ISO-NE Offer Review Trigger Price 2013 Update – Draft Results Presented to:

1. ISO-NE Offer Review Trigger Price 2013 Update – Draft Results Presented to: NEPOOL Markets Committee Presented by: Sam Newell (Brattle) and Chris Ungate (Sargent & Lundy) August 7, 2013

2. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

3. SummaryObjectives and Approach • Objectives • Provide Offer Review Trigger Price (ORTP) values for various resource types for use in FCA9 • Provide a capital budgeting model and indices that ISO-NE’s IMM can use to update ORTPs for FCA10 and FCA11 • Approach • Screen technologies • Build bottom-up cost estimates of capital costs, then estimate the amount a resource would need from the first-year FCA to achieve zero NPV net of all revenue sources over 20 years • Recommend indices for future updates

4. SummaryRecommended ORTP Values Summary of ORTPs (2018 $) • Notes: • Overnight costs, fixed O&M, Gross CONE and revenue offsets are calculated based on installed capacities; Net CONE and ORTP values are calculated based on qualifying capacities. • Some values, esp. Onshore Wind, may appear high compared to current costs. These values are in 2018$ and include all cost components (e.g. Onshore Wind is $2,823/kW in 2013$ of which $496/kW is due to interconnection.) See later slides for detailed values of each technology for which we developed an ORTP. • FOM includes site leasing costs. • DR categories evaluated at the asset level. Actual resources would be aggregations of at least 100 kW.

5. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

6. MethodologyGeneration Technology Screening (in 2018 $s) • We developed ORTPs for CTs, CCGTs, and Onshore Wind • Offshore Wind, Solar PV, and Biomass have too high a Net CONE to use any ORTP other than the auction starting price per kW of Installed Capacity per kW of Qualifying Capacity

7. MethodologyCost of Capital • We estimated the after-tax weighted-average cost of capital (ATWACC) based on market data for merchant generation companies • There are only two public merchant generation companies • Estimated ATWACC for NRG is 6.9%, reflecting substantial hedging • Estimated ATWACC for Calpine is 7.5%, reflecting greater merchant exposure • Contrary to earlier presentations, no risk-free adjustment was needed since rates have increased over the past 2 months • We have chosen to use the average ATWACC of NRG and Calpine due to our consideration of their portfolios relative to tariff requirements (assume PPA on only non-capacity revenues) • The value-weighted average of these two data points is 7.2%

8. MethodologyNet Energy and Ancillary Service Revenue Offsets • Estimated 1st year E&AS margins using historical net revenues for like units in 2010-12 adjusted to 2018/2019 based on gas and electricity futures prices • 2018/2019 E&AS Margin = Historical E&AS Margin / Historical Electricity Price * 2018/2019 Electricity Price • 2018/2019 MA Hub On Peak Electricity Price = 2013 Market Heat Rate * (2018 Henry Hub + 2013 Algonquin City Gates Adder) • This is a proxy for a PPA-supported forward energy price that accounts for the effect of rising gas prices. It does not account for how market heat rates might increase as generation reserve margins tighten after the FCA price floor disappears; nor does it fully account for the growing discount one would expect for forward prices relative to expected spot prices for longer forward periods (as with any pro-cyclic commodities) Projected Mass Hub On Peak prices for estimating energy revenues Projected Gas and Electricity Prices Average Projected E&AS Margin

9. MethodologyREC Revenue Offsets • 1st year REC Revenues have been estimated using the most forward-looking prices available in New England • REC forwards for 2018/2019 are not available • The furthest forward RECs are 2016 MA Class I RECs currently priced at $47/MWh (source: SNL) • We escalated the 2016 REC forward value to $50/MWh (2018$)

10. MethodologyFive Year Lock-In • New resources may take the 5-year price lock-in option • If they do, five years of non-capacity revenues could be considered in estimating their competitive capacity offer • However, if future revenues stay constantin real terms (nominally increasing at the rate of inflation), Net CONE would be unaffected by the lock-in • We adopt this assumption for simplicity, lacking readily-available data sources to project energy margins in 2019-2024

