BOSTON DALLAS DENVER LOS ANGELES MENLO PARK MONTREAL NEW YORK SAN FRANCISCO WASHINGTON RGGI Markets Workshop : Summary and Key ‘Take-Aways’ Susan Tierney Presentation to RGGI Stakeholders Meeting February 16, 2005

22 Markets Workshop – Summary of workshop Overview of the Markets – Dave Lawrence, NYISO Issues for Traditional Suppliers – Mark Brownstein, PSEG Issues for Non-Traditional Suppliers – Rich Cowart, RAP Issues for System Operators – Mark Babula, ISO-NE

33 Key Take-Aways from Presentations Issues for Traditional Suppliers (Brownstein): Concerns about leakage, especially in PJM where the regional market is a mixture of RGGI and non-RGGI states exacerbating competitiveness impacts related to differences in market rules, between merchant generators in RGGI region and traditionally regulated, rate-based generators outside of RGGI region effect of cap in creating environmental “adder,” putting economic pressure on relative competitiveness of coal-fired generation fuel diversity in the Northeast power markets timing of implementation of the cap relative to other key issues (e.g., end of standard of contracts, contents of bilateral contracts) Implications of the design of the RGGI rule for its ability to serve as national model

44 Key Take-Aways from Presentations Issues for Non-traditional suppliers (Cowart): Advocating the positions that: RGGI can not rely on traditional power markets alone RGGI success depends upon ability to develop non-traditional resources (renewables, efficiency, and other distributed resources (CHP, price-responsive demand, etc.)) market and regulatory barriers persist which inhibit reliance on these resources need for additional RGGI design issues to overcome these barriers (e.g., allocations of credits to these resources, output-based allocations) need for other policy remedies (e.g., ISO transmission policy, ISO stand-by rates for alternative resources, system benefit charge enhancements) to address barriers

55 Key Take-Aways from Presentations Issues for System Operators (Lawrence, Babula): RGGI design should take into account: cost and competitiveness implications for various types of generators need to maintain certain uneconomic units needed for local reliability but which may have high GHG profile (and costs) need for fuel diversity among power generators (including dual-fuel resources in winter) Need for flexibility of system operators to deal with emergencies, siting, trades, fuel diversity Role of the ISOs regarding tracking RGGI data, compliance Special operational considerations associated with wind resources Other design issues – allocation of allowances, cap size and phase in, inter-temporal borrowing, leakage

66 Market-related issues for RGGI “Core RGGI Issues” – Issues that must be addressed (one way or other) in RGGI design Technically, “critical success factors” for RGGI “Collateral” or “Auxiliary” RGGI Issues – Important to support RGGI objectives Typically under responsibility of other entities – Not generators – Not RGGI regulatory entities

77 Central RGGI Issues – Core “Take-Aways” The value of regulatory “certainty” – setting the rules sooner rather than later Timing of announcing the RGGI architecture and requirements Timing of implementing the RGGI architecture and requirements Issues of timing interactions between phase-in plan and bilateral contracts: not likely possible to get it just right everyway at the same time

88 Central RGGI Issues – Core “Take-Aways” The effects of leakage on the cap Likely more important issue for RGGI states in PJM Likely less important for RGGI states in NY and NE Possible design remedies – Require imports to have allowances? – Require load-serving entities to hold allowances (a la Renewable Portfolio Standard)? – Regulatory hook for alternative approaches? – Need for inter-state consistency of approach?

99 Central RGGI Issues – Core “Take-Aways” Issue of fuel neutrality versus non-fuel-neutrality – No “right” design answer; it’s a policy choice “Fuel-Neutral” policy design may not have fuel neutral effect Allowance allocations – Set-asides for different resources – e.g., – For efficiency? – For small clean resources? – For reliability-must-run units? – For new generators? Output-based versus non-output based?

10 Central RGGI Issues – Core “Take-Aways” Important contextual issues – but which are difficult to address directly in RGGI design. Difficulties experienced by generators in RGGI states – e.g., merchant generators competing with rate-based generators – e.g., high fuel prices for gas-fired projects – e,g., non-diversity of fuel mix among power plants – e.g., in earning sufficient revenues to cover costs – e.g., in “reliability-must-run” units in certain locations Difficulties experienced by “clean” power resources – e.g., transmission problems for renewables – e.g., lack of funding for energy efficiency investments

11 Central RGGI Issues – Core “Take-Aways” Some issues are important for regional power markets, but may not need “big” policy fix in RGGI design – Reliability-must-run units – not clear why need special fix – Flexibility requirements for system operations – make sure that inter-temporal trading and/or length of compliance period(s) allow for emergencies (e.g., system outages, fuel shortages)

12 Key “Collateral” or “Auxiliary” RGGI Issues List of complementary issues and policy items to be pursued in parallel with RGGI Identify set of problems that are barriers to accomplishing RGGI objectives Many of these problems exist independent of RGGI initiative Some are not even worsened by RGGI Solving the problems will help accomplish solutions that reinforce RGGI goals Suggest remedies that should be supported by RGGI states, but not necessarily part of RGGI Model Rule Encourage continuing effort by RGGI states to address these collateral issues

13 Key “Collateral” or “Auxiliary” RGGI Issues List of collateral issues System benefit charges (for efficiency, for renewables) Price-responsive demand initiatives Rewewable portfolio standards RTO/ISO policies with respect to wind resources (back up, transmission, intermittency, reactive power requirements) Siting reforms (to take greenhouse gas emissions into account) Retail pricing reforms Wholesale market reforms

14 Susan F. Tierney, Ph.D. Managing Principal Analysis Group, Inc. 111 Huntington Ave., 10 th Floor Boston, MA ph: fax: