ERS Procurement Methodology Mark Patterson, ERCOT Wholesale Market Subcommittee October 9, 2013

ERS Time Period Capacity Demand Curve MW $/MW/Hr Offer Cap Expenditure Limit Capacity Demand Curve Inflection Point ERS Time Period Capacity Demand Curve October 9, 2013 ERCOT Public

Benefits of Proposed Procurement Methodology Primary goal of the methodology is to provide transparency into how offers are procured or rejected Procurement Parameters will be published as part of the RFP for a Contract Term Capacity demand curve creates liquidity in the ERS Market and encourages offers based perceived cost of providing the service Meets the recommendation of the PUCT to move to a clearing price as opposed to pay-as-offered October 9, 2013 ERCOT Public

Definitions Time Period Risk Weighting Factor – A value from 0-10 that represents the relative risk of entering into an EEA during each ERS time period. These factors are assigned by ERCOT ahead of each ERS procurement using the most current information available (i.e.; load forecast, available operating reserves, outage information, etc.) Time Period Expenditure Limit – An allocation of the $50 Million ERS budget that sets the maximum dollars that can be spent on all ERS products in each ERS time period Capacity Inflection Point – The point on the capacity demand curve at which capacity = spend limit / (offer cap × hours) Capacity less than inflection will result in procurement < spend limit Capacity greater than inflection will result in clearing price < offer cap October 9, 2013 ERCOT Public

Expenditure Limit and Capacity Inflection Point Calculations   Risk Weighting Factor (a) Time Period Hours (b) Offer Cap (c) (a)*(b)*(c) Expenditure Limit Allocation Factor ERS Time Period Expenditure Limit Capacity Inflection Point FebMay bh1 1 430 $ 80 34,400 3.05% $ 1,527,423 44.4 bh2 258 20,640 1.83% $ 916,454 bh3 344 27,520 2.44% $ 1,221,938 nbh 1,871 149,680 13.29% $ 6,646,064 JunSep 420 33,600 2.98% $ 1,491,901 10 252 201,600 17.90% $ 8,951,407 444.0 336 268,800 23.87% $ 11,935,209 1,920 153,600 13.64% $ 6,820,119 OctJan 20,160 1.79% $ 895,141 26,880 2.39% $ 1,193,521 1,945 155,600 13.82% $ 6,908,923 October 9, 2013 ERCOT Public

Estimated Clearing Prices per Capacity Procured Risk Weighting Factor (a) Max Clearing Price Allowed to Procure a MW Level 100 MW 250 MW 500 MW 750 MW 1000 MW FebMay bh1 1 $ 35.52 $ 14.21 $ 7.10 $ 4.74 $ 3.55   bh2 bh3 nbh JunSep 10 $ 80.00 $ 71.04 $ 47.36 OctJan October 9, 2013 ERCOT Public

Assigning Risk Factors Need to Redefine ERS Standard Contract Terms and Time Periods % hrs in # Hrs % Tot Hrs SCT Feb-May13 BH1 425 0.05 0.15 BH2 255 0.03 0.09 BH3 340 0.04 0.12 NBH 1859   0.21 0.65 Jun-Sep13 420 0.14 252 336 0.11 1920 0.22 0.66 Oct13-Jan14 1945 Issue: Typical winter peak hours ~ 5-8 a.m. in late Dec through Feb ERCOT’s approach is to assign conservative risk weighting factors for the winter peak until SCT and TP issues are resolved. October 9, 2013 ERCOT Public

ERS Time Period Offer Cap The ERS time period offer cap is a constraint on the demand curve to identify unreasonable offers. The offer cap will apply to all ERS types in each time period during the ERS budget year and will be established at $80/MW/Hr. This cap is consistent with the prices historically paid to loads participating under the TDSP Energy Efficiency Rule pertaining to the Standard Offer Load Management Programs. Any offers above the offer cap will be rejected and not considered for procurement. Based on the historical levels of participation, the proposed methodology makes it highly unlikely that ERS will clear at the offer cap in any time period and most likely will clear significantly below the cap October 9, 2013 ERCOT Public

ERS Capacity provided through ERS Self Provision Other Clearing Price The highest offer accepted for a time-period from will set the clearing price for all ERS Resources cleared in that time-period. Each ERS type as different characteristics ERS-10 has shorter ramp but deployed in EEA L2 ERS-30 deployed in EEA L1and potentially more often ERCOT believes 10-Minute and 30-Minute ERS are deployed for the same purposes Help recover operating reserves Reduce or prevent firm load shed ERS Capacity provided through ERS Self Provision For any ERS self-provision, ERCOT will reduce the Time Period expenditure limit for any offers to self-provide part or all of a QSE’s ERS Obligation by the clearing price for ERS. October 9, 2013 ERCOT Public