Overview and Update on the Ever-Evolving New England Wholesale Capacity Market

1. Overview and Update on the Ever-Evolving New England Wholesale Capacity Market presentation to Boston Bar Association May 23, 2013 Presented by: Paul N. Belval (pnbelval@daypitney.com)Sebastian M. Lombardi (slombardi@daypitney.com)

2. New England Wholesale Capacity Market • Introduction of Wholesale Electricity Components Sold • Overview of New England’s Forward Capacity Market • Update on Key Challenges and Evolving Solutions

3. Introduction - Wholesale Power Markets • The Markets • Energy • Capacity • Other Ancillary Services

4. Wholesale Electricity Cost Components Total Wholesale Load Cost in 2012: $7,332,216,296 Source: Wholesale Load Cost Report, ISO New England Inc. (March 2013) Monthly Regional Network Load Cost Report (Jan. 2013 4

5. New England Wholesale Capacity Market KEY TERMS Installed Capacity Requirement (ICR) - Amount of capacity needed to reliably serve New England. Forward Capacity Auction (FCA)– A periodic auction held by ISO New England to procure generating capacity or demand reduction capacity to satisfy ICR. Capacity Commitment Period (CCP) – The period from June 1 to May 31 that defines the duration of a capacity obligation procured in the FCA.

6. New England Wholesale Capacity Market KEY TERMS (cont.) Offer - Amount of capacity for a New Resource that is bid into an FCA. De-list Bid - Amount of capacity from an Existing Resource that is proposed to be withdrawn from an FCA. Capacity Supply Obligation (CSO): MW of capacity obligation assigned to a Resource during all of or a portion of a specific Capacity Commitment Period.

7. Why have Capacity Markets? • Ensure adequate resources are available where and when they are needed to “keep the lights on” • Units that operate only during peak demand times would require huge payments in energy market to recover their full costs during few hours of operation • Society has been unwilling to allow prices to rise to such levels, even in the small number of hours when high prices would be required • Separate and assured revenue stream necessary to keep generators that are required for reliability and available to operate when needed • Help to stimulate new generation and demand resources that are desired to meet future needs

8. New England Wholesale Capacity Market New England’s Forward Capacity Market (FCM): • “Forward market” where ISO New England procures enough capacity to meet reliability needs 3 years in the future • ISO New England procures needed capacity through an annual auction

9. New England Wholesale Capacity Market Installed Capacity Requirement (ICR) • ICR is the amount of installed resources (both generating and demand) needed to meet ISO-NE’s Resource Adequacy Criterion • Calculated outage probability – “one day in ten years” criterion. • To meet this requirement, ISO-NE calculates how much capacity should be needed to meet the expected demand (i.e.. “How much electricity is going to be used 3 years from now?”) and handle foreseeable uncertainties associated with load or performance of the capacity resources

10. New England Wholesale Capacity Market What Resources Can Meet the “Need”? • Supply Resources • Oil, coal, nuclear, natural gas, intermittent renewable generation • Demand Resources • Distributed generation, energy efficiency, load management • Imports

11. Forward Capacity Market: Qualification Process to Participate in Auction Qualification process begins over a year before the auction New Resources (i.e., Resources that have not cleared in any previous Forward Capacity Auction) • Rigorous process to assure that new resources are “real” • To qualify, New Resources must submit sufficient documentation indicating their ability to operate at a specific MW value for the relevant Capacity Commitment Period • Must clear as “new” for one auction

12. Forward Capacity Market: Qualification Process (cont.) Existing Resources (i.e., Resources that have cleared in any previous Forward Capacity Auction) • If existing, resource automatically treated as price-takers in the auction based on historical capabilities, unless they exit by delisting. • If resource does not want to take on a capacity obligation, must submit permanent or static de-list, or export, bids at qualification time (during auction Existing Resource can submit dynamic de-list bid) - - all such de-list bids are subject to reliability reviews *Minimum project size for all eligible Resources = 100kW

13. Forward Capacity Auction Mechanics • Descending clock auction conducted in discrete rounds (held in February) • During process, the price in the auction will be lowered and some resources will remove themselves from the auction • Existing Resource • Will clear if no action taken in auction (Existing Resources are price takers) and will receive a CSO for a one-year commitment period • Will not clear if Existing Resource submits de-list bid (varied forms) • New Resource • Can offer into the auction to receive a CSO for a Capacity Commitment Period of 1-5 years, in one-year increments • Will clear if New Resource offers at a price at or below the FCA clearing price • Will not clear if New Resource offers at price above FCA clearing price • Outcome of Forward Capacity Auction sets the initial Capacity Supply Obligation (CSO) for resources

14. What Does it Mean to be Selected? Every Resource that clears in an FCA receives a Capacity Supply Obligation and a price (or “capacity payment”) for that obligation. Capacity Payment:Monthly payments to Resources with a Capacity Supply Obligation However, with payment comes all sorts of obligations. . .

15. Obligations and Penalties in FCM Example of a Resource’s Obligation: Generating Capacity Resource that has a CSO must offer its obligated capacity into the Day-Ahead Energy Market and Real-Time Energy Market whenever and to the extent the resource is available Penalties Capacity payments reduced by: • Penalties assessed when resources are not available in real-time during the most needed hours (Shortage Hours/Events) • Peak Energy Rents (PER) • PER $ = revenues obtained from reduction in capacity payments when energy prices are extremely high

16. New Rule for Next Forward Capacity Auction Minimum Offer Price Rule (MOPR) • Intended to address price suppressing effect of Out-of-Market (OOM) resources • Beginning with the next Forward Capacity Auction (FCA #8), New Resources will be assigned an Offer Review Trigger Price • Offer Review Trigger Price (ORTP): Default floor on lowest price that a particular resource can offer into the auction

17. FCM Redesign Efforts Under Consideration Key Challenges: • What are you paying for versus what you are getting? Scope and definition of obligations? • New England’s increased reliance on natural gas Potential Solution: “FCM Performance Incentives” • Pay-for-performance mechanism • Over-performing resources would be paid a premium through revenue transfers from under-performing resources

18. New England Wholesale Capacity Market Is It Worth It and To Whom? • Forward Capacity Market provides added revenue for generation and demand side resources • But efforts, and therefore costs, of qualifying and clearing are not insignificant (i.e., MOPR makes clearing an FCA more difficult for new renewables, absent state request accepted by FERC) • Penalties now add a downside risk • Not required to participate in FCM to be in other markets, but once resource clears in one FCA, it is committed for the rest, absent a de-list

19. New England Wholesale Capacity Market Can You Finance It? • Challenge of addressing Capacity Resources in a Financial Model • Long-lived assets, but annual market redesign • More frequent “tweaking” of Market Rules • Revenues are provided on a year-to-year basis – no assurance of revenue long-term • Consider as an additional payout for equity, not as cash flow for the bank

20. Questions? 43091880