1. ERCOT WHOLESALE MARKET OPERATIONS MODULE 2

2. 2 Essential Concepts Ancillary Services Congestion Management Topics

3. 3 Topic 1: Essential Concepts

4. 4 Market Structure Wholesale Concepts and Roles Introduction to the Day-Ahead and Operating Day process

5. 5 TOPIC 1: Essential Concepts Wholesale Market: Zonal Design Zonal Design Bilateral Market Bilateral Market Requirements: QSE Representation QSE Representation Balanced Schedules Balanced Schedules ERCOT Structure

6. 6 Market Participants qualified by ERCOT to: Submit Balanced Schedules Submit Ancillary Services Bids Settle with ERCOT Qualified Scheduling Entity (QSE) QSE TOPIC 1: Essential Concepts All Resources and LSEs must be represented by a QSE

7. 7 Definition / Summary A trade agreement between two entities Bilateral transactions are scheduled with ERCOT Examples: 1.QSE A sells a block of 50 Mwh (North Zone), to QSE B for Hour-Ending 1100-1300 2.QSE A sells 3 Mw of Responsive Reserve to QSE B for Hour- Ending 1400. Bilateral Transactions TOPIC 1: Essential Concepts

8. 8 Balanced Schedules For each Interval of a QSE schedule: Qty of Resources and Obligations must Balance Qty of Resources and Obligations must Balance Bilateral Transactions must Match (Qty, QSE, Zone) Bilateral Transactions must Match (Qty, QSE, Zone) Resources: Generation or purchases Obligations: Load or sales TOPIC 1: Essential Concepts

9. 9 “Relaxed” Balanced Schedules For each Interval of a QSE schedule: Qty of Resources and Obligations must Balance Qty of Resources and Obligations must Balance Bilateral Transactions must Match (Qty, QSE, Zone) Bilateral Transactions must Match (Qty, QSE, Zone) QSE may set obligations equal to supply, and/or schedule BES via ERCOT to meet Obligations* QSE may set obligations equal to supply, and/or schedule BES via ERCOT to meet Obligations* Resources: Generation or purchases Obligations: Load or sales TOPIC 1: Essential Concepts * Limited by QSE’s collateral with ERCOT

10. 10 Balanced Schedules ERCOT does not require QSEs to be balanced within each Congestion Zone. However, not being balanced within each zone may result in congestion charges (or payments). SQSESQSE TOPIC 1: Essential Concepts

11. 11 QSE Balanced Schedule – Portal Display TOPIC 1: Essential Concepts

12. 12 Balanced, but mismatched TOPIC 1: Essential Concepts

13. 13 What is the Resource Plan? Each QSE representing a Resource or Load Acting as a Resource must submit a Resource Plan!! Plan of how Generation Resources will operate Due to ERCOT by 4:00 pm of the day-ahead period Used by ERCOT to determine resource adequacy Validated against balanced schedules Let’s Check Under the Hood! Resource Plan TOPIC 1: Essential Concepts

14. 14 SYSTEM RELIABILITY ERCOT is here to ensure reliability by: Resource capacity planning. Real-time transmission management. Procure balancing energy. Issue deployment instructions to units, as needed. ERCOT Roles: Reliability ERCOT is similar to an Air Traffic Controller TOPIC 1: Essential Concepts

15. 15 Energy Buyers and Sellers submit their bilateral transactions (trades) to a Qualified Scheduling Entity (QSE). QSEs submit Balanced Schedules, Ancillary Services Bids and a Resource Plan (if applicable) to ERCOT. ERCOT manages any real-time imbalances during the Operating Period between forecasts and actual demands by deploying balancing energy. Wholesale Process: From Scheduling to Power Flow TOPIC 1: Essential Concepts

16. 16 Wholesale Market Timeline ERCOT Market Timeline Market Operations Adjustment Period: Precedes Operating Period Operating Period: Balancing Energy Clearing Occurs every 15 minutes Power Operations Day-Ahead Period: 6:00am to 6:00pm prior to Operating Day. Commercial Operations Initial Settlement 10 days after Operating Day Final Settlement 59 days after Operating Day True-up Settlement: 180 days after Operating Day And/or specific Protocol Criteria is met TOPIC 1: Essential Concepts

