Proposal how to integrate renewable resources under a market design construct

1. Proposal how to integrate renewable resources under a market design construct Aleks Mitreski NEPOOL Markets Committee March 18th2014

2. FCM Sloped Demand Curve Design • Renewable resources provide value to the supply mix in New England • Incorporating public policy under a market construct is important • The Brookfield proposal does not oppose renewable exemptions, these are not diametrically opposite concepts • Instead, the proposal complements the renewable exemption by allowing participation of uneconomic resources in the capacity markets while also mitigating buyer side mitigation and undoubted price suppression effect • With this amendment, price formation in the capacity market will be more indicative of the true conditions of the system since the supply curve will be unaltered • Overview

3. FCM Sloped Demand Curve Design • New England states have set renewable standards to meet public policy goals which have existed in the region for some time • While the Commission “acknowledges the rights of states to pursue policy interests within their jurisdiction”it has expressed concerns with the implementation of exemptions since “OOM capacity suppresses prices regardless of intent and that the Commission has exclusive jurisdiction on assessing whether wholesale rates are just and reasonable” • Developing an approach where renewable standards can be achieved with no incremental cost to consumers, while minimizing price formation impact is challenging, but if achieved it will be a win-win outcome for: • Public policy goals, and • Efficient market design • Accommodating renewable policy standards without incremental cost to consumers and minimal impact to price formation

4. FCM Sloped Demand Curve Design • While the issue today is out-of-market revenue to renewable resources, the impact would be the same from any other technology or other out of market action if uneconomic entry is allowed to clear the capacity in the market • Allowing resources to offer below their long-run average cost distorts price formation where clearing prices no longer signal the true market conditions • In the April 2011 order on FCM, the Commission expressed concerns with the impact of resources in New England with out-of-market revenues when allowed to offer below a competitive price because: • “It suppresses the clearing price below competitive levels” • “OOM resources can affect prices even when no new capacity is needed, by displacing what would otherwise be the marginal, price-setting existing resource” • “Whether the FCM design in New England will provide sufficient income to incent market entry when necessary without the assistance of supplemental revenue streams from outside ISO-NE markets“ • Consequently, the Commission established Offer Review Trigger Prices to mitigate the price suppressing impact of the of out-of-market capacity entry • Robust Forward Capacity Markets are designed to provide the correct price signals and incentives

5. FCM Sloped Demand Curve Design This proposal accommodates public policy on renewable standards since resources electing Renewable Technology Resources (“RTR”) treatment would be able to receive CSO even if their offer is above the clearing price Participation Requirements • As part of the qualification package resources can request RTR treatment • ISO will provide indication of total qualified capacity that can receive RTR treatment and resources can confirm or reverse their decision The RTR Cap • Per each commitment period up to 200MW of new capacity would be allowed to receive RTR treatment • The annual cap can rise to 600MW due to unused RTR from the 2 previous auctions • The maximum amount of RTR capacity with CSO that has never cleared an auction would be set to 1,000MW (approximately 3% of ICR) • Proposal how to integrate renewable exemptions under a market design framework

6. FCM Sloped Demand Curve Design Offer Requirements • RTR resources must offer above their minimum offer price • This treatment allows the auction to clear offers based on the economic merit of each offer • If RTR clears the auction, the RTR obtains a CSO • Becomes existing capacity resources and in future auctions receive the same treatment as all other existing capacity resources • Reduces the amount of RTR toward the cumulative 1,000MW RTR treatment cap • If RTR does not clear the auction then these resources are awarded a CSO and are counted toward the cumulative 1,000MW cap • This approach allows resources to receive a CSO in advance to the time when they would have economically done so • Proposal how to integrate renewable exemptions under a market design framework

7. FCM Sloped Demand Curve Design Prorated Clearing Price • To avoid a missing money problem there will be a price proration applied to all resources to accommodate the incremental amount of awarded CSO to RTR under this concept • The auction clears based on the economic merit of all offers • The auction clearing price times total MW cleared establishes total cost to consumers. This cost does not change. • The total cost from the auction is divided by the sum of the cleared MW and the RTR MW to calculate a prorated clearing price • During the qualification process, resources will have an option to elect whether they would like to receive the pro-rated price if their de-list bid is between clearing price and prorated price • The impact of awarded CSO to RTR is absorbed by all suppliers that cleared the auction • Proposal how to integrate renewable exemptions under a market design framework

8. FCM Sloped Demand Curve Design • Due to the region wide public policy on renewables, the proposal is envisioned to prorate the clearing price across all capacity zones proportionally to cleared CSO • This approach creates equitable price reduction across all zones Example 1 with total RTR of 100MW • Price proration across multiple capacity zones

9. FCM Sloped Demand Curve Design Example 2 with total RTR of 1,000MW • Price proration across multiple capacity zones (cont.)

10. FCM Sloped Demand Curve Design • Due to short timeframe to analyze the impact from the renewable exemption using the latest proposed demand curve, a limited analysis has been performed • Initial indication is that 100MW of renewable exemption results in $0.45 of price suppression to the clearing price to the right of the 1-in-7 value • The price suppression to a local capacity zone would be far greater. For example adding 200MW of price takers in Maine equals 5% of the local capacity (compared to only being 0.07% of total system capacity) * Table for illustration purpose only. Considerations such as load growth, retirements, new capacity have been omitted. • Impact to clearing prices with and without a mitigation to the minimum offer rule

11. FCM Sloped Demand Curve Design • The NU curve was tuned to meet the 1-in-10 standard and not specifically to accommodate a renewable exemption • While in certain portions of the curve, the slope may (or may not) absorb some impact from a renewable exemption, the curve was not shifted to the right to fully neutralize the renewable exemption • How would the curve perform when there is a higher amount of RTR in the program (e.g., 500MW, 1,000MW, 2.000MW) • Fundamentally, even with this curve, the price suppression effect will always occur in each auction • This approach becomes incomplete solution where public policy is accommodated at a trade off for sending correct market signals • Adopting the NU proposed curve is not a mitigation to the renewable exemption

12. FCM Sloped Demand Curve Design • The notion that participants will simply increase their capacity offers to adjust for the proposed price-proration is incorrect • The Brookfield amendment does not propose any changes to the mitigation rules, hence the current mitigation rules prohibits such risk to be added to the formulation of de-list bids • Therefore, participant will experience the price-proration in the form of reduced capacity revenue. This price-proration creates a smaller revenue impact compared to the broader impact of carte-blanche renewable exemption • If including such “price risk” is allowed under the current market rules to be factored in the de-list bid formulation then can participants: • Add $.45 for each 100MW of RTR in all upcoming auctions? • Add any other amount of risk to factor in any expected retention for reliability by resources during the auction? • Speculations of what participant may be allowed to do will not change the reality that price suppression will occur if there is no offer mitigation • The cost to consumers will not increase

13. FCM Sloped Demand Curve Design • Renewable resources provide an important benefit to the region • Creating a market construct to accommodate the renewable exemption creates a win-win for public policy and efficient market design • Absent such offer mitigation rules creates price suppression effects that can have undesired long term effects and inhibit merchant entry • This proposal does not oppose the renewable exemption, on the contrary, complement the concept by incorporating it under a market construct • Thoughts and comments are welcomed Aleks Mitreski 413 636. 5732 aleksandar.mitreski@brookfieldrenewable.com • Summary