ERS Procurement Methodology 09/04/2013 ERS Workshop Presented By: ERCOT Staff

Why Change Procurement Methodology? Remove as much of the subjectivity as possible from the current ERCOT procurement process Create a methodology that aligns expenditure limits with risk Establish known procurement parameters for ERS Providers Use value established in PUC rule as the offer cap benchmark 2 DSWG/QMWG Meeting05/31/2013

Change Control Process ERS Workshop09/04/ ERCOT Staff will provide a period for stakeholder review and comment for proposed revisions to this document as follows: 1.ERCOT shall post proposed revisions to the Emergency Response Service Procurement Methodology to the ERCOT website. 2.ERCOT shall also electronically notify stakeholders of the proposed revisions via the TAC and Others distribution list and define the comment period which shall conclude no less than 14 days after initial posting. 3.To receive consideration, comments should be submitted via to by the deadline set forth in the notification. 4.Upon Market Participant written request, ERCOT will conduct a conference call and online review of the submitted comments. 5.ERCOT will review proposed document revisions with the Technical Advisory Committee (TAC). 6.ERCOT will submit proposed document revisions for ERCOT Board approval. 7.Within three Business Days of ERCOT Board approval, ERCOT shall post the revised document to the ERCOT website.

ERS Time Period Capacity Demand Curve 4 ERS Workshop09/04/2013

ERS Time Period Offer Cap 5 The ERS offer cap establishes a maximum possible procurement price of $80/MW/hr for every ERS Time Period during the ERS budget year. ERCOT will automatically reject any offers above the offer cap. This cap is consistent with the prices historically paid to Loads participating in TDSP Standard Offer Load Management Programs. ERS Workshop09/04/2013

Expenditure Limit and Capacity Inflection Point Calculations 6 ERS Workshop09/04/2013

Offers Exceed Offer Cap 7 ERS Offers Procured Capacity Capacity Inflection Point ERS Procurement Price Expenditure Limit MW $/MW/Hr Offer Cap ERS Workshop09/04/2013

Offers Exceed Expenditure Limit 8 ERS Offers Procured Capacity Capacity Inflection Point ERS Procurement Price Expenditure Limit MW $/MW/Hr Offer Cap ERS Workshop09/04/2013

Other Clearing Price –The highest offer accepted for a time-period will set the clearing price for all ERS Resources cleared in that time-period. 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. ERS Workshop09/04/2013

Stakeholder Comments to ERS Procurement Methodology 10 DSWG/QMWG Meeting05/31/2013

Stakeholder Comments Section B. Change Control Process –All comments favorable Section D. ERS Offer Cap –Using a fixed cap of $80/MWh allocates too much of the $50 million annual budget to low risk periods. –Recommendation to use some variation of historical Responsive Reserve Service prices corresponding to ERS contract time periods. –Another alternative is to expand the possible range of the risk weighting factors 11 DSWG/QMWG Meeting05/31/2013

ERCOT’s Response: 1.ERCOT chose to use a single fixed offer cap to simplify one aspect of this procurement methodology. This eliminates any confusion of the cap in relation to the Standard Contract Terms and time periods. In addition varying offer caps are not necessary with the introduction of the risk weighting factors. These factors are time period specific and are used to allocate the annual budget across time periods. 2.ERCOT believes the range of 1-10 for the risk weighting factors is appropriate to begin with. If we start to observe unintended results the methodology can be amended with Board approval. 12 DSWG/QMWG Meeting05/31/2013 Stakeholder Comments

Section E. ERS Expenditure Limit –Support the use of a risk weighting factor as a mechanism to allocate the annual ERS budget Section G. Clearing Price –Overall support moving to a market clearing price for ERS Section H. ERS Capacity provided through ERS Self Provision –Recommendation to eliminate the clause that the value of self- provided ERS resources reduce the expenditure limit. ERCOT ‘s Response: 1) There is a cost to those that elect to self provide their ERS obligation. 2) Loads are charged for all ERS capacity based on their LRS and receive the equivalent of a payment for capacity self provided therefore the cost of this capacity should be charged against the expenditure limit. 13 DSWG/QMWG Meeting05/31/2013 Stakeholder Comments