17. 17 Day-Ahead Period 6:00AM to 6:00PM on the day prior to the Operating Day (“flow” date) QSEs submit balanced schedules and ancillary services bids ERCOT clears Ancillary Services Markets, and publishes results. Adjustment Period Time between the close of the Day-Ahead Market and the start of the Operating Period. QSEs may modify their schedules and/or bids during this time. Operating Period Includes the Operating hour (“flow hour”) and the hour prior to Operating hour (look-ahead studies). Wholesale Market Timeline TOPIC 1: Essential Concepts

18. 18 Midnight Wholesale Market Timeline TOPIC 1: Essential Concepts

19. 19 Day-Ahead Period Key Times 06:00 Forecast Information Published 11:00Deadline for Day-Ahead Scheduling (Bilateral, A/S) 11:15Deadline to resolve Day-Ahead Mismatches 13:00 Deadline for A/S Capacity Market Bids Deadline for Adjusted Day-Ahead Schedules 13:30A/S Capacity results & MCPC 16:00Deadline for Resource Plan submittal Replacement Reserve Bids System Lockdown for Day-Ahead Analysis 18:00Day-Ahead Period complete; start of Adjustment Period Wholesale Market Timeline – Day Ahead Period TOPIC 1: Essential Concepts

20. 20 Adjustment Period – ERCOT does not have an “Hour-Ahead” period, as in some ISOs – it is referred to as the Adjustment Period. On the Operating Day, the Adjustment Period is anytime up to one hr prior to Operating (“flow”) Hour when QSEs can alter or remove existing schedules, or submit new schedules for the Operating Hour. Deadline for QSEs to submit schedules & changes is one hour prior to the “flow” hour. (i.e., deadline for HE1300 is 1100, because HE 1300 begins at 1200). Wholesale Market Timeline – Adjustment Period TOPIC 1: Essential Concepts

21. 21 Operating Period is 2 Hours. It starts immediately after the Adjustment Period, when all QSE schedules have been submitted and cannot be altered or removed. First Hour – system lockdown – allows for system studies for the upcoming flow hour based on QSE schedules Second Hour is the Operating (“Flow”) Hour Wholesale Market Timeline – Operating Period TOPIC 1: Essential Concepts

22. 22 Topic 2: Ancillary Services

23. 23 Ancillary Services (Reserves) Definitions and Requirements (and why we need them) LSE Obligations and Supply Options Descriptions of Services Merit-Order vs. Out of Merit TOPIC 2: Ancillary Services

24. 24 What are Ancillary Services, and why does ERCOT need them? Generation that is intentionally reserved, in the event it is needed. (i.e., a plant that generates 50 Mw of its maximum of 100 Mw has 50 Mw of reserve capacity available) Reserve capacity can be utilized (converted to energy) to keep the lights on in the event of an unforeseen system disturbance. TOPIC 2: Ancillary Services “ Energy Insurance ”

25. 25 As a QSE that schedules load, why do I need to know about A/S? Market Participants serving load have an A/S Obligation as a “cost of doing business.” Similar to Auto Insurance: If you own a vehicle in Texas, Liability Insurance is a mandated cost that goes along with owning the vehicle. TOPIC 2: Ancillary Services

26. 26 Annual Procedure ERCOT establishes the procedure for determining A/S system requirements. It is reviewed and approved in the stakeholder process. Monthly Calculation System-wide requirement is calculated, based on statistical calculations and historical deployments. ERCOT System Requirements TOPIC 2: Ancillary Services “ERCOT Methodologies for Determining Ancillary Service Requirements” posted under Key Documents.

27. 27 OK, what is my share of the ERCOT System Requirement? It is based on your load relative to total ERCOT load, or Load Ratio Share (LRS). If you have 10 Mw of Load, and ERCOT has 100 Mw of total load, your LRS is 10%. Your obligation will be 10% of each service that ERCOT requires. QSE Day-Ahead LRS Obligations are posted each morning by 6AM TOPIC 2: Ancillary Services

28. 28 Do I have a requirement if I am a QSE that has no load? No. If you only have bilateral transactions and no load, you will not incur any A/S Obligations, UNLESS…… …you have an EXPORT on the DC Tie. An export is considered load, so if you schedule an export, you can expect to see an A/S Obligation 14 days later. QSE Day-Ahead LRS Obligations are posted each morning by 6AM TOPIC 2: Ancillary Services

