Fuel Supply Contracts and Mitigation Impacts in ERCOT Market

1. NPRR1177 – Fuel Supply Contracts, MOC Impacts, and EFC Process WMWG May 5th, 2023

2. Fuel Supply Contract • Contractual gas costs for some fuel supply agreements are based on volumes and variable rates set by the intrastate pipeline • These incremental costs are also subject to hourly, daily & cumulative imbalance charges. Resources have to pay the pipeline: • To leave gas on the pipeline they purchase & deliver but do not burn • To draw gas from the pipeline for burns in excess of the gas purchased & delivered • Resources price their Energy Offer Curves (EOC) based on the purchased & delivered gas, incremental heat rates, and these contractual costs for variances and incremental fuel balancing.

3. Mitigation Details • Mitigation occurs when the Resource’s EOC is bypassed and the Resource is dispatched along an ERCOT estimated, incremental cost curve • The Mitigated Offer Curve (MOC) estimates the resource cost by taking an estimated market gas price (FIP) + Fixed Price FIP adder * capacity factor multiplier • When Resources are mitigated and dispatched along the MOC with an inaccurate cost, it results in significant uneconomic dispatch and unrecoverable losses • Between Jun-Oct 2022, Constellation Resources were mitigated and suffered unrecoverable losses

4. MOC v Contractual Cost Illustrative Example Example Fuel & Mitigation Parameters Gas Price $2.00 FIP Adder $0.50 Example Fuel Contract Imbalance Structure Tier 1 2 3 Imbalance Swing Pct 10% 50% > 50%: Variable Contractual Gas Cost Contractual Cost $/MMBtu 0 $1.00 $7.00 Example EOC v MOC Calculation Breakpoint 1 2 3 4 5 6 7 8 EOC LSL MW 100 267 268 330 331 350 351 500 Incremental HR 9.1 10.9 10.9 11.9 11.9 12.3 12.3 16.0 Imbalance Gas Cost ($1.00) ($1.00) $0.00 $0.00 $1.00 $1.00 $8.00 $8.00 Incremental Gas Price $1.00 $1.00 $2.00 $2.00 $3.00 $3.00 $10.00 $10.00 MOC Gas Price $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 Effective Heat Rate 4.5 5.4 10.9 11.9 17.9 18.5 61.7 79.8 MOC Price EOC Price $23 $27 $27 $30 $30 $31 $31 $40 $9 $11 $22 $24 $36 $37 $123 $160 50% Swing Start 10% Swing Down 10% Swing Up 50% Swing Up Start 50% Swing Up End Variable Contract Price Start HSL The MOC uneconomically dispatches the contractual cost of the Resource ~$100/MWh

5. MOC v Cost Economics Example Energy Price (Revenue) Real Time $/MWh $50 Actual Variable Cost Energy Offer Curve $9 $11 $22 $24 $36 $37 $123 $160 Estimated Variable Cost Mitigated Offer Curve $23 $27 $27 $30 $30 $31 $31 $40 Breakpoint 1 2 3 4 5 6 7 8 MW 100 267 268 330 331 350 351 500 Breakpoint 1 2 3 4 5 6 7 8 MW 100 267 268 330 331 350 351 500 Total EOC Incremental Dispatch Economics $4,091 $6,538 $41 $1,607 $14 $249 ($73) ($16,330) ($3,863) MOC Incremental Dispatch Economics $2,727 $3,820 $33 $1,241 $20 $367 $19 $1,505 $9,732 Energy Offer Curve v Mitigated Offer Dispatch Curves Incremental Dispatch Cumulative Economics $180 $160 $16,000 $14,000 $140 $12,000 $120 $10,000 Cumulative $ $/MWH $8,000 $100 $6,000 $80 $4,000 $60 $2,000 $0 $40 0 100 200 300 400 500 600 ($2,000) $20 ($4,000) $0 ($6,000) MW 0 100 200 300 MW 400 500 600 Energy Offer Curve (EOC: Actual Variable Cost) Energy Offer Curve Mitigated Offer Curve Mitigated Offer Curve (MOC: Estimated Variable Cost) Assuming $50/MWH RT Price, the MOC would cause the Resource to uneconomic

6. Current Exceptional Fuel Cost (EFC) Process By day 15, Resource provides ERCOT with actual Weighted Average Fuel Price (WAFP) By Day 60, Resource provides ERCOT with supporting information Resource Submits EFC with signed attestations • Today a Resource can use the EFC process to include fuels costs in the Mitigated Offer Cap calculation • The issue with the current EFC process is that some Resources do not pre purchase fuel and their costs are determined based on contractual fuel supply contracts which include variable transportation costs

7. Proposed Changes By Day 15, Resource provides ERCOT with actual WAFP or Energy Offer Curve consistent with the fuel supply contract if the unit was flagged or subject to mitigation By Day 60, Resource provides ERCOT with supporting documentation if the unit was flagged or subject to mitigation Ten Business Days prior to submitting an EFC, a Resource must provide ERCOT with its fuel supply contract Resource Submits EFC with signed attestations • ERCOT/IMM can request additional information at any time during the process • These changes will allow real-time Energy Offer Curves to reflect their short-run marginal costs