2013 Fuel Security Enhancement

1. 2013 Fuel Security Enhancement Dual/Secondary Fuel Operational Issues

2. Summary of Issue – Dual/Secondary Fuel • There is little incentive to maintain, much less attract dual fuel capability • Upside potential is small to negligible • Bidding rules severely limit the ability to extract any economic advantage from dual-fuel capability. • Ongoing costs are significant • Commissioning expense • Regular testing expense • Cost of filling tanks • Insurance • Other downside risks are large • Can unit be forced to run on secondary fuel even when not in economic interest of unit owner? • Purchasing liquid fuel, but then not actually burning it. • Physical wear and tear • NCPC traps

3. Dual Fuel History • As a result of these conditions, most of our dual-fuel capability has been decommissioned • The 2004 CELT report listed 10,614 MW of dual-fuel capable units (winter) • The 2012 CELT report listed 6,219 MW of dual-fuel capable units (winter) • This includes >1000 MW of new CT RFP generation that was required to be dual-fuel • Result: Essentially half (5000 MW) of our dual-fuel capability has been decommissioned over the past 8 years.

4. Dual Fuel Disincentives • There are three principal disincentives to keeping dual-fuel capability, all of which are relatively easily correctible: • Mitigation rules make it difficult to bid dual fuel units in a way that can extract value from the flexibility, and limit owners’ ability to manage fuels. • Periodic testing of oil-fired capability is expensive and currently uncompensated. • NCPC rules pose unintended/unexpected costs on units that switch fuels in Real-Time.

5. 1. Dual-Fuel Bidding - Problem • Rules require bidding lower-cost fuel, unless it is (expected to be) physically unavailable. • Cannot bid higher-cost fuel in an effort to save inventories of lower-cost fuel for later use. • We should allow generators to manage scarce fuels – making them most available when they are needed most. • If higher cost fuel is bid, you must document that you actually burned it. • If you are able to burn lower cost fuel, then you are mitigated after-the-fact to that lower price. • This is a disincentive to search for or find ways to secure cheaper fuel. • This virtually eliminates any up-side to having flexibility to burn secondary fuels.

6. 1. Dual-Fuel Bidding - Solution • Solution: • Allow dual-fuel units to bid based on their own best judgment of the proper fuel to burn • Provides potential economic reward for taking on risk and cost of dual-fuel capability. • Allows generators to manage fuel inventories efficiently – so liquids (or gas) are available during system stress. • Incents generators to search for and switch to least-cost fuel in RT. This increases system efficiency and reduces overall production cost.

7. 1. Consistency with Review Criteria • Reliability needs addressed • Provides a possible up-side for having dual fuel capability, helping to stop decommissioning of existing 2-fuel units, and incent re-commissioning of others. It also incents units to keep reliable supplies of secondary fuels on hand. • Will allow generators to manage fuels proactively, in a way that reduces production costs, and preserves scarce fuels for when they are needed most. • Payments • There are no special payments. Changes only allow units to bid flexibly in energy markets. • Cost Allocation. • There are no special costs to allocate. Payments fall naturally out of the energy markets. • Markets Impact • RT pricing is actually enhanced and more efficient, because unit owners are able to manage and bid their fuels in the manner that is most efficient; RT prices will more accurately reflect the societal value of fuel at any one moment.

8. 2. Secondary Fuel Testing • Issue: • Units with ability to burn a secondary fuel require periodic testing. • The amount varies by technology – from a few times/year to monthly. • Today, such tests are typically accomplished by self-scheduling an out-of-merit run • The out of merit fuel cost (greater than LMP) is not compensated, and can be significant. • This uncompensated cost has been a major reason many units have decommissioned dual fuel.

9. 2. Fuel Testing – Possible Solution • Allow secondary-fuel testing to be compensated to the extent energy is OOM. • Could limit testing compensation to winter period, and maximum number of tests/unit. • NCPC paid similar to the way “ISO-Initiated Audits” are paid under new CCA rules. • Cost could be allocated to Network Load as a Reliability Expense, similar to Black Start. • Eligibility could be linked to ability to provide the attributes ISO is seeking (e.g. minimum inventory) • This will not only prevent exodus of existing dual-fuel and help incent return of decommissioned units, but will also enhance the reliability of existing dual-fuel facilities. • If secondary fuel operation is not regularly tested, its reliability when called is diminished.

10. 2. Consistency with Review Criteria • Reliability needs addressed: • The proposal will help stop decommissioning of dual-fuel units, help incent currently decommissioned units to re-commission, and increase the reliability of dual-fuel units when burning secondary fuels. • Payments • Difference between market revenues and costs for fixed # of tests (NCPC like “Surprise” CCA). • Cost allocation • To Network Load (reliability cost). • Markets impacted • None materially

11. 3. RT Fuel Switching • Issue: • Existing rules disqualify NCPC if a unit changes its EcoMin in RT • RT fuel switching often involves small changes to physical and permitting limits. • The current NCPC rule means that a RT fuel switch could lead to significant $ losses, even if the new fuel is much cheaper to run on. • Fix is relatively easy: • Allow RT changes to eco-min that are linked to physical or permitting requirements associated with fuel switching, without NCPC disqualification.

12. 3. Consistency with Review Criteria • Reliability needs addressed • Removes disincentive to switch fuels in RT when appropriate or necessary. This will better allow units to release gas when it is scarce, and manage fuel inventories most efficiently. • Payments • No new payment streams are necessary; change only removes a criteria for NCPC disqualification. • Cost Allocation • There are no special costs to allocate. Total NCPC pool-wide should not change; instead NCPC stays the same, but unit owners can manage fuels within their NCPC payment stream. • Markets Impacted • Should have no impact on market prices or total NCPC – just allows generators to better manage their fuel.

13. If we ignore these problems: • Absent changes, expect: • Continued trend towards additional dual-fuel decommissioning. • Existing rules, together with volatile market dynamics, incent more flight from dual fuel capability • No re-commissioning of resources that used to be dual fuel. • Continued incentives against efficient management of fuel. Generators incented to manage fuel according to tariff requirements, often contrary to efficiency or reliability.