May 6-7, 2014 | NEPOOL Markets Committee

1. May 6-7, 2014 | NEPOOL Markets Committee Matt Brewster Market DevelopmentMbrewster@iso-ne.com | 413.540.4547 Quantitative analysis demonstrating Energy and Reserve market revenue results Subhourly Real-Time Market Settlements

2. The quantitative analysis indicates subhourly settlement does improve market incentives • Simulation results indicate that subhourly settlements: • Increase or decrease asset compensation (on the order of +/- 5%) • Energy revenue change between -40% and 138% • Reserve revenue change between -100% and 11% • Produce small aggregate changes in annual market revenues • Energy revenues increased by $3.4M; up 1% • Reserve revenues decreased by -$2.8M; down 5% • Quantitative estimates are drawn from simulated 5-minute real-time Energy and Reserve market settlements for 2013 • The simulation applied the ISO’s conceptual design proposal for 5-minute settlement of generators and DARD pumps only • Conceptual proposal was discussed at the January 14-15, 2014 MC

3. Conceptual Design Overview Brief recap of project objective and conceptual proposal 3

4. Subhourly settlements will improve resource compensation relative to hourly average credits • Resource dispatch is determined subhourly (e.g., 5 minute) • Market prices are established every 5 minutes • However, the settlements are performed using market prices and quantities averaged* over hourly intervals • Averaging can either increase or decrease resource compensation relative to the market value of products provided within the hour • If quantity and/or price are constant for the hour then averaging does not alter compensation • Resources that receive lower energy market revenue due to hourly averaging may require NCPC *Energy quantity is determined using megawatt-hour (MWh) per hour meters; “average” is used for convenience of discussion.

5. Objective of subhourly settlement is to improve market incentives for flexible resources • Resource performance and flexibility in response to dispatch is an important factor in maintaining system reliability • Aligning the performance and pricing intervals for settlement can help improve market incentives for resources to respond to current system conditions • Subhourly settlement establishes resource credits using the market value of energy and reserve at the time when these products were provided

6. Conceptual design: 5-minute real-time Energy and Reserve settlement of generators & DARD pumps • 5-minute settlement of generators and DARD pumps • Resource dispatch and market pricing interval for real-time Energy and Reserve market correspond to 5-minute intervals • 1-hour settlement of all other market activity (no change) • e.g., load assets, charge allocations, bilateral contracts • Market design principles will not be modified, but must be adapted to apply under subhourly settlement • Coordinated Transaction Scheduling (CTS) project requires 15-minute settlement interval at the external interface • Modifications to NCPC, Regulation, FRM, and FCM for application of 5-minute data will be evaluated

7. Simulation Results Quantitative results from simulated 5-minute real-time Energy Market and real-time Reserve settlements for 2013 7

8. Simulation period and methodology • Study period includes all months of 2013 • Dispatchable generators and DARD pumps were settled using 5-minute interval quantities and prices (rather than hourly) • All other assets and market activity were kept hourly • 5-minute energy quantities were estimated in two steps: • Creating an asset “profile” of energy output within each hour using telemetry data • Scaling the asset profile to match the hourly revenue quality energy quantity submitted by the meter reader • Energy simulation excluded about 1% of hours where subhourly data were not available

9. Subhourly settlement improves compensation by aligning performance and pricing periods • Energy: subhourly settlement tends to increase credits • Convex nature of supply stack (prices rise faster as quantity increases) tends to result in higher subhourly credits during system ramp • Although some resources will have lower credits if energy is not provided during periods of high LMP (e.g., a unit that trips) • Reserve: subhourly settlement tends to reduce credits • 5-minute accounting ensures MW credited for reserve are not greater than the reserve requirement (which tends to reduce total credits) • Although some resources receive more revenue for MW provided to maintain requirements when credited at the coincident price • Examples of these outcomes are included in the last slides

10. Annual market revenue change for most generators and DARD pumps is within +/- 5% • For individual assets, subhourly settlement tends to: • Increase net annual Energy credits (majority increase < 5%) • Decrease net annual Reserve credits (majority decrease < 5%) Increased asset revenue Decreased asset revenue

11. In aggregate there are small changes in the real-time Energy and Reserve market revenues • Real-time (RT) energy credits increased by $3.4M; up 1% • RT reserve credits decreased by -$2.8M; down 5%

12. RT Energy subhourly settlement results for generators and DARD pumps (2013) • Individual Asset RT Energy revenue change for 2013: • Aggregate RT Energy revenues for 2013: RT Revenue = RT Deviation Energy Quantity x Energy RT LMP • Total energy market value for 2013 was above $8 billion • $3.4 million is about 0.04% of the annual market value

13. RT Reserve subhourly settlement results for generators and DARD pumps (2013) • Individual Asset RT Reserve revenue change for 2013: • Aggregate RT Reserve revenues for 2013: RT Revenue = RT Reserve Product Quantity x RT Reserve Product Price

14. Examples Stylized examples that demonstrate different revenue outcomes between hourly and subhourly settlement 14

15. Energy settlement examples Example 1 – ramped up to provide additional energy • Energy prices tend to rise more quickly as quantities increase (convex supply function) • As a result, units dispatched up or down as system ramps will receive lower revenue when credited using hourly averages Example 2 – tripped at mid-hour • Hourly averages obfuscate whether quantity and prices occurred coincidentally • A unit that trips benefits from a high LMP afterward since its payment rate includes samples from the high price intervals

16. Depiction of how hourly averages in the reserve settlements produce higher credits • When available reserves exceed the requirement, the reserve price is zero. Available reserves often exceed the requirement. • When available reserve is equal to (or less than) the requirement, the reserve price is positive. These periods are typically short. • The total MW credited for reserve should be equal to (or less than) the requirement. This would be the result in 5-minute periods, but is often not the outcome with hourly averages. • With hourly settlement, all reserve MW provided in the hour (blue shaded area) are credited using the hour's average reserve price. • With subhourly settlement, only reserve MW provided from [:30 to :45] (orange shaded area) are credited for reserve. 5-minute settlement tends to reduce total reserve payments, but can increase individual asset payments. Available Reserve is equal to Requirement between [:30-:45]. There will bea positivereserve price during this interval.

17. Reserve settlement examples Example 1 – most reserves provided when zero price • More reserves than required are available during most periods (reserve prices are zero) • The hourly average quantity tends to credit resources for more MW than provided to maintain the requirement (when reserve prices are non-zero) Example 2 – dispatched to provide additional reserve • Some resources will be dispatched to provide more reserve during tight conditions • For resources that are dispatched to maintain the reserve requirement, hourly averages tend to under-value performance