May 13, 2013 - RC/MC Meeting

1. May 13, 2013 - RC/MC Meeting ISO New England Staff Winter 2013/2014 Issues and Proposed Solutions Fuel Dependence Risk

2. Presentation Overview • Participant Feedback • Current Proposal • High Level Flow Chart • Bid Submittals • Walk Through Examples

3. Feedback Consideration • ISO has carefully considered feedback provided by the Participants over the series of meetings and correspondence to date and made several modifications. • The stated objective, to obtain the incremental energy needs to help secure reliable system conditions this winter if severe weather occurs, must be achieved. • We are dealing with a very limited timeframe to develop and implement a workable solution. • ISO solution focuses on oil, dual fuel and demand response. • ISO considered and deliberated on an LNG option but could not structure a workable proposal

4. Concerns Regarding LNG • Primary concern: an LNG solution is inherently more complicated • Multiple players must be involved in direct supply chain: storage facility, pipeline, generator • Must get incentives right for each • Multiple sets of consumers and sources of natural gas add complexity • Providing more supply might reduce gas released from other uses (e.g., fuel switching), which reduces effectiveness • How do you ensure that an LNG program results in incremental energy? • Must design contracts so that LNG is used fully when needed, but pipeline gas is used when economic • Are contracts for base-load service; peaking service; some combination? • Opportunity costs drive regional gas prices • Natural gas spot price during winter 2012-13 ranged from $15 to $55, which demonstrates that pricing is driven by opportunity costs • If ISO interferes with the opportunity cost by engaging in contracts with suppliers or a subset of generators, it will impact the scarcity value, and affect the entire wholesale electric market • Contracting mechanisms must somehow ensure that scarcity signals and efficient rationing via prices are not undermined

5. Concerns Regarding LNG (cont.) • Given the central role that natural gas plays in both the electric market and the home heating market, it is essential that all complexities be addressed; otherwise there is the potential to make the situation worse, not better • Coupled with the extremely limited timeframe for developing a solution, ISO decided to focus on oil, which appears to be a much simpler problem • Even so, ISO struggled to put together a proposal that minimizes market impacts • Oil is demonstrably less complicated in each respect: one entity; opportunity costs are very infrequent; once oil is in tank, only one consumer; oil is really a backstop fuel, not a centerpiece of market (electricity from natural gas resources was more expensive than that from oil resources only about 5 days last winter) • Any LNG solution that relies on a level of ISO intervention in the fuel market (e.g., ISO taking ownership of LNG; or deciding when it is needed; or allocating amongst various parties), in our view is unworkable • That said, if a comprehensive proposal gets the support of stakeholders, the ISO would consider it.

6. Current Proposal • In consideration of Participant feedback, ISO further developed the current proposal into three primary elements • Procurement For Demand Response • Procurement For Single Fuel Oil Generators • Procurement For Dual Fuel Generators • Market Solutions are on-going

7. High Level Flow Chart

8. Bid Submittal Format for Soliciting Incremental Energy Storage • The ISO’s objective is to obtain the incremental energy needs to secure reliable system conditions this winter if severe weather occurs; target timeframe is December, January and February. • In response to concerns raised in the last meeting about the but-for level of inventory, and in order to simplify the solicitation process, the ISO will solicit offers in price/quantity pairs for the full requirement. • The ISO anticipates ample competition, which will drive offer prices toward the incremental costs and risks associated with the incremental fuel inventory quantities.

9. Bid Submittal Format for Soliciting Incremental Energy Storage (cont’d) • We would anticipate that as each resource offers more inventory (higher percentage of storage capacity) that their costs above their normal fuel management plan will increase. • For example, a generator offering a quantity equal to their normal inventory levels would incur little incremental cost and therefore would likely offer that initial quantity at a relatively low price. As that generator offers additional quantity blocks the price would tend to rise to account for additional carrying costs and potential costs of dealing with surplus fuel at the end of the season. • Bid price for each block will reflect incremental cost, competitive pressures, and expected procurement prices paid by ISO.

10. Incremental Fuel Price/Quantity Offers Concept • Base Block • consistent with normal inventory and is expected to have little additional cost • Up to 3 additional offer pairs • it is expected that these blocks will have increased incremental costs • If supply curve is steep, ISO may elect not to purchase the full requirement Base Block Inventory (MWH, barrels)/ Offer Price Incremental Block 3 Inventory (MWH, barrels)/ Offer Price Incremental Block 2 Inventory (MWH, barrels)/ Offer Price Incremental Block 1 Inventory (MWH, barrels)/ Offer Price

12. Winter 2013/2014 Supplemental Obligation Program – Objectives

13. Objectives • ISO will review the offers and award the MWh allotment to the Resources up to 2.4 million MWh (4.2 million barrels of oil) • The total procurement is expected to be made up from three resource components: • Oil Fired Generation • Dual Fuel Generation (Gas Primary, Liquid Secondary) • Demand Response

14. Winter 2013/2014 Supplemental Obligation Program – Market Solutions

15. Market Solutions - Update • Additional Market Solutions under Consideration for Next Winter • Real-time reserve requirements and when RCPFs are triggered • Constraints modeled in real-time (e.g., local second contingency protection) that could be also modeled in the day-ahead market.

