Implementation of NPRR153 Carrie Bivens Supervisor, Day-Ahead Market WMS May 8, 2013

1. Implementation of NPRR153 Carrie Bivens Supervisor, Day-Ahead Market WMS May 8, 2013

2. Summary • NPRR153 was a nodal parking deck item • The purpose is to allow Generation Resources to offer their offline Non-Spin in fixed quantity blocks • Currently only Load Resources can submit block offers for Ancillary Services • It is a straightforward and minor system change to the MMS validation rules, with an impact analysis between $12 and $16k. • During project planning, ERCOT recognized and studied that this NPRR could cause some potentially undesirable pricing outcomes and now seeks stakeholder guidance WMS May 8, 2013

3. Clearing Price Impact • Fixed quantity blocks present a challenge to a marginal pricing scheme. • This issue was discussed extensively as it relates to DAM energy bids/offers during the MMS requirements approval phase of nodal. • Fixed quantity block offers do not set the clearing price and are essentially price-takers once selected in the commitment phase of DAM • For DAM energy, it is a regular occurrence to be struck below offer price, but the price differences are usually minimal • Upon implementation of NPRR153, fixed quantity Non-Spin offers could also clear below the offer price (and alternatively, fail to clear even when MCPC > offer price). • A/S market is less liquid than energy market so the magnitude of the price drop is likely to be larger (next lower variable offer sets price) • A/S products are linked together, so pricing impacts carry to other services • As an offline non-spin award, it will not be eligible for DAM make-whole payment WMS May 8, 2013

4. Clearing Price Impact • In an extreme case study performed by ERCOT, the MCPC could be $0 no matter the offer costs • This outcome was simulated using a recent production case by converting all variable non-spin offers to block non-spin offers • MCPCNon-Spin = Shadow Price of the Non-Spin requirement constraint • If there are no committed variable offers to adjust with a small change in the Non-Spin requirement, then an incremental increase to the Non-Spin requirement would result in no change to the objective function Offer Price ($/MW) Non-spin req’t Offer MW WMS May 8, 2013

5. Clearing Price Impact • This is an existing potential issue for Load Resources but is not observed because: • Currently LRs do not regularly offer Non-Spin, they only participate in the RRS market which has a 50% procurement limit • Offers from Generation Resources routinely set the clearing price WMS May 8, 2013

6. Discussion of Options • Options: • Continue work on NPRR153 with existing block offer implementation • Choose to not implement NPRR153 • An alternative implementation with a change in price-setting methodology (and revise Impact Analysis for NPRR153): • Add a pricing run where the block of the marginal offer is removed for clearing purposes and it is allowed to set the price (economic dispatch is re-solved with the commitment pattern frozen and the offer as variable MW) • Creates inconsistency between dispatch, price and offer/bid values • Could lead to increased requests for make-whole consideration from both supply and demand side, once we begin publishing inconsistent results • Co-optimization is impacted • Generators would no longer be guaranteed an optimal dispatch among energy and A/S, once committed • This pricing run would be necessary for all hours due to the situation of fixed quantity block offers that are also multi-hour blocked. • More discussion and analysis would be needed if this option is desired 4. Other concepts or ideas? WMS May 8, 2013