1. Electricity Industry The Potential Effect of Locational Marginal Pricing on Renewable Resources for Environmental Issues in Energy NECPUC Annual Symposium June 17, 2002 Janet Gail Besser Senior Vice President

2. © 2001 Lexecon Inc. All rights reserved. Overview Locational Marginal Pricing (LMP) will create winners and losers Renewables are uniquely sensitive to locational pricing Renewables are as important as ever Care should be taken in Standard Market Design (SMD) re: LMP to avoid barriers to renewable generation

3. © 2001 Lexecon Inc. All rights reserved. Overview of Locational Marginal Pricing Current treatment of congestion –Costs of transmission congestion termed uplift and socialized across New England Treatment of congestion under LMP –Costs of congestion become part of energy price paid by load and to generation within transmission- constrained regions –Energy prices paid by load and to generation outside constrained regions do not include costs of congestion –Financial congestion rights (FCRs) can hedge price risks

4. © 2001 Lexecon Inc. All rights reserved. Overview of Renewables Unique siting needs of renewables Current location of most renewables relative to T interfaces Impacts of LMP on existing renewables Impacts of LMP on ability to finance and construct new renewables Potential environmental consequences State and federal law and policy re: renewables Potential market rule and policy responses re: LMP

5. © 2001 Lexecon Inc. All rights reserved. Unique Characteristics of Renewables Site choice limited based on availability of necessary physical characteristics: – wind, water, wood Physical characteristics of New England such that ideal sites for renewables likely to be on low-cost side of transmission interface

6. © 2001 Lexecon Inc. All rights reserved. Potential Effect of LMP on Renewables Renewables in load centers see higher energy prices –Some distributed generation –Municipal solid waste? Renewables in remote locations see lower energy prices –Hydro –Biomass/wood –Wind

7. © 2001 Lexecon Inc. All rights reserved. Figure 1.1 The 13 RTEP sub-areas shown in Figure 1.1 are designated: BHE-Bangor Hydro Electric ME-Maine S-ME-Southern Maine NH-New Hampshire VT-Vermont BOSTON-Boston Import CMA-NEMA-Central Mass./Northeastern Mass. W-MA-Western Massachusetts SEMA-Southeastern Massachusetts RI-Rhode Island CT-Connecticut SWCT-Southwestern Connecticut NOR-Norwalk / Stamford NB, HQ and NY represent the New Brunswick, Hydro Quebec and New York external control areas respectively. Source: ISO-NE 2001 Regional Transmission Expansion Plan (RTEP01), Approved October 19, 2001. Transmission Sub-regions & Constraints

8. © 2001 Lexecon Inc. All rights reserved. Renewables Locations, by type

9. © 2001 Lexecon Inc. All rights reserved. Renewable Capacity, by type

10. © 2001 Lexecon Inc. All rights reserved. Objectives of LMP: Effect on Renewables LMP promotes economic efficiency LMP sends price signals about where to locate infrastructure investment to relieve congestion But these price signals can not affect locational decisions of some renewables Other policy goals: Environmental, diversity, reliability

11. © 2001 Lexecon Inc. All rights reserved. Public Policy Commitment to Renewables Renewables Portfolio Standards (RPS) –CT, ME, MA Renewables System Benefits Charges (SBC) –CT, ME, MA, RI Information Disclosure –CT, ME, MA, NH, RI Emissions Performance Standards (EPS) –CT, MA

12. © 2001 Lexecon Inc. All rights reserved. Recommendations How to avoid negative implications of LMP for Renewables Market rules/mechanisms –E.g., allocate FCRs to renewables State policies –E.g., SBC (more $?) –RPS (and maybe EPS) rules? –Other?

13. © 2001 Lexecon Inc. All rights reserved. Conclusion Implementation of LMP is necessary and timely LMP likely to lead to reduction in renewables with negative environmental consequences SMD should include mechanisms to avoid this States may also want to re-visit renewables policies as part of solution