Conceptual discussion how to integrate renewable resources under a robust market design

1. Conceptual discussion how to integrate renewable resources under a robust market design Aleks Mitreski NEPOOL Markets Committee March 12th 2014

2. FCM Sloped Demand Curve Design • In the April 2011 order, the Commission expressed concerns with the impact of resources with out-of-market revenues when allowed to offer below a competitive price because: • “It suppresses the clearing price below competitive levels” • “OOM resources can affect prices even when no new capacity is needed, by displacing what would otherwise be the marginal, price-setting existing resource” • “Whether the FCM design in New England will provide sufficient income to incent market entry when necessary without the assistance of supplemental revenue streams from outside ISO-NE markets“ • In New England significant effort has been undertaken to develop Offer Review Trigger Prices (“ORTP”) to address these concerns and minimize impact from entires with out of market revenues • Allowing resources to offer below their long-run average cost distorts price formation such that clearing prices no longer reflect the true market conditions • For example, the ISO-NE/Brattle proposed demand curve has been optimized to meet certain reliability standards and send the correct price signal as a function of reserve margin conditions and Cost Of New Entry for merchant resource • Alterations to the supply curve through exemptions can have major impact to clearing prices which in turn will affect near and long term incentives for merchant entry and maintaining system reliability • Robust Forward Capacity Markets are designed to provide the correct price signals and incentives

3. FCM Sloped Demand Curve Design • New England states have set renewable standards to meet public policy goals • The Commission “acknowledges the rights of states to pursue policy interests within their jurisdiction” but is concerned that “OOM capacity suppresses prices regardless of intent and that the Commission has exclusive jurisdiction on assessing whether wholesale rates are just and reasonable” • The Commission has expressed concerns with the implementation of exemptions where “we cannot establish an exemption in a vacuum or without facts supporting a specific exemption” • Integrating renewable resources under a robust market design is challenging • The sloped demand curve is intended to send the correct price signal based on the economics of a new merchant entry and maintaining reliability standards (e.g.,1 in 10) • Developing an approach where renewable standards can be achieved with no incremental cost to consumers, while minimizing price formation impact is a win-win outcome for public policy goals and efficient market design • Achieving renewable policy standards without incremental cost to consumers and minimal impact to price formation

4. FCM Sloped Demand Curve Design Premise: Enable renewable resources with out-of-market revenue to participate in the Forward Capacity Market and receive a Capacity Supply Obligation (“CSO”) with minimal impact to the economics of a new entry and without increased cost to consumers • Under this concept, if renewable exemption rules are adopted by the Commission, then resources that choose Renewable Technology Resources (“RTR”) treatment can receive CSO up to the approved annual cap even if the clearing price is below their offer • The RTR resources would be required to offer above their respective ORTP • If RTR clears within the auction, the RTR becomes existing and no further steps are needed • If RTR does not clear in the auction then these resources still receive a CSO • To avoid a missing money problem there will be a price proration applied to all resources to accommodate the incremental amount of capacity associated with RTR • All resources with a CSO receive a prorated clearing price • Cost to consumers does not increase • Conceptual overview how to integrate renewable exemptions in a robust market design

5. FCM Sloped Demand Curve Design • Assume: • 100MW of RTR elects to utilize the renewable exemption • These 100MW must offer above their ORTP (e.g., $10/kW-month) • During the auction, the ISO-NE clears 35,000MW to meet ICR which results in a clearing price of $7/kW-month • Total cost to load is $245,000/kW-month ($7/kW-month x 35,000MW) • Since none of the RTR cleared the auction (since their offer was $10/kW-month) these 100MW are nevertheless added to the pool of cleared resources which results having total Capacity Supply Obligation of 35,100MW • The capacity clearing price is then prorated as $245,000/35,100MW = $6.98/kW-month. Total cost to load remains $245,000/kW-month • All 35,100MW receive the prorated capacity clearing price of $6.98/kW-month *Numbers used in the example are for illustration purpose only • Example how renewable resources could beintegrated under a robust capacity market design*

6. FCM Sloped Demand Curve Design • This proposal is still in a conceptual stage • Thoughts and comments are welcomed Aleks Mitreski (413) 636 - 5732 aleksandar.mitreski@brookfieldrenewable.com • Further discussion can be undertaken to ensure the concept can be appripriatly implemented