AS Demand Curves

1. AS Demand Curves Shams Siddiqi, Ph.D. Crescent Power, Inc. (512) 619-3532 shams@crescentpower.net SAWG Meeting June 24, 2015

2. Demand for Operating Reserves • SOR (i.e. NSRS and future Contingency Reserve) is capacity (i.e. call options on energy) available to provide energy at its corresponding energy offer price (i.e. strike price) to be deployed by SCED in order to meet uncertain demand (GTBD). • Since VOLL represents the maximum price load is willing to pay for energy to avoid involuntary curtailment, demand curve for SOR should reflect value of expected unserved energy (VEUE) avoided by the purchase of incremental amounts of SOR capacity. • Thus, total payment for energy plus SOR capacity should not exceed load's willing-to-pay to avoid curtailment, i.e. avoided VEUE. A simplified implementation of this concept is reflected in the subtraction of System Lambda from the VOLL in determining the ORDC price adder. • E.g. if SOR capacity and EOC are greater than the marginal avoided VEUE, then load is not willing to procure that SOR – thus if EOC close to VOLL, then there’s no “reliability” nor economic need for procuring that SOR capacity

3. SOR Demand Curve • SOR demand curve (simplified) is a function that represents the diminishing avoided VEUE with increased amounts of SOR capacity • This demand for SOR must be compared to the energy plus capacity offer price for the SOR capacity • Thus, SOR capacity will be procured to the extent that energy plus capacity offer prices for the SOR capacity is less than or equal to the marginal avoided VEUE

4. RRS Demand Curve • RRS is to ensure Frequency is arrested above the Under-frequency Load Shedding (UFLS) threshold of 59.40 Hz and to meet NERC Frequency Response Obligation (FRO) Standard (BAL-003-1) • FRO for ERCOT is determined based on instantaneous loss of two largest nuclear units (2750 MW) • ERCOT has determined that the ERCOT system must maintain specified MW amounts of RRS in order to comply with BAL-003-1 requirements • ERCOT, on behalf of load, is willing to pay up to the SWOC to meet RRS capacity requirements • I.e, as long as there is capacity available on the system beyond what's required to meet load, ERCOT will acquire the required amount of RRS even if the capacity offer is at the SWOC regardless of how high the associated energy offer price

5. RRS Demand Curve • RRS has value even if the associated energy is at SWOC since RRS is to ensure Frequency is arrested • Unlike SOR where theoretically each MW of capacity could avoid one MW of load curtailment during contingencies, insufficient RRS capacity could result significant frequency deviation and loss of load during contingencies • Thus, even if the underlying energy offer price plus the RRS capacity offer price exceeds SWOC, ERCOT would still be willing to acquire that RRS capacity • Thus, RRS Demand Curve is at SWOC for total RRS requirement to meet NERC FRO Standard • In real-time, if there's insufficient capacity to meet both load and provide RRS, ERCOT would first meet load by deploying energy from RUS when PBPC is below SWOC and then deploy additional energy (i.e. procure less RRS) when PBPC is above SWOC

6. RUS Demand Curve • Regulating reserve is required to compensate power imbalance between each SCED interval that could otherwise cause frequency deviation • Resources providing RUS must closely follow LFC signal • ERCOT on an annual basis determines the MW amounts of RUS required to provide adequate regulating service for the system • ERCOT, on behalf of load, is willing to pay up to the SWOC to meet RUS capacity requirement to ensure reliability • I.e., as long as there is capacity available on the system beyond what's required to meet load, ERCOT will acquire the required amount of RUS even if the capacity offer is at the SWOC regardless of how high the associated energy offer price • RUS has value even if the associated energy is at SWOC since RUS is required for reliable operation

7. RUS Demand Curve • Thus, even if the underlying energy offer price plus the RUS capacity offer price exceeds SWOC, ERCOT would still be willing to acquire that RUS capacity • Thus, RUS Demand Curve is at SWOC for total RUS requirement to meet ERCOT reliability requirements • Of course, in real-time, if there's insufficient capacity to meet both load and provide RUS, ERCOT would first meet load by deploying energy from RUS when PBPC is below SWOC and then deploy additional energy (i.e. procure less RUS and RRS capacity) when PBPC is above SWOC