16. Winter 2013/2014 Supplemental Obligation Program - Demand Response

17. Changes to Winter DR Program Term Sheet From April 30th Stakeholder Discussions • Asset Eligibility, Selection, and Registration • Clarified language regarding asset eligibility • Added provision allowing aggregation of end-use facilities into assets • Eliminated “deliverability” provision • Metering and Meter Data Reporting • Added provision on meter data reporting for aggregations • Settlement • Clarified computation of monthly average MW performance • Excluded 30-minute notification time from performance computations • Added section describing asset obligations and settlement if an asset were dispatched more than 10 times during the program term • Penalties • Clarified computation of monthly average MW performance and energy penalty provisions

18. Concerns Regarding Simultaneous Participation of Assets in Winter DR Program and FCM • Adding Winter DR Program MW and retaining FCM MW improves reliability and decreases oil purchases • Shifting MW from FCM to Winter DR Program would not improve system reliability or reduce oil purchases • When shifting the dispatch of FCM MW from just after to just before OP-4, the same assets would be used to address the same reserve deficiency • Since these assets would be utilized around the same point in the dispatch, these assets would provide little to no additional energy • Allowing FCM MW to participate in the Winter DR Program would increase costs but not offset oil purchases

19. Concerns Regarding Simultaneous Participation of Assets in Winter DR Program and FCM (cont) • Complexity of performance measurement and allocation • Rules and software would need to be developed to address: • Overlapping Winter/FCM Dispatch • Overlapping Winter Dispatch and Partial FCM Dispatch • Overlapping day-ahead or real-time Transitional Demand Response and Winter Dispatch • Allocation of asset performance (including over- and under-performance) between Winter DR Program and FCM Resource • Disconnect between Winter DR Program asset-based dispatch and FCM Resource-based dispatch • Time and resources are not available to develop the necessary rules and software to address these issues • For these reasons, the ISO does not believe that simultaneous participation of assets in Winter DR Program and FCM is desirable or feasible

20. DR Winter Program Settlement Examples

21. DR Winter Program Settlement Examples (cont)

22. Winter 2013/2014 Supplemental Obligation Program - Oil Fired Generation

23. Offers • Offers are submitted by the participants including but not limited to: • MWh • The total amount of initial energy inventory that the Resource offers pursuant to this supplemental program • MW • The capacity provided by the Resource • $/MWh • Offer price for the energy, not the MW • These will need to be specifically defined in the Market Rule

24. Energy Required • ISO will review the offers and award the MWh allotment to the Resources equivalent up to 4.2 million barrels of oil • Assumed fuel heating value = 137,000 btu/gal • Assumed generator heat rate = 10,000 btu/kWh

25. Resource Selection • Optimize based on selection criteria • Minimize/maximize (as appropriate) generator operating characteristics • Minimize cost • Historical availability and performance • Diversity of location • Total capacity of resources

26. Resource Allocation • Once the MWh allocation has been determined, it will be published and released to the Resources. • Each Resource must have its agreed upon inventory on site on December 1, 2013.

27. Fuel Retention • ISO will conduct a fuel survey on 12/1/2013. • All Resources in the program will send in their fuel survey ON DECEMBER 1st. • ISO will compare their inventory to the agreed-upon inventory to verify that the procurement is in place.

28. Resource Performance Evaluation • The availability of each Resource will be evaluated against its supplemental energy obligation in the program. • Oil inventory will be submitted regularly via fuel surveys to verify the inventory for each Resource.

29. Payment and Penalties • At the end of each month, penalties will be calculated based on that month’s performance. • Resources will receive payment from the program based on: • Performance during each month, with commitment and dispatch as a baseline • ISO will evaluate whether or not oil inventory is sufficient to meet remaining obligation

30. Examples • For all examples: • Generator has the full amount of required oil at the beginning of the winter • The generator runs perfectly for the ISO commitment and dispatch • Oil inventory goes down proportional to the MWh received on the power system from the generator

31. Example 1: Expected Oil Depletion Under Supplemental Procurement • On two occasions, ISO commits the generator to run for a week at a time.

32. Example 1: Expected Oil Depletion Under Supplemental Procurement

33. Example 2: Expected Oil Depletion Under Supplemental Procurement • ISO commits the generator to run one day a week, for 15 hours per day, throughout the winter.

