FCM PI Impact Assessment

1. FCM PI Impact Assessment Additional Data and NRG Alternative Analysis Analysis Group August 2013 (Revised August 16, 2013)

2. Overview • FCM PI vs. FCM Status Quo (and alternatives) • March 1 Meeting • Overview of impact analysis and role of Analysis Group • Potential additional scope items • April 10 Meeting • Proposed analytic approach • Key elements of scenarios • Expected sources of data and assumptions • June 4 Meeting • Model construct and status • Scenarios and assumptions, data sources, examples of outputs • Feedback on inputs • July 10 Meeting • Core results • Generator options for mitigating gas shortages • Incorporating PI Risk Factors into FCA Bids

3. Today Additional information/observations in response to July discussion Results of NRG proposal impacts Overview

4. FCM PI has the potential to create multiple benefits Improvements in reliability Reduction in production cost, with some reductions likely flowing to customers in reduced energy prices FCM PI creates incentives that can make New England less dependent on natural gas-only resources, which in turn can increase reliability during periods of tight winter gas supply Quantity of new dual-fuel capability increases with increased expectations of constrained gas shortage hours Note: dual-fuel numbers are a proxy for solutions that firm up supply during gas-constrained times; to the extent there are solutions lower in cost than dual-fuel additions, the same incentives and results would apply (albeit at lower cost) Observations

5. Other changes in the resource mix support higher performing resources overall – PI leads to: Increase in demand response resources and combined cycle (in certain scenarios) Reduction in older oil-fired resources Increased expectations for environmental compliance costs lead to roughly equivalent retirements of at-risk capacity in both the PI and non-PI cases Though retirement of at-risk capacity is slightly higher in the PI case Overall, PI leads to resource mix with higher average performance characteristics Improves reliability and expected system performance; clears more resources that are flexible (DR, CC) PI lowers expected reserve deficiency hours (b/c with PI additional non-cleared capacity remains in service) PI can lower production costs – cleared resources on average have better heat rates, lower marginal energy costs Can lower energy prices as well as NCPC Observations

6. Resource Mix Impact: Historical • Historical Reserve Shortage Levels : • Results reflect current over-supply of resources: • PI results in: • More DR/Imports • Fewer oil-fired resources • PI shifts mix of retirements toward lower-performing (low ‘A’) resources • Participation of other resource types is generally unaffected by PI with few scarcity hours

7. Resource Mix Impact: Near-Term Equilibrium • Equilibrium Reserve Shortage Levels: • PI results in: • More resources across many resource types • Fewer oil-fired resources • More resources in aggregate • PI shifts the resource mix toward higher performing (high ‘A’) resources across all resource types • Resource shifts reflect both number of hours and system conditions during reserve shortages

8. Historical with 3 Hours Winter Reserve Shortage Hours Resource Mix Impact: Gas Dependency

9. Historical with 6 Hours Winter Reserve Shortage Hours Resource Mix Impact: Gas Dependency

10. Resource Mix Impact: Historical, Gas Shortages • Historical with Gas Shortages: • Compared to the Historical scenario, gas shortage hours increase delist of oil-only units • Same quantity clears with or without PI for most resource types • Expected gas shortages increases DR that clears with PI

11. NRG Alternative • NRG has proposed an alternative to FCM PI • ISO-NE has asked that AG evaluate an alternative with the following three components: • Incremental increase in RCPF’s by $5,000 per MWh • Elimination of the Peak Energy Rent adjustment • Implementation of an EFOR-based mechanism

12. NRG Alternative: $5,000/MWh RCPF • Impact of proposed $5,000 RCPF is modeled within the FCM PI Impact Assessment model • Increase in energy market payments reflecting higher RCPF • Number of reserve shortage hours remains fixed between comparable FCM PI scenario – that is, assumes there are no resources with energy markets offers > energy market bid + $500 / MWh (current RCPF) • FCM offers are adjusted to reflect decrease in Going Forward Costs (due to higher energy market net revenues) • Lowers FCM clearing prices • Several impacts of $5,000 RCPF proposal are evaluated • Change in net payments by load • In principle, the net impact of energy and FCM market changes could be positive or negative • Variation in revenues to resources given uncertainty in reserve shortage hours

13. Near-term Equilibrium Scenario Impacts of NRG Alternative: $5,000/MWh RCPFFCM Clearing Price and Payments to Suppliers Note: Results for NRG Alternative do not reflect adjustments for the elimination of PER at current RCPFs.

14. Impacts of NRG Alternative: $5,000/MWh RCPFPayments to Suppliers Under FCM PI and NRG Proposal Expected H • Total payments are similar under PI and NRG Alternative when actual reserve shortage hours are similar to expected hours

15. Impacts of NRG Alternative: $5,000/MWh RCPFPayments to Suppliers Under FCM PI and NRG Proposal Lower H Higher H • Actual payments can diverge from expectations when actual reserve shortage hours differs from expectations

16. Impacts of NRG Alternative: $5,000/MWh RCPFIllustrative Unit Payments under Varying Performance and H High Performance (A=90-100%) Average Performance (A=60-70%) Low Performance (A=10-20%) FCM PI NRG Proposal

17. NRG Alternative: Elimination of PER • If the PER deduction was not eliminated under the NRG proposal, then the PER would result in: • Significant PER deduction payments by suppliers to loads when the RCPF sets the RT LMP; and • A positive FCM clearing price that reflects suppliers expectations and risk factors associated with these PER deduction payments. • Because retaining the PER deduction with the high RCPF is not part of NRG’s proposal, we have not evaluated this scenario

18. Monthly PER Adjustments, 2010 to 2012 ($) NRG Alternative: Eliminate PER • PER has been low since the increase in PER threshold • Source: ISO-NE Internal Market Monitor, 2012 Annual Markets Report, May 15, 2013.

19. NRG Alternative: EFOR-based Mechanism • EFORp proposal has several important attributes • Performance is based on availability, rather than output • Availability measured during particular high demand periods (e.g., top peak load hours, reserve shortages) • Payments flow between generators based on each unit’s availability relative to a pre-determined benchmark • Benchmark based on unit-specific historical availability is evaluated (in principle, class-specific or other benchmark could be used) • “Deviations” in Actual versus Benchmark availability (adjusting for aggregate fleet availability) result in payments/charges equal to: • Payment/charge = MW Deviation * FCM Price * Marginal Multiplier

20. NRG Alternative: EFOR-based Mechanism • Analysis of EFOR-based mechanism • Under the EFOR-based mechanism, offers will reflect expectations about availability relative to the predetermined benchmark • With expectations set at historical performance, bids are not adjusted from FCM offers (i.e., based on GFC) • With uncertainty about future availability, resources may add a risk premium to offers – we have not evaluated these risk premiums • Conclusion: EFOR-based mechanism with unit-specific benchmarks would not be expected to result in any meaningful change in FCM payments (compared to current FCM) • Combining NRG’s proposed EFOR-based mechanism with a $5000 RCPF increase in the energy market would still result in FCA clearing price of “zero”

21. Paul J. HibbardAnalysis Group111 Huntington Avenue, 10th Floor Boston, MA 20199phibbard@analysisgroup.com617-425-8171Todd Schatzki, Ph.d.Analysis Group111 Huntington Avenue, 10th Floor Boston, MA 20199tschatzki@analysisgroup.com617-425-8250