Load Resources Negative RRS Bidding in the Nodal Market

1. Load Resources Negative RRS Bidding in the Nodal Market Credit Working Group January 30, 2008

2. Some Background: What is a LaaR? • Load Acting as a Resource, or “LaaR”, is an end use customer with an interruptible load that meets ERCOT requirements and is qualified to provide Ancillary Services under ERCOT’s “LaaR” program • Responsive Reserve is one Ancillary Service that a Load can provide if the customer is capable of instantaneously interrupting their power supply with no notice prior to the interruption • In the Nodal market these facilities will be called Load Resources (LR) • LaaR providers can sell their capacity by either: • Contracting directly with an REP (fixed price, term) • Bidding into the daily ERCOT Ancillary Service Auction • In the Zonal market, LaaRs compete with generators for a single clearing price (MCPC of RRS) • LaaRs can provide up to a maximum of 1150 MWs for any hour • Generators comprise a minimum of 1150 MWs plus any incremental RRS ERCOT procures above 2300 MWs • ERCOT procures 2300 MW to 2800 MW of RRS depending on projected temperatures (day-ahead) Credit Working Group

3. LaaR Bidding History • ERCOT procures RRS MWs in the ERCOT auction starting with the lowest offer and working their way up the bid stack • LaaR participation eventually exceeded the 1150 MW quantity cap and LaaRs began reducing their offer prices, eventually bidding negative to get selected by ERCOT • Offers as low as -$19,000/MW were submitted • Positive bid actually clears the market (normally a positive generation offer sets the MCPC) • CWG identified the market flaw: What if all RRS generation for a particular hour came in self-arranged? • MCPC could be set by a LaaR at a negative clearing price and there may not be credit available at the QSE level to cover the exposure Credit Working Group

4. Historical LaaR Bidding Credit Working Group

5. Solutions to the Problem Solving the problem in Zonal: • Credit Working Group sponsored PRR646 in November of 2005 which created a $0 floor on the RRS bidding price Solving the problem in Nodal: • In junction with PRR646, a long term solution task force was created to determine solutions under the Nodal protocols • Task force proposed a dual bid stack mechanism to correct the problem in the Nodal protocols (Floor price was not included in the Nodal protocols.) • Resulting NPRR018: Separate LaaR & Generator MCPCs for RRS was rejected by TAC in Jan 2007.  • No stop gap measure has been put in place to compensate for NPRR018 • DSWG believes CWG should support the addition of a floor price until another solution is implemented • Without a stop gap measure to correct this issue the extreme negative bidding seen in 2005 could reemerge.   Credit Working Group

6. Nodal Solution Issues DSWG believes there are two potential options to correct issue for day one of the Nodal market: • Implement a floor price until a market based solution in agreed upon by stakeholders • Modify the credit requirements used during procurement activities: • Current design approach for AS Procurement in DAM does not take into account negative AS bids • Requires system modification to not accept bids unless credit limits were met • Penalizes smaller LR’s who don’t have large corporate financial backing and may create an ‘unequal playing field’ for Loads • DSWG has proposed continuing use of the floor price approach until better alternatives can be identified. • Would result in pro-ration of individual resources which may be problematic for some loads • Other solutions will require significant system changes that could result in $ increase to Nodal budget or delays in delivery • DSWG proposes the CWG again take this issue on and propose an NPRR that would set a floor price for DAM RRS procurement • Finding a solution to negative RRS bidding is on the list of 2008 goals for both DSWG and WMS Credit Working Group

7. DSWG Proposed Nodal Solution Credit Working Group

8. Q&A ON OFF • Questions? Credit Working Group