Capacity Valuation

+ + − − + = Summary RPS Calculator Valuation Framework A primary component in the Net Market Value (NMV) calculation used to rank competing resources Reflects the value associated with a resource’s ability to avoid conventional capacity Version 6.0 now utilizes ELCC values versus fixed NQC values in Version 2.0-5.0 + Levelized Cost of Energy + Transmission Cost − Capacity Value − Energy Value + Integration Cost* = Net Resource Cost *Not currently quantified in RPS Calculator

Major Updates to RPS Calculator Methodology used to value output of renewable generation captures declining returns to scale, allowing for better analysis of high penetrations Version 2.0 - 5.0 Capacity value attributed to renewable resources based on static assumptions Avoided cost of capacity valued at cost of new entry Value based only on snapshot in 2020 Version 6.0 Capacity value evaluated endogenously in each year based on other renewable resources in portfolio Avoided cost of capacity calculated based on load-resource balance Value streams calculated based on lifecycle impact to ratepayers

Goals for New Methodology Model Functionality Versions 2-5 Version 6 Differentiate capacity value between renewable resources  Dynamic methodology that captures renewable portfolio effects and declining capacity value with resource saturation  Avoided cost of capacity accounts for CAISO reserve margin relative to load-resource balance

Avoided Cost of Capacity Capacity Value Capacity value reflects the value associated with a renewable resource’s ability to avoid conventional generation capacity, and it is calculated as: RPS Calculator measures capacity value at various renewable penetrations and mixes by: Quantifying each renewable resource’s capacity credit using the Effective Load Carrying Capability (ELCC) method Varying the avoided cost of capacity depending on system-wide reserve margin Capacity Value ($/kW-yr) Capacity Credit (% of nameplate capacity) Avoided Cost of Capacity ($/kW-yr)

Old Methodology Based on NQC Capacity value reflects avoided conventional generation investments afforded by renewable build Common practice is to measure the contribution of variable renewables towards reliability based on output during peak load conditions Original method: Net Qualifying Capacity (NQC) calculated using 70% excedence methodology Calculated as 70th percentile of generation between HE14 and HE18 (Apr-Oct) Differentiated between technologies Did not account for changes to the net peak that occur with continued renewable build Guiding Principle: Resources that are more peak-coincident have more capacity value

New Methodology Based on ELCC While the first increment of solar PV has a relatively large impact on peak, it also shifts the “net peak” to a later hour in the in day This shift reduces the coincidence of the solar profile and the net peak such that additional solar resources have a smaller impact on the net peak

Changing Value of Capacity The marginal ELCC of one renewable resource technology declines as its penetration increases This is most apparent for solar PV, which has a high capacity credit at low penetrations, but this rapidly decreases as additional capacity is added A renewable portfolio that contains a diverse set of technologies can mitigate the decline in ELCC

Effective Load Carrying Capability (ELCC) Pursuant to legislation, Resource Adequacy has adopted “Effective Load Carrying Capability” to determine the contribution of variable renewables towards the system’s reserve margin By definition, ELCC depends on the composition of the system (both conventional and renewable resources) ELCC is now incorporated in Version 6.0 as a lookup function in an ELCC “surface” or matrix ELCC of incremental resources updates each year as the composition of the system changes In the RPS Calculator, the surface contains nearly 10,000 ELCC values—each associated with a different portfolio of renewable resources Interpolation between points on the surface is used to determine marginal ELCC values for resource screening ELCC is the additional firm load that can be met by an incremental generator while maintaining the same level of system reliability

Development of the ELCC Function E3 used a stochastic LOLP methodology to calculate the ELCC of a wide range of possible renewable portfolios Example portfolios: RPS Calculator can access up to 9,750 of these portfolios to best characterize the ELCC of a portfolio and the marginal ELCC of potential additions Portfolio CSP (No Storage) (w/ Storage) Solar PV (Distributed) (Utility-scale) Wind (Coastal) (Inland) ELCC of Portfolio (% of Peak) 1 1.50% 12.00% 9.00% 2.50% 0.00% 16.11% 2 3.00% 7.50% 18.29% 3 10.50% 10.00% 22.52% 4 6.00% 21.08%

ELCC Calculation Approach ELCC values used in RPS Calculator were developed by E3 using the Renewable Energy Capacity Planning (RECAP) model Uses industry-standard approach to evaluate loss of load probability: Calculate hourly net load distributions (based on load, wind, solar shapes) Calculate capacity outage probability table (based on generator forced outage assumptions) Calculate probability that supply < net load in each time period Method is expected to yield similar results to methodology under development in the RA proceeding Values will be benchmarked against calculations used in the RA proceeding when available RECAP Model: https://ethree.com/public_projects/recap.php

ELCC Function Interpolation To approximate the ELCC of points not sampled by the LOLP simulations, the RPS Calculator uses linear interpolation Example: Utility-scale solar in absence of other renewable resources ELCC function represents ELCC of whole renewable portfolio Marginal ELCC (ELCC of incremental resources in year of build) is approximated by the slope of the curve

ELCC Function Interpolation To approximate the ELCC of points not sampled by the LOLP simulations, the RPS Calculator uses linear interpolation Example: Utility-scale solar in absence of other renewable resources In year of interest: Renewable portfolio online Marginal ELCC of solar 1MWh of additional solar Existing renewable portfolio in year of interest ELCC from LOLP model

Renewable Portfolio ELCC ELCC Surface Because the ELCC of each incremental resource depends on the whole portfolio of renewable resources, the ELCC function is actually a multidimensional surface Wind/solar slice of surface: One dimension for each renewable resource type Marginal ELCC for each resource is approximated by slope of surface in each direction Linear interpolation in multiple dimensions involves placing each portfolio on to a facet of this surface Renewable Portfolio ELCC Wind Penetration Solar Penetration

ELCC Surface Because the ELCC of each incremental resource depends on the whole portfolio of renewable resources, the ELCC function is actually a multidimensional surface Wind/solar slice of surface: For any portfolio on this facet: Marginal ELCC of wind Renewable Portfolio ELCC 1MWh of additional wind Wind Penetration Marginal ELCC of solar 1MWh of additional solar Solar Penetration

Capacity Value Calculation The other component of a resource’s capacity value is the avoided cost of capacity from an alternative source Avoided capacity cost is driven by the need for capacity When the system is short, capacity avoided cost approaches the all-in net cost of a new CT When the system is long, capacity avoided cost is represented by today’s average RA contract price RPS Calculator includes Load-Resource Balance for CAISO to determine the timing of this transition Assumptions from LTPP used where possible New CT net cost Based on recent average RA contract prices

Determining Avoided Capacity Costs Year-by-year avoided cost evaluated based load-resource balance using assumptions provided by LTPP Load forecast, demand-side resources, conventional generator additions & retirements Avoided cost transitions from short-run to long-run avoided cost when load-resource balance is reached Transition from short-run to long-run avoided cost

RPS Calculator Guide The parameters that affect Capacity Value can be found on the following tabs: Generators: list of non-renewable generators in the CAISO and/or contracted to CAISO loads Includes NQC assumptions for each conventional plant Aligned with LTPP ELCC_Table: ELCC lookup table for a range of RPS portfolios ELCC_Interp: calculation of marginal ELCCs for each technology based on current portfolio of renewable resources System_Capacity: evaluation of CAISO system load-resource balance (and the corresponding value of capacity) Valuation: calculation of capacity value ($/MWh) used in resource screening and selection process