34. Example 2: Expected Oil Depletion Under Supplemental Procurement

35. Example 3: Expected Oil Depletion Under Supplemental Procurement • ISO commits the generator to run continuously from December 1 through January 1. • Their oil inventory is continuously depleted as they run. • The generator is not dispatched again from January 2 through the end of the winter. • At the end of the winter period, the generator retains title to the remaining oil inventory.

36. Example 3: Expected Oil Depletion Under Supplemental Procurement

37. Program Completion • On March 1, 2014 all program participants are released from their winter obligations from the program and retain title to the oil. • All Resources are still subject to the rules and regulations of the existing market structure before, during, and after the procurement period.

38. Scenario 1 December 1st: Does the generator have agreed upon amount of oil in tanks on site? Generator remains eligible for full payments subject to performance penalties Was the generator committed and dispatched on oil during the procurement period? The generator can use oil after the procurement period as desired. Generator receives full payment Yes No • Generator meets on-site fuel requirement and does not get committed

39. Scenario 2 December 1st: Does the generator have agreed upon amount of oil in tanks on site? Generator remains eligible for full payments subject to performance penalties Was the generator committed and dispatched on oil during the procurement period? Yes Yes Does the generator committed and dispatched on oil during the procurement period perform as expected? No performance penalties within the structure of this program.  Generator receives payment  as determined December 1 Yes • Generator meets on-site fuel requirement and operates as committed

40. Scenario 3 December 1st: Does the generator have agreed upon amount of oil in tanks on site? Generator remains eligible for full payments subject to performance penalties Was the generator committed and dispatched on oil during the procurement period? Yes Yes Does the generator committed and dispatched on oil during the procurement period perform as expected? • Generator meets on-site fuel requirement and does not operate for some committed hours No Generator does not receive the supplemental payment for the hours in which it did not operate

41. Scenario 4 December 1st: Does the generator have agreed upon amount of oil in tanks on site? Was the generator committed and dispatched on oil during the procurement period? The generator can use oil after the procurement period as desired. Generator receives payment as determined on Dec. 1 No No Yes No Generators’ monthly payments are proportionally reduced and generator pays per gallon penalty Is the generator completely deficient? Does the generator committed and dispatched on oil during the procurement period perform as expected? No performance penalties within the structure of this program.  Generator receives payment  as determined December 1 Yes No • Generator does not fully meet on-site fuel requirement, repeat Scenarios 1, 2, and 3 Generator does not receive the supplemental payment for the hours in which it did not operate

42. Scenario 5 December 1st: Does the generator have agreed upon amount of oil in tanks on site? No Generators’ monthly payments are proportionally reduced and generator pays per gallon penalty Is the generator completely deficient? Yes Generator is removed from program • Generator has no fuel on 12/1/2013

43. Scenario Summary December 1st: Does the generator have agreed upon amount of oil in tanks on site? Generator remains eligible for full payments subject to performance penalties Was the generator committed and dispatched on oil during the procurement period? The generator can use oil after the procurement period as desired. Generator receives payment as determined on Dec 1 Yes No No Yes No Generators’ monthly payments are proportionally reduced and generator pays per gallon penalty Is the generator completely deficient? Does the generator committed and dispatched on oil during the procurement period perform as expected? No performance penalties within the structure of this program.  Generator receives payment  as determined December 1 Yes Yes No Generator is removed from program Generator does not receive the supplemental payment for the hours in which it did not operate

44. Oil Winter Program Settlement Examples

45. Oil Winter Program Settlement Examples (cont.)

46. Winter 2013/2014 Supplemental Obligation Program -Dual Fuel Generation

47. Overview • Dual fuel generators will agree to swap to/operate on a secondary fuel should the unit’s primary fuel not be available • Dual fuel for this proposal is the capability of operating on natural gas (primary) and a liquid fuel distillate or residual (secondary)

48. Requirements • Subject to the same obligations as the Oil Supplemental Program • Additionally, demonstrate prior to December 1st swapping from the primary fuel to secondary fuel within three hours and operation on secondary fuel • Duration of testing based on manufacture specifications • Must include a minimum of 60 minutes at ECOMAX • Test plan must be submitted and approved by the ISO

49. Resource Selection • Optimize based on selection criteria • Minimize cost • Historical availability and performance • Ability to switch while on-line • Initial fuel inventory • Test Plan • Operating characteristics including physical restrictions

50. Energy Payment • Out-of-merit energy costs (NCPC) for successful demonstration of swapping and operating on the secondary fuel in accordance with the unit’s ISO approved test plan • If unit has a standing offer at the start of the operating day on its primary fuel and swaps to its secondary fuel with the ISO’s approval, the forecaster will substitute the secondary fuel reference cost as the supply offer for the duration of the operating day • The substitution to a secondary cost curve will be open to all dual fuel units until Hourly Re-offer becomes available