11. MethodologyPerformance Incentives • Given the preliminary nature of the PI proposal, we did not include performance incentives in the formulation of the ORTPs • PI could be included in asset specific reviews

12. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

13. Combined Cycle ORTPCC Technical Specifications • Recent and planned new CCs are typically 500-700 MW in a 2x1 configuration • Duct firing is common on CCs in New England to increase summer output • New England CCs with duct firing include Kleen, Mystic, and Fore River • We assumed duct firing expands capacity by 15% • Other features include dry cooling, dual-fuel, and SCR • Hampden County was chosen due to proximity to high voltage transmission and gas pipelines

14. Combined Cycle ORTPCC Capital Costs

15. Combined Cycle ORTPCC Revenue Offsets Projected E&AS margins were estimated using historical margins for New England CCs with similar characteristics, adjusted based on forward prices • 2010 - 2012 Average E&AS Margin for CCs was $3.13 / kW-mo • 2018/2019 Projected E&AS Margin for CCs is $3.84 / kW-mo

16. Combined Cycle ORTPCC ORTP Calculation (2018 $s)

17. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

18. Simple Cycle Gas Turbine ORTPCT Technical Specifications • LMS100 is the dominant simple-cycle turbine type being developed today, due to superior heat rate and cost/kw relative to LM6000 • 2x0 plant configuration reduces impact of common costs on overall $/kW • LMS100 requires on-site gas compression to raise pressure of delivered gas • Other features include dry cooling, dual-fuel, and SCR

19. Simple Cycle Gas Turbine ORTPCT Capital Costs

20. Simple Cycle Gas Turbine ORTPCT Revenue Offsets Projected E&AS margins were estimated using historical margins for New England CTs with similar characteristics adjusted based on forward prices • 2010 - 2012 Average E&AS Margin for CT was $2.27 / kW-mo • 2018/2019 Projected E&AS Margin for CT is $2.84 / kW-mo

21. Simple Cycle Gas Turbine ORTPCT ORTP Calculation (2018 $)

22. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

23. Onshore Wind ORTPOnshore Wind Technical Specifications • Assumed siting in Western Maine due to the quality of the wind resources and proximity to transmission • Analyzed characteristics and costs based on recent projects in other parts of the country • Capacity Factor is based on the wind farms used to develop the capital cost estimates • Qualified Capacity is from ISO-NE analysis of Onshore Wind average summer capacity value and is consistent with Intermittent Resource rules

24. Onshore Wind ORTPOnshore Wind Capital Costs

25. Onshore Wind ORTPOnshore Wind Revenue Offsets • Projected E&AS margins were estimated using historical margins for five New England wind farms with a weighted capacity factor of 32% • 2010–2012 Average E&AS Margin was $9.47 / kW-mo • 2018/2019 Projected E&AS Margin is $13.35 / kW-mo • 2018/2019 Projected REC price is $50 / MWh

26. Onshore Wind ORTPOnshore Wind ORTP Calculation (2018 $) Note: Onshore Wind ORTP is highly sensitive to assumptions • Onshore Wind ORTP is very sensitive to REC, capacity factor, capital costs, FOM and ATWACC • Most sensitive to REC price and capacity factor • Wind ORTP is more sensitive than other technologies due to low Qualified Capacity (19% of Installed Capacity)

27. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

28. Demand Response ORTPDR Asset Specifications • There is a wide range of asset types operating in ISO-NE • We identified “Large C&I” and “Mass Market” asset types as representative of typical DR bidding into FCM • Large C&I • Commercial or industrial customer that is using existing control technologies to implement load reductions; incremental costs include metering and two-way communication technologies • 1 – 4 MW of load with 20% demand reduction • Mass Market • Large-scale programs targeting residential or small commercial customers that control specific end-uses (i.e., air conditioning, water heating, etc.); typically implemented in conjunction with an AMR or “Smart Grid” project • 1 kW of reduction, based on Automated Meter Reading and Air Conditioning Control (AMR A/C) programs

