1. WMS Meeting- February 13, 2013 Day-Ahead Market (DAM) Analysis of Feb. 6 Ancillary Service Prices ERCOT- Matt Mereness (DAM/CRR Manager) IMM- Dan Jones (Director Potomac Economics)

2. February 13, 2013 February 6, 2013, Hour Ending 1 - Overview On February 5, 2013, DAM published $3,000 prices each for RegUp, RRS, and Non-Spin, for February 6, Hour 1 –An offline non-spin offer at $3,000 was struck for 4.4 MW. –Less Non-Spin was available to the meet the AS requirement in Hour 1 than is typical. –This also set the price for RegUp and RRS (more discussion next) –Energy prices were in normal range While the prices were unusual, our investigation found that the DAM behaved as designed and there was no cause for correction HourRRSRegUpNon-SpinRegDnSys Lambda 1 $ 3,000.00 $ 3,000.50 $ 3,000.00 $ 12.96 $ 20.96 2 $ 4.60 $ 5.58 $ 1.00 $ 9.19 $ 19.56 3 $ 4.60 $ 5.12 $ 1.00 $ 10.25 $ 18.90 4 $ 4.60 $ 5.51 $ 1.00 $ 10.50 $ 18.42 2

3. February 13, 2013 Why did it affect RRS and RegUp? RegUp, RRS, and Online Non-Spin are routinely offered as “linked” to the same capacity – one MW quantity is offered with three different prices for each service, allowing DAM to optimize among the online services. –DAM went near the top of the offer stack to clear Non-Spin –There were Resources that needed to be awarded RRS and/or RegUp in order to meet those AS requirements; however, those same Resources’ linked offers could have also provided Non-Spin with the same capacity and could have otherwise received the high Non-Spin price –Due to this opportunity cost, RRS and RegUp MCPCs are set by the same Non-Spin offer. On the energy side, there was no shortage of energy offers so energy prices were in normal range; 3

4. February 13, 2013 How does the optimization value AS Offers? When energy prices go up, AS prices are affected due to co- optimization (energy competes with AS), but not vice versa. Objective function for DAM is to maximize bid-based revenues while minimizing offer-based costs. For the AS side, there are no “bid-based revenues”, only an AS requirement as a fixed constraint –The optimization does not take into account the settlement impact on LSEs for high AS prices – not a voluntary purchase with an associated bid –As opposed to the energy side, where bid prices serve to constrain the offers 4

5. February 13, 2013 How does the optimization value AS Offers? (cont’d) The “offer-based cost” of the Non-Spin was only ~$13k since it was a small number of MWs procured from the $3k offer. –There were online Non-Spin offers much less than $3,000 that were not struck. For example, say a resource had $6,000 startup cost, $35 min energy offer, $3/MW online Non-Spin offer, and a min run time of 4 hours. The cost of starting up this hypothetical Resource to access the relatively low-priced offer to provide online Non-Spin in one hour, then having to keep it on uneconomically for hours, is >$13k. Recall that online Non-Spin awards are a daily commitment decision, rather than a simple marginal dispatch –Also offered as a reference, the total objective function for this DAM was $339million, with a MIP gap of $112k, where the MIP gap represents the area wherein multiple possible solutions that meet the constraint set become equivalent to the DAM engine 5

6. February 13, 2013 Why was less Non-Spin available? A portion of the offered Non-Spin capacity for Operating Day 2/6/13 was unavailable for award due to temporal constraints in the DAM –Resources will not be awarded in hours where temporal constraints are violated (e.g., min offline time, max online time, min online time). Reminder that DAM utilizes current day COP status at time of DAM Close to determine all Resource initial conditions for the next Operating Day. Thus the final hours of the current day COP affect the transition into the study period and the availability to the DAM optimization for the first hours of the Operating Day. 6