 2. Any Filing Entity that submits an actual fuel adder must provide documentation that establishes the historical costs for fuel, including transportation, spot fuel, and any additional verifiable cost associated with fuel contracts that can be easily differentiated from the standard commodity cost of fuel and clearly attributable to the Resource for the period. The fuel adder for a rolling 12-month period is the difference between the Filing Entity’s average fuel price paid (including all fees) during the period and the fuel price utilized by ERCOT for the corresponding Resource. The Filing Entity shall provide rolling 12-month supporting data to verify total fuel price for all purchased volumes to support the actual Resource fuel consumption. Data to support these costs should include, but are not limited to, accounting ledger entries, invoices, and copies of fuel contracts. In addition, the actual costs used to calculate the fuel adder may include, but are not limited to, the following categories: transportation, deliveries, storage, injection, withdrawal, imbalance, and minimum requirements fees. Other costs not described herein may be included and approved by ERCOT.

8. Fuel Cost Components in the Fuel Adder • Requesting WMS guidance for Option 1 or Option 2

9. Generation Resource Compensation during a Market Restart • ERCOT presented ideas for settlement during a market disruption and subsequent restoration • RCWG discussed the need to pay generators during a market disruption to ensure continued resource operations, with the ability for true-up at a later time • May need a fund to support payments (CRR fund?) • May need a guarantee or declaration from a governmental entity (e.g. Governor) to ensure payments and continuity of fuel and operations during market disruption and restart • RCWG to continue discussion, based on WMS guidance

10. Next RCWG Meeting • Thursday September 22, 2016