1. Better Align Capacity Markets with Policy/Planning Objectives James Daly, VP Energy Supply Restructuring Roundtable Sept 21, 2012

2. Do We Need a Centralized Capacity Market ? 2

3. Capacity Markets Historically in NE New England has had a capacity market for decades Primarily a bilateral market prior to December 2006 Load Serving Entities held capacity to meet share of the pool requirement Buyer and seller negotiated prices for capacity Failure to meet capacity obligations resulted in deficiency charges (base on the cost of peaking capacity) Prior to April 1998 energy and capacity was integrated – Capacity payments in bundled transactions granted a call on energy High capacity payments associated with lower cost energy Low capacity payments associated with higher cost energy 3

4. Framework for Considering Capacity Markets Capacity is needed to ensure reliability Setting a value on capacity is highly variable – Surplus markets = low value – Deficient markets = high value Market entry and exit can take a long time – potentially exposing customers to prolonged periods of high or low prices Magnifying dynamic in NE with generation divestiture – Generation generally does not have load responsibility – Load generally does not own generation Polarization drives litigation 4

5. Emergence of Centralized Markets Forward Capacity Market (FCM) emerged in 2006 to be effective June 2010 Centralized market clearing through ISO Uniform capacity payment to all capacity Prices set competitively between a floor and ceiling Geared to the short term – 1year existing, 5 years for new Weak penalties and incentives 5

6. Proposed Improvements Called for at FERC Demand curves – administratively set prices based on quantity of capacity in market Minimum Offer Prices Rules (MOPR) – Prices set by regulation rather than competition – Price = long run marginal cost of resource – Move from minimum cost capacity (peaker) to max cost capacity (clearing technology) – Not likely to incent new generation Payment duration (5 years for new) too short to motivate capital Market prices volatile Exceptions allowed in some cases for renewables Call for increase incentives and penalties 6

7. Proposed Improvements at FERC MOPR can lead to very large cost swings: 7 2010 Total NEMA / Boston Capacity Cost & Price Under Various LSR Clearing Prices $Million$/kW-yr¢/kWh % Increase from Base Base364483.0 CT (LM6000)576774.858 CC (2 x 1 F)594795.063 Biomass8941197.5146 Offshore wind1,90125315.9423

8. Bilateral Capacity Markets Capacity obligations met primarily through bilateral markets – buyers and sellers set price Locational needs as warranted for the load zone ISO sets minimum terms to qualify as capacity Operating parameters, ramp rates, capability Backup fuel and inventory requirements Audits performance and sets penalties/incentives Capacity that meets minimum terms qualifies to meet load serving entities capacity requirements Failure to secure sufficient capacity results in deficiency charge 8

9. Advantages of a Bilateral Capacity Market Allows market to set capacity prices to reflect what is being purchased – Renewables to meet states environmental policy – Reliability projects per states goals – Energy rich resources for low energy costs – Peaking resources for quick start and load following capability Eliminates need for offer review trigger prices ISO can focus on maintaining a minimum level of reliability – Performance penalties and incentives – Pricing for market should be less controversial Load has responsibility to manage its own resources rather than relying on a central market 9