Electric Reliability Council of Texas (ERCOT) A Success Story… In Progress Ingmar Sterzing United States Association of Energy Economics (USAEE) Pittsburgh Conference October October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape

US NERC and ISO Regions NERC and ISO Regions and Transmission Interconnects Not all “markets” are the Same… Some restructured, some regulated The Electric Reliability Council of Texas (ERCOT) is an isolated (non-interconnected) NERC Region and an Independent System Operator (ISO) The Electric Reliability Council of Texas (ERCOT) is an isolated (non-interconnected) NERC Region and an Independent System Operator (ISO) October 27th, 20152I. Sterzing, USAEE Dynamic Energy Landscape

ERCOT Overview 3I. Sterzing, USAEE Dynamic Energy Landscape 24 million consumers Competitive-choice customers: 75% of load More than 43,000 circuit miles of high- voltage transmission 550 generating units More than 74,000 megawatts (MW) capacity for peak demand Record peak demand: 69,830 MW on 5:00 pm (102.8 °F) Energy used in 2014: 340 billion kilowatt- hours Market participants: More than 1,400 active entities that generate, move, buy, sell or use wholesale electricity ERCOT serves the public by ensuring a reliable grid, efficient electricity markets, open access and retail choice.

The Electric Power System in ERCOT Wholesale Power Supply Transmission and Distribution Retail Demand Megawatts (MWs)kilowatts (kWs) $/MWh¢/kWh Commodity Price Un-Regulated or Restructured Regulated Un-Regulated, Restructured, Competitive and Non-opt In October 27th, 20154I. Sterzing, USAEE Dynamic Energy Landscape

Energy Price Cap Raised to $9,000/MWh in 2015 October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape5 $9, x $42 Average 2014 Price (MWh)2015 Market Cap (MWh) Texas Energy Only market design allows scarcity pricing of energy to escalate times normal cost All generation is centrally dispatch on an economic basis by ERCOT Generation resources are paid their Locational Marginal Price (LMP) for the output of their facility No centralized capacity market No centralized planning for generation Energy pricing and ancillary services are primary incentive to maintain and develop supply

ERCOT Generation Reserve Margin October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape6 ERCOT continues to maintain reasonable reserve margins above the established target of 12.5% 17.0%18.5%21.4%18.7%17.1%16.1%14.6%13.2%11.8%10.4% Source: ERCOT CDR Report May 2015

ERCOT Wholesale Energy Pricing Henry Hub Gas Pricing - $2.84/mmBtu ERCOT Average Price – $27/MWh ERCOT Average Pricing, September 9 th, 2016 Mid-Afternoon June 2015 (0.97) Minimum Average Maximum July 2015 (2.90) Minimum Average Maximum August 2015 (0.93) Minimum Average 1, Maximum September Minimum Average Maximum Low natural gas pricing, continues to drive low power prices Summer Power Pricing ($/MWh)

ERCOT Transmission October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape8 Open access transmission Transmission Cost of Service 89% increase from ,000 MW - $4.1 M/Mo. ERCOT total $261 M/Mo. $3.1 B/year total Clean Renewable Energy Zone (CREZ) lines - 3,500 Miles, completed Over $7 Billion Cost Wind curtailment dropped significantly Less negative electricity pricing 89% Increase

ERCOT Renewable Energy More than 15,635 MW of installed wind capacity Wind energy 10.6% of total in 2014 Solar, Hydro, and Biomass < 1.0% in MW of installed solar capacity, still less than 1% of capacity and energy More than 6,000 MW of solar is under study Another 385 MW of solar has agreements in place to connect to the ERCOT grid in the next couple of years October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape9 Wind Generation Records  11,467 MW, September 13, 2015, 10:56 p.m.  40.58% Wind Penetration, March 29, 2015, 2:12 a.m. Wind Generation Records  11,467 MW, September 13, 2015, 10:56 p.m.  40.58% Wind Penetration, March 29, 2015, 2:12 a.m. Renewable energy could grow to 18% by 2020

Residential Retail Energy Pricing October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape10 Sources: PowerToChoose.org and U.S. Energy Information Administration, July 2015 ₵ /kWh lowest competitive residential retail rates Texas Average - ₵11.86/kWh National Average - ₵12.98/kWh Lowest Texas Price – ₵5.00/kWh

ERCOT Clean Air Plan Impact The EPA proposed the CPP in June 2014 – Interim CO2 emissions limit of 853 lb CO2/MWh on average during the period from 2020 to 2029 – Final limit of 791 lb CO2/MWh on average from 2030 onward. – 8,700 MW coal capacity retirement predicted Under the final rule, August, 2015 – Texas will be required to meet a final CO2 emissions rate limit of 1,042 lb CO2/MWh on average from 2030 onwards – 4,200 MW coal capacity retirement through 2030 – 16% increase in energy costs for customers by 2030 – Capacity picked up mainly by solar, wind, and combustion turbines – Potential transmission reliability issues due to the loss of generation resources in and around major urban centers – Strain on ability to integrate additional renewable generation resources October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape11 Source: ERCOT Analysis of the Impacts of the Clean Power Plan Final Rule Update 2015

Current Focus Areas for ERCOT Market Optimization Renewable Power Integration Distributed Energy Resources Resource Adequacy & Scarcity Pricing Potential Clean Air Plan Impacts October 27th, 2015I. Sterzing, USAEE Dynamic Energy Landscape12