March 13, 2013 Day-Ahead Market (DAM) Clearing Process follow-up from February WMS Matt Mereness, ERCOT Manager DAM & CRR

Outline of Discussion from WMS regarding DAM OD 2/6/13 Two action items from WMS in Feb 1.What was the amount of load resource proration 2.Details and requirements of DAM Optimization Other observations -A/S linked offer summary -A/S trends since Feb 6 -MIP trend since NPRR322 implemented Feb 12 Appendix -Basic example of DAM Optimization in A/S shortage -Reminder of A/S trades and self-arrangement positions 2 March 13, 2013

Q1- WMS Load Proration Question for HE1 OD 2/6/13 -Question from WMS of how many Load Resources and MW were prorated in DAM for HE01 on Feb 6 -Answer is that no Loads were prorated for HE01 -Some loads not fully awarded due to COP for Resources (HSL below Offer amount so only awarded up to HSL) 3 March 13, 2013

Q2- DAM Design DAM design and objective function in protocols Protocols 4.5.1(4) The DAM uses a multi-hour mixed integer programming algorithm to maximize bid-based revenues minus the offer-based costs over the Operating Day, subject to security and other constraints, and ERCOT Ancillary Service procurement requirements. (a)The bid-based revenues include revenues from DAM Energy Bids and Point-to-Point (PTP) Obligation bids. (b)The offer-based costs include costs from the Startup Offer, Minimum Energy Offer, and Energy Offer Curve of any Resource that submitted a Three-Part Supply Offer, DAM Energy-Only Offers and Ancillary Service Offers. 4

Q2- DAM Design Documentation DAM Requirements document from Go-Live posted at –From Appendix 1, DAM clearing mathematical function (see next slide for market clearing objective function) - Energy and A/S Prices both driven by shadow prices for next MW 5 March 13, 2013

Q2- DAM Design 6 March 13, 2013

Q2- DAM Design DAM clearing process and analysis DAM engine – Unit commitment creates potential commitment patterns/solutions, then sends to network security analysis. Based on the results, adjusts commitment pattern –Continues to iterate until all violations are resolved and the solution meets all parameters, including the MIP threshold As previously noted, the MIP gap/threshold represents the area wherein multiple possible solutions that meet the constraint set become equivalent and indistinguishable to the DAM engine Once an acceptable solution is found and DAM converges, the final prices are calculated in a pricing run All awards and prices sent to Price Validation Tool analysis and investigated and validated in parallel by DAM Operator See appendix for basic market clearing and pricing example 7

Other Observations: A/S Linked Offer Summary Majority of online AS offers from generators (~75%) were not linked with Non-Spin on Feb 6 –Example is 50 MW capacity offering $10 RegUp and $8 RRS. Perhaps the QSE would also be willing to sell Non-Spin at $8 from the same capacity, but that is not reflected in the offer No A/S substitution –More linked offers from online resources may have helped the non-spin scarcity in Hour 1 8 March 13, 2013

Other Observations A/S Offer trends since Feb 6 9 OffNon-Spin TREND

March 13, 2013 Other observations: MIP threshold since NPRR322 MIP threshold is necessary because DAM is not a straight marginal dispatch problem –DAM solution is a combination of binary and continuous variables –Binary variable decisions (turning on a generation resource, awarding a fixed quantity block bid, etc.) are subject to an imperfect solutions within the MIP gap Purpose of the DAM Make-Whole payment in the case of valid Three-Part Offers –Looks at total profit for the OD, however; doesn’t help if DAM extends the commitment by an hour when turning off sooner was more optimal, for instance –Continuous variable decisions (such as awarding an energy bid curve) are not subject to it and will always be consistent with the clearing prices –Binary variables for recent DAMs: approx 240 TPOs plus 50 fixed quantity bid/offers times the hours contained therein 10

March 13, 2013 Other Observations: MIP threshold How MIP gap is calculated: –As each iteration completes, the engine runs a mini auction where all the binary variables become continuous (e.g., that a resource with a 200 MW LSL can be awarded just 0.1 MW) –This removes the lumpiness from the solution and provides a baseline to compare to the real solution So the “optimal” solution that is used for comparison is one that is not feasible nor attainable, but it gives an indication of the current solution quality. 11

March 13, 2013 Other Observations: MIP Threshold Refinement since NPRR322 on Feb MIP TREND

APPENDIX 13 March 13, 2013

Example with Linked AS Capacity Simplified example to illustrate price effect from linking AS capacity in AS Offers: 14 Energy BidEnergy Offers 400 MW$1,000G MW$10 G MW$20 G MW$30 G MW$40 AS requirements RegUp20 RRS70 NSRS50 AS OffersRegUpRRSNSRS G1135 MW$20 $10 $1 G310 MW- - $3,000 RegUp MCPC=+$20 -$1 +$3,000=$3,019 RRS MCPC=+10 -$1 +$3,000=$3,009 NSRS MCPC=$3,000= Energy LMP=$30 AwardsEnergy MWRegUp MWRRS MWNSRS MW G G G G40000

Reminder of Mechanics of AS Trades 15 March 13, 2013 = QSE AS Obligation - Self-Arranged AS submitted AS amount ERCOT buys in DAM for QSE QSE AS Responsibility Self-Arranged AS + AS sold in Trades - Total DAM AS Offer awards + Total SASM AS Offer awards AS bought in Trades =