Resource Cost Working Group February 1, 2017 WMS Update

1. Resource Cost Working Group February 1, 2017 WMS Update

2. Significant Capital Costs for RMR Contracts • RCWG discussed initial draft NPRR • Requires ERCOT Board approval for all RMR Agreements, as directed by WMS • Discussed removing capital cost threshold that allows for RMR agreements > 12 months • On-hold pending PUCT rulemaking relating to RMR (i.e. no vote today)

3. Real-Time Mitigation During Exceptional Fuel Events Background: • Some Resources were mitigated in real-time to below their actual cost due to large differences between FIP and their actual gas price on certain days in February and March 2014 • NPRR664 implemented a manual Real-Time Make-Whole Payment process for exceptional fuel events that expired May 1, 2015 • Also provided for a resource-specific Fuel Index Price (FIPR) of HSC, Waha or weighted-average • NPRR714 extended the manual process for Make-Whole with a sunset date of 6/1/17

4. Real-Time Mitigation During Exceptional Fuel Events Background (continued): • TAC assignment to investigate alternatives to NPRR664 • Prefer exceptional fuel costs in LMPs to avoid make-whole and uplift, but also concerned with incorrect LMPs • In the past, RCWG/WMS have discussed several options without reaching consensus • Option 1: Continue with existing Real-Time Make-Whole Payment • Option 2: Pursue “Exceptional Fuel Cost flag” concept • Option 3: Increase MOC’s during Cold Weather Events • ERCOT proposed a new option

5. Real-Time Mitigation During Exceptional Fuel Events • ERCOT proposed new option • During an exceptional fuel event, QSEs could submit a weighted average intraday fuel price (WAFP) to ERCOT via MMS • ERCOT would use the WAFP in the MOC calculation • After the event, QSEs would provide documentation of the WAFP to ERCOT for verification, including attestation by an officer • RCWG discussion focused on risks/benefits of new option and “Exceptional Fuel Cost Flag” option • WMS discussion or direction?

6. Generation Resource Compensation during a Market Restart • Discussed compensation for renewable resources during a market restart • Wind, solar, hydro, biomass • Questions about curtailment of renewables during and after black start, and before market restart • ERCOT to provide clarification at next RCWG meeting

7. Fuel Cost Components in the Fuel Adder Issue: • TAC assignment to WMS to RCWG • Review appropriate treatment of fixed costs such as pipeline capacity charges and penalties in the Fuel Adder Background: • Fuel Adder is used in calculation of Offer Caps and Make-whole payments • Default is $0.50/MMBtu, but a Resource can elect to submit an “actual” fuel adder, subject to verification by ERCOT • Fuel costs can include a number of components, such as commodity and capacity costs for transportation, storage, etc. Status: • RCWG has developed and discussed a list of gas cost components • Working on guiding principles

8. Long-Term Solution to Coal Index Price • VCMRR014 provided an interim solution • $1.10 fuel adder for coal and lignite resources that is added to the $1.50 Solid Fuel Price • Sunsets 6/1/18 • ERCOT developing revised draft NPRR/VCMRR for Coal Fuel Index Price • “CFIP” Coal Fuel Index Price: “Delivered to ERCOT” index price based on PRB 8400 coal plus rail transportation • $0/MMBtu fuel adder for coal and lignite

9. WMS Open Action Items for RCWG

10. APPENDIX

11. Real-Time Mitigation During Exceptional Fuel Events Overview of NPRR664 • Resource can designate a Fuel Index Price (FIPR) of HSC, Waha or weighted-average • Includes Real-Time Make-Whole Payment provision for exceptional fuel cost events • Exceptional event: Actual price paid for delivered fuel must be greater than the FIPR plus the fuel adder plus a threshold fuel price of $2/MMBtu • Uplift allocated by LRS • NPRR664 Approval • Authorized manual workaround to implement Make-Whole Payment for this winter, to be discontinued on May 1, 2015 • ERCOT to revisit the rank and priority with TAC before project initiation

12. Real-Time Mitigation During Exceptional Fuel Events Option 1 - Continue with manual implementation of NPRR 664 • Rationale: Number of exceptional fuel events may be too small to justify significant system changes at this time • Continue with manual calculation of make-whole payments • Lower the priority for implementation of new Fuel Index Prices • Revisit if manual process becomes too burdensome

13. Real-Time Mitigation During Exceptional Fuel Events Option 2 - Pursue “Exceptional Fuel Cost flag” concept • Resource will not be mitigated if it sets an exceptional fuel cost “flag”, submitted with its Energy Offer Curve (EOC) • If set, Resource will be subject to verification of the exceptional fuel costs used in its EOC • Rationale: Exceptional fuel costs would be reflected in LMP’s, possibly eliminating need for make-whole and new index fuel prices (i.e. NPRR664)

14. Real-Time Mitigation During Exceptional Fuel Events Option 3 – Increase MOC’s during Cold Weather Events • When ERCOT issues a cold weather event and is allowed to procure more reserves through a SASM, increase the CF multipliers used in the MOC calculation by 0.50. • Retain manual make-whole process in case higher MOC’s are not sufficient to compensate Resource’s exceptional fuel costs • Rationale: Increase MOC’s during periods when the risk of gas price spikes is higher and provide headroom for exceptional fuel costs in LMPs. Keep manual make-whole process as a backstop. • May be an overly broad solution

15. Real-Time Mitigation During Exceptional Fuel Events Option 3 proposed multipliers: During an ERCOT cold weather event, increase the mitigated offer cap multipliers in 4.4.9.4.1(e) by 0.50.

16. Exceptional Fuel Costs in Real-Time Mitigated Offer Cap • Proposal for modifying the Mitigated Offer Cap • The Mitigated Offer Cap (MOC) can be modified such that it incorporates exceptional fuel costs to ensure LMPs reflect the incremental cost of intraday fuel (if included in EOC). • The MOC can be modified as follow: • The greater of: • [Generic Heat Rate * FIP, • {IHR * Max [(FIP + FA), WAFP] + O&M} * Multiplier] • Where, • WAFP($/MMBtu) = For the affected period, fuel cost based on the actual exceptional fuel prices, weighted by applicable volumes.