29. Demand Response ORTPDR Asset Costs • We interviewed several DR aggregators and used public program cost summaries to develop costs for each asset • Cost components and values were identified for an incremental customer being added to an existing DR provider or program administrator

30. Demand Response ORTPDR ORTP Calculation (2018 $)

31. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

32. Energy Efficiency ORTPEE Program Specifications We calculated costs and benefits for the following state programs, excluding Low Income programs • Benefits and costs of all programs are aggregated into a single “resource,” consistent with how states offer into the FCM • Program MW sizes are for summer peak conditions and grossed up for line losses

33. Energy Efficiency ORTPEE Program Costs and Benefits EE program costs are computed using the 2012 budget from each state • Include customer costs to account for total costs to support energy savings • Assume budgets will be spent during pre-power year We considered both energy and avoided T&D investment as benefits • Avoided energy saving ($/MWh) is calculated based on historical load-weighted average LMP adjusted by Mass Hub futures prices • Projected load-weighted wholesale price in 2018/19 is $63/MWh • Avoided T&D savings is estimated at $36/kW-yr ($41/kW-yr in 2018/19) based on Connecticut 2013 Conservation and Load Management Plan

34. Energy Efficiency ORTPEE ORTP Calculation (2018 $)

35. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

36. Annual UpdatesAnnual Updates of ORTP Values • ORTPs for FCA10 and FCA11 will be updated in 2014 and 2015 using escalation factors calculated from indices for each line item of capital and fixed O&M cost • Indices specific to each capital cost line item have been selected based on applicability and availability (see below) • E&AS margins and RECs will be updated based on futures prices available at the time • Futures updates will require inserting new values for each index and model will escalate each line item accordingly

37. Agenda • Summary • Methodology Updates • ORTP Results • Combined Cycle ORTP • Simple Cycle Gas Turbine ORTP • Onshore Wind ORTP • Demand Response ORTP • Energy Efficiency ORTP • Annual Updates • Appendix

38. Sensitivity AnalysisCost of Capital Sensitivities • Limited sensitivity to range of ATWACC values • Wind is most sensitive due to its highest capital cost per kW of qualified capacity ORTP ($/kW-mo)

39. MethodologyGeneration Costs Sargent & Lundy developed bottom-up estimates for capital and fixed O&M costs for selected technologies Assume a competitive entrant at an unencumbered site • No electric transmission line or gas lateral costs (nor network upgrades, but need direct interconnection costs include breakers and substation expansion) • No site-specific challenges or unusual environmental requirements • Contingencies and owner’s development cost at the lower end of the range Sargent & Lundy has seen Escalate 2013 installation to a 2018 online year (in 2018 $s)

40. MethodologyCONE Calculations • The Cost of New Entry (“CONE”) is the net revenue a new resource would need in Year 1 to be willing to enter the market, such that the NPV of all cash flows (over 20 years) is zero • A key driver of CONE is whether total net revenues are likely to increase over time (such that lower first year revenues are acceptable) or decrease (such that higher first-year revenues are necessary) • Long-term revenues will be determined by future prices (energy + capacity + other) which, all-in, must equal CONE of future entrants to support investment • Hence, projected cost trends determine revenue trajectories for current entrants • Need to consider different non-capacity net revenues between current and future entrants • Revenue trajectories may vary by technology • Assume total revenues for current gas entrants will be approximately constant in real terms over time because future entrants are likely to enter at a higher CONE (turbine prices have historically increased slightly faster than inflation) but out-compete current entrants slightly on efficiency • We assume total revenues for renewables will also stay approximately constant as future entrants enjoy more efficient technology but must locate at inferior or more remote sites

41. MethodologyRevenue Offsets and Net CONE • First year revenues must equal CONE, with revenues coming from several sources, including capacity, energy and ancillary services margins (EAS), RECs if applicable, and performance incentives (PI) • “Net CONE” is the 1st year revenue a new resource would need specifically from capacity to be willing to enter the market • Net CONE = CONE – 1st Year Non-Capacity Revenue Offsets • ORTP is Net CONE of a competitive entrant for each technology