Proposed modifications to ISO’s proposed Pay-For-Performance FCM construct

1. Proposed modifications to ISO’s proposed Pay-For-Performance FCM construct Aleksandar Mitreski NEPOOL Markets Committee September 24th 2013

2. About Brookfield Renewable • One of the largest public pure-play renewable power businesses in the world with100 years of experience in power generation with predominantly hydro portfolio

3. Proposed Changes to the FCM Pay-For-Performance Construct Proposing three areas of modification to the current FCM Pay-for-Performance construct • When a resource is subject to an ISO-imposed limit then the resource should not be penalized for non delivery of energy/reserves above that restriction • Only applicable for ISO-imposed limits that occur due to transmission issues, voltage issues, posturing, largest system contingency protection • Intermittent resources should not be penalized for non performance • This class of resources are already penalized through the discount in their determination of Qualified Capacity in FCM • External Transactions supporting Import Capacity Resources that were not dispatched by the ISO due to inaccurate LMP forecast/latency in scheduling protocols should not be penalized for non-performance • Should apply only to External Transactions that offered below the actual nodal LMP (i.e., were economic) of that scheduling interval, but were not cleared by the ISO to flow • Overview of Brookfield’s Proposed Changes

4. Proposed Changes to the FCM Pay-For-Performance Proposal Premise (Generators) – At times ISO forecasts and informs a Market Participant that there is a system issue (e.g., transmission outage/ line overload/voltage issue/posturing of a generator) that restricts the maximum amount of energy/reserves that can be delivered from a generator • A Market Participant is obliged to follow those instructions and restrict output • For example assume transmission work in the area limits the maximum output of a generator from 100MW to only 25MW • Unreasonable to expect the resource to deliver energy/reserves above the ISO-imposed limit of 25MW • But if the balancing ratio is .25, and this resource has a CSO of 100MW then this resource is expected to fully deliver 25MW during the scarcity period • Generator Limitation due to ISO-Imposed Limit

5. Proposed Changes to the FCM Pay-For-Performance Proposal Premise (Import Capacity Resources) – At times ISO forecasts that there will be a transmission issue/largest contingency protection that limits the maximum amount of energy that can be delivered across an external interface. • The Market Participants experience limitation of their desired flow (i.e., curtailments) due to the ISO-imposed limit (or the neighboring control area) across that interface • For example assume a Market Participant has a CSO from an Import Capacity Resource for 100MW and delivers the capacity/energy across an external interface with import capacity of 1,000MW. Assume an ISO-imposed limit reduces the maximum flow (i.e., TTC) across that interface to 800MW • Unreasonable to expect the resource to deliver is full CSO because it could be subject to curtailment due to the reliability issue • Participant should be expected to deliver a pro-rata of its CSO according to the reduction (in this case a 20% reduction) • But if balancing ratio is .25, and this resource has a CSO of 100MW then this resource is expected to fully deliver 25MW • Import Capacity Resource Limitation due to ISO-Imposed Limit

6. Proposed Changes to the FCM Pay-For-Performance Proposal Rationale - Following ISO dispatch instructions to restrict output/flow in order to alleviate a reliability constraint is a bedrock principle under which resources should never be penalized for non-performance • Unreasonable to expect that this resource should trade out part of its obligation, especially if ISO-imposed limit was received only several hours in advance • Resource is ready and available to perform up to its full CSO (e.g., it has fuel, made all appropriate scheduling arrangements) • This resource is already incurring opportunity cost in the energy market for not being able to deliver energy/reserves due to the ISO-imposed limit. Additional FCM penalties exacerbate the lost revenue, especially since the cause of the ISO-imposed limit is beyond the control of the Market Participant • 1. Resource Limitation due to ISO Imposed Limit – Rationale

7. Proposed Changes to the FCM Pay-For-Performance Proposal Proposal 1. When an ISO-imposed limit impacts the generator’s maximum output due to: • Transmission work/outage/thermal issue • Voltage issues on the system • Reduction in output to protect against largest contingency on the system or when postured • An “ISO-limited CSO” should be established for any generator whose output is restricted due to the ISO-imposed limit. Generators should not be subject to any non-delivery of energy/reserves above that “ISO-limited CSO” as currently proposed in the FCM Pay-for-Performance construct 2. When ISO-imposed limit (or a neighboring control area) reduces the maximum flow of energy (i.e., TTC) across an external interface due to reliability reasons then: • An “ISO-limited CSO” should be calculated for any Import Capacity Resource on a pro-rata of the reduction in the interface flow. Import Capacity Resources should not subject to any non-delivery of energy above that “ISO-limited CSO” as currently proposed in the FCM Pay-for-Performance construct • As a result, the Performance Payment Rate will be reduced to offset any ISO-imposed limits that occur during a scarcity event • 1. Resource Limitation due to ISO Imposed Limit – Proposal

8. Proposed Changes to the FCM Pay-For-Performance Proposal Premise • Inherent nature of intermittent resources is that they can not increase their output at all times • ISO’s operational practice and planning procedures (i.e., ICR procurement) already account for the intermittent nature of resources • The existing Qualified Capacity methodology already discounts the maximum CSO that an intermittent resource can obtain compared to its nameplate rating: • The Qualified Capacity is calculated as the average output of the resource during reliability hours (2 hours in the winter and 5 hours in summer) in the previous 5 years • For example a wind resource with Eco Max of 100MW may only receive a CSO for 20MW • In many hours intermittent resources provide energy above their CSO • For example spring output of a run-of-river hydro resource • 2. Intermittent Resources are Already Subject to Reduced Revenue in FCM

