Reliability-Must-Run (RMR) Cost Evaluation and Settlement Basis Ino González ERCOT RMR Workshop May 24, 2016

PUBLIC Agenda RMR Cost Evaluation Settlements Discussion Outline  Eligible Costs Standard for Eligibility  Budgeting Non-Fuel Eligible Costs  Non-Fuel Eligible Costs  Non-Eligible Costs  Fuel Costs  Capital Costs  Capital Contributions and Expenditures  Settlement Basis  Standby Price  Energy Payment  Incentive Factor  Variable Operations and Maintenance Costs  Reporting Actual Costs RMR 2

PUBLIC RMR Costs Budgeting Non-Fuel Eligible Costs Eligible Costs Standard for Eligibility  Eligible Costs are costs that  Are incurred by RMR Unit owner  To provide the RMR Service  Excluding o Fuel costs o Costs the RMR owner would have incurred anyway had it been mothballed or shut down. RMR 3

PUBLIC Budgeting Non-Fuel Eligible Costs 4 Eligible Costs Base Cost of Operations Outage Maintenance Costs Other Budget Items Non-Outage Maintenance Costs Eligible Costs

PUBLIC Budgeting Non-Fuel Eligible Costs (continue) 5 Base Cost of Operations Costs independent of  Levels of Operations  Outages  Non-outage maintenance Base Costs

PUBLIC Budgeting Non-Fuel Eligible Costs (continue) 6 Outage Maintenance Costs  Planned or maintenance outage  Inspections  Maintenance alternatives available, including  Budget for each option  Benefits of each alternative  Unit availability  Recommendation to ERCOT Outage Costs

PUBLIC Budgeting Non-Fuel Eligible Costs (continue) 7 Non-Outage Maintenance Costs  Non-recurring eligible costs, independent of a particular scheduled Outage  Maintenance alternatives available, including  Budget for each option  Benefits of each alternative  Unit availability  Recommendation to ERCOT Non-Outage Costs

PUBLIC Budgeting Non-Fuel Eligible Costs (continue) 8 Other Budget Items  Environmental emissions credits  Opportunity costs of using emission credits  Compliance costs  Firm fuel reservation and transportation costs Other Costs

PUBLIC Non-Fuel Eligible Costs Eligible Costs  Direct labor to operate the Resource  Plant staff  Support staff  Materials and supplies consumed  Internal and external services  Water treatment  Vibration testing  Boiler and turbine Inspections  Equipment monitoring, etc.  Maintenance to keep the Resource operational during contract period  Equipment maintenance  Replacement to alleviate unsafe conditions, or  Meet regulatory compliance  Property and other taxes attributable to operations during contract period  Reservation and transportation costs associated with firm fuel supplies 9 Eligible Costs

PUBLIC Non-Fuel Eligible Costs (continue) Eligible Costs  Environmental  Emissions costs o Consumption or purchase of emission credits o Opportunity cost of using emission credits o Costs associated with emission reduction equipment ( NP ) Maintenance costs of operating existing equipment Capital expenditures  Compliance  Equipment and maintenance costs to o Meet or comply with environmental regulations o Ensure availability of Resource to continue operating RMR Unit ERCOT may execute an RMR Agreement for a term longer than 12 months if the Resource Entity must make a significant capital expenditure to meet environmental regulations or to ensure availability to continue operating the RMR Unit (NP ) Eligible Costs

PUBLIC Non-Eligible Costs Non-Eligible  Depreciation expenses  Return on Equity  Fixed property taxes  Income taxes of property owner  Labor costs not associated with RMR operation  Any costs the RMR owner would have incurred even if the unit had been mothballed or shutdown 11 Non-Eligible Costs

PUBLIC Fuel Costs  Costs associated with fuel consumption  Cost of fuel stock  Transportation  Storage  “Take or Pay” provisions  Fees  Fuel Adder 12 Fuel Costs

PUBLIC Capital Contributions Contract for Capacity (NP (d))  Settled like an RMR Resource  Capital expenditures must be approved by ERCOT in advance  Used to make power plant improvements  Capitalized equipment and all installation charges must have an asset life greater than one year in accordance with GAAP  RMR Resource Owner  Must provide to ERCOT a linearly depreciated schedule from o Manufacturer for new equipment o Resource Entity and agreed to by ERCOT for used equipment  Can’t participate in energy or Ancillary Services markets until the book value of contributions are refunded to ERCOT  ERCOT will return refunded capital contributions  To QSEs on same LRS used to collect monthly expenditures 13 Capital

PUBLIC Capital Contributions (continue) Capital Contributions Example  $300,000 purchase price of Air Compressor  $10,000 scrap value  10 year depreciation schedule 14 Capital

PUBLIC Settlement Basis 15 Standby Price  Standby Payment ($/hr)  Initial Settlement o Based on non-fuel eligible costs plus the incentive factor  True-Up Settlement o Based on actual costs plus the incentive factor

PUBLIC Settlement Basis (continue) 16 Energy Energy Payment  Energy Payment  Initial settlement o Based on estimated fuel and generation Average Verifiable Heat Rate Fuel Index Price plus Fuel Adder Actual generation  True-Up settlement o Based on actual fuel costs

PUBLIC Incentive Factor 17 Incentive Factor  Initially set at 10%  Allows for the recovery of Resource equipment financing  Does not apply to capital expenditures for (NP )  RMR for reliability (NP ) (NP (d))  RMR for capacity (NP (d))  It can be reduced by various factors  Testing capacity  Resource availability  Shall never be less than zero

PUBLIC Variable Operations and Maintenance 18 O&MO&M  Startup and variable O&M costs  Proxy for verifiable o Startup costs Startup fuel times FIP/FOP plus fuel adder and O&M o Minimum Energy costs Heat rate from agreement times FIP/FOP plus fuel adder and O&M  O&M costs estimates revised monthly with latest actual costs  Not included in Standby Price but derived from  Verifiable Costs if available or  Eligible variable costs  Used to calculate  Resource Caps for the 3PO  Real Time Mitigation for RMR for Reliability

PUBLIC Reporting Actual Costs 19 Reporting Non-Fuel Costs Actual Non-Fuel Costs  Reporting Actual Eligible Costs  On a monthly basis with enough detail for ERCOT to verify  To be included in the final, costs must be submitted o By the 20 th of the month  To be included in the True-Up, costs must be submitted o 30 days prior to the publishing date for the first date of the month  Deviations from these schedules must be requested of ERCOT by QSE representing RMR Resource  Costs not submitted on time are deemed to be zero

PUBLIC Reporting Actual Costs (continue) 20 Reporting Fuel Costs Actual Fuel Costs  Reporting Actual Eligible Fuel Costs  On a monthly basis with enough detail for ERCOT to verify  May include a fuel adder to better approximate actual costs o Difference between actual costs and FIP/FOP o Must include Transportation costs Delivering and fuel imbalances  Must follow same reporting schedule as non-fuel costs filing

PUBLIC The End 21