9. Proposed Changes to the FCM Pay-For-Performance Proposal Rationale • Intermittent resources are already penalized through shortfall in their capacity payment, compared to their capacity factor/nameplate rating/delivery of energy and should not be subject to the proposed non-delivery penalty • FCM is one of the fundamental revenue streams for these types of resources • Exposure to proposed non-delivery penalties creates significant risk to existing renewable resources and disincentive for investment in new ones (i.e., counterintuitive to existing renewable standards) • The intermittent nature of these resources is already factored in the operating/planning process of the ISO • 2. Intermittent Resources are Already Subject to Reduced Revenue in FCM

10. Proposed Changes to the FCM Pay-For-Performance Proposal Proposal • Intermittent resources should not be penalized for any non-delivery as currently proposed in the FCM Pay-for-Performance construct • Intermittent resources shouldbe eligible to receive compensation for any energy/reserves delivered above the CSO x Balancing Ratio as currently proposed in the FCM Pay-for-Performance construct • This revenue will supplement some of the forgone revenue in the FCM due to the current Qualified Capacity methodology that is applied to intermittent resources • 2. Intermittent Resources are Already Subject to Reduced Revenue in FCM - Proposal

11. Proposed Changes to the FCM Pay-For-Performance Proposal • Currently Import Capacity Resources are required to offer External Transactions below a threshold price. Subsequently, when ISO clears the transactions the Market Participant is responsible for ensuring that the energy flows into New England (i.e., delivers the energy) • ISO proposes to eliminate the “offer below the threshold price” requirement, which could may produce right behavior, but this change in isolation disregards the scheduling seems issues between neighboring control areas: • External Transactions do not have the flexibility (e.g., intra-hour self-scheduling) to react to any intra-hour scarcity event • Only with one neighboring control area (NY) the Coordinated Transaction Scheduling (CTS) is expected to be implemented (according to tentative implementation plans) • 15-minute scheduling will be in place, but intra-hour offer flexibility (re-offering of price) for External Transactions will not be allowed • With remaining control areas, scheduling of External Transactions will continue on an hourly basis • External Transactions may be offered at a price that would be economic in a given hour, but may not be cleared to flow due to latency effect in the timing of the check-out protocol between control areas • External Transactions may be offered at a price that would be economic in a given hour and may be cleared using a forecasted LMP, but the actual LMP may cause a loss for the Market Participant • 3. Import Capacity Resources Under the Proposed FCM PFP Construct

12. Proposed Changes to the FCM Pay-For-Performance Proposal • Assume a non-CST interface on which for HE 15 and 16 an External Transaction backing an Import Capacity Resource was submitted for 50MW at $100/MWh. • Assume the ISO forecast the nodal LMP of that interface at $90 so the transaction does not clear for HE 15 • Assume a contingency occurs at 14:10 and the LMP during that hour increases to $150/MWh • This transactions would have flowed had there been a more dynamic scheduling practice • Analogously, since the unit dispatch system cases are performed more frequently, a fast start generator might have been dispatched on-line • Alternatively, assume a contingency occurs at 14:40 causing the LMP to increase to $150/MWh. The check-out between neighboring control areas for HE 16 has already been completed (at approximately 16:30) with nodal forecasted LMP of $95. The transactions does not clear for HE 16 • This transactions would have flowed had there been a more dynamic scheduling practice • The external transaction would have been economic in both hours (and is in the best economic interest of the Market Participant for those transactions to have flowed) if there was a more dynamic scheduling process between the two control areas • 3. Import Capacity Resources Under the Proposed FCM PFP Construct – Example 1

13. Proposed Changes to the FCM Pay-For-Performance Proposal • Assume a CST interface where a for HE 15 an External Transaction is offered at a spread of +$5 between NY and NE. CTS forecasts that the spread is +3 for the first 15-minute interval of that hour and does not clear the transaction • While transactions will be re-cleared every 15 minutes, there still exists a latency between the forecasted LMP and the actual LMP that occurs in any 15-minute interval • If there is a scarcity event in that first 15-minute interval, the spread between NY and NE may actually increase to $10 • The external transaction appears to have been economic during that first 15-minute interval, but due to latency of the scheduling practices the current FCM Pay-for-Performance construct would not create a non-delivery penalty • External Transactions do not enjoy the benefit of providing reserves, although energy flow can be scheduled with a 15-minute notice on the interface • 3. Import Capacity Resources Under the Proposed FCM PFP Construct – Example 2

14. Proposed Changes to the FCM Pay-For-Performance Proposal Proposal • Remove the current offer threshold requirement and evaluate the economics of External Transactions supporting Import Capacity Resources • Import Capacity Resources should be penalized for non-delivery if deemed to offer uneconomically: • For example, an External Transaction was offered at $300/MWh and the actual LMP during that hour was $80/MWh, and an FCM scarcity event occurred, non-delivery penalty should be applied • Continue penalizing if ISO clears an External Transaction but the transaction does not flow (i.e., the Market Participant did not make the necessary scheduling arrangements) • 3. Import Capacity Resources Under the Proposed FCM PFP Construct – Proposal

15. Proposed Changes to the FCM Pay-For-Performance Proposal Proposal cont. • Import Capacity Resources should not be penalized for non-delivery if: • External Transactions would have been deemed to be economic in a given scheduling interval (15-minues for NY once CTS is implemented, 1 hour for remaining interfaces) • This determination is accomplished through a look-back in the scheduling interval to determine if the price of the External Transactions would have been economic compared to the actual ex-post LMP/interface spread (not the forecasted ex-ante LMP for that scheduling interval) • For example if an External Transaction was offered at $100 and the actual hourly LMP was $150/MWh, but the ISO did not clear that transaction, no FCM penalty should be applied • During intervals when the NY-NE spread is negative • When the flow of energy into New England on that interface is at its maximum (i.e., all the energy is delivered to New England) • 3. Import Capacity Resources Under the Proposed FCM PFP Construct – Proposal