29. 29 Where can I get Ancillary Services to fulfill my obligation? QSEs can Self-Arrange: a.Using its own resource b.Purchase from another entity (A/S Bilateral Trade) QSEs can purchase from ERCOT at the Day-Ahead MCP for Capacity (MCPC). Note: Per Protocol Section 4.3.1: QSEs that intend to purchase their obligation from ERCOT MUST schedule a bilateral PURCHASE from ERCOT. Ancillary Service Supply Options TOPIC 2: Ancillary Services

30. 30 A/S providers must be qualified by ERCOT to provide each A/S Must keep awarded capacity in reserve Must meet performance metrics (perform when called upon) Ancillary Services Sellers A/S TOPIC 2: Ancillary Services

31. 31 Out-of-Merit vs. Merit-Order Merit-Order Based on bids, “stacked” from least to most expensive Based on bids, “stacked” from least to most expensive Market Price for Capacity and Energy is produced. Market Price for Capacity and Energy is produced. Out-of-Merit: Without respect to cost Without respect to cost Needed for reliability, regardless of economics. Needed for reliability, regardless of economics. Also utilized when no market solution exists. Also utilized when no market solution exists. Selection Scenarios ERCOT NEEDS YOU! TOPIC 2: Ancillary Services

32. 32 Ancillary Service StatusDeploymentReason Regulation Up On-LineImmediate Small changes in Frequency Regulation Down On-LineImmediate Small changes in Frequency Responsive Reserve On-Line Within a few minutes Significant deviation in Frequency Non-Spinning Reserve Off-Line Within 30 Minutes >92 degrees, 92 degrees, < 30 degrees, or contingency of resource loss Target Frequency: 60 Hz Other Attributes: Day-Ahead Capacity MarketDay-Ahead Capacity Market Selected in Merit OrderSelected in Merit Order Ancillary Services: Option to Self-Arrange TOPIC 2: Ancillary Services

33. 33 Day-Ahead A/S Capacity Market: Selection Process System Requirement – 2300 Mw 2300 1380 Self-Arranged Qty (from A/S schedules) ERCOT to procure 920 Mw via A/S Capacity Market TOPIC 2: Ancillary Services

34. 34 920 ERCOT moves “up the bid stack” until it reaches the necessary qty. The price associated with that qty sets the MCPC. ($2.10 in this example) TOPIC 2: Ancillary Services

35. 35 A/S Cash Flows QSE A ERCOT Day-Ahead Capacity Result Award * $ Hourly MCPC “I will reserve X Mw (awarded qty) of generation” QSE A ERCOT Mw * $ MCPE (BES) Deployment on Operating Day ERCOT-instructed Mw TOPIC 2: Ancillary Services

36. 36 A/S Cash Flows QSE A ERCOT Day-Ahead Capacity Result Award * $ Hourly MCPC “I will reserve X Mw (awarded qty) of generation” If NO Deployments are issued by ERCOT: QSE A KEEPS the capacity payment Also similar to paying auto insurance premium, but not having a claim before the policy expires TOPIC 2: Ancillary Services

37. 37 A/S Cash Flows QSE A ERCOT How does ERCOT get the money to pay for Capacity? Net Obligation ERCOT charges load QSEs for non-self-arranged obligations ERCOT remains revenue-neutral! $$$$ Capacity Capacity TOPIC 2: Ancillary Services

38. 38 Replacement Reserve Resources planned to be off-line, but available Resources planned to be off-line, but available Deployed for Capacity Insufficiency, Zonal Congestion or Local Congestion Deployed for Capacity Insufficiency, Zonal Congestion or Local Congestion Black Start Widespread black out event Widespread black out event Started without support of the power grid Started without support of the power grid Contracted by ERCOT annually Contracted by ERCOT annually Exclusively Arranged by ERCOT TOPIC 2: Ancillary Services

39. 39 Reliability Must-Run Resolves local system reliability Contracted by ERCOT Otherwise would not be an active resource Exclusively Arranged by ERCOT TOPIC 2: Ancillary Services

40. 40 Out-of-Merit Capacity (OOMC) Capability of providing additional Balancing Energy Service Otherwise not selected because of the place (or absence) in the Merit Order bid stack Out-of-Merit Energy (OOME) Provision of balancing energy to solve local congestion, or when no market solution exists Exclusively Arranged by ERCOT / Out of Merit TOPIC 2: Ancillary Services

41. 41 Balancing Energy (Merit Order) Energy deployed by ERCOT every 15 minutes Deployed when load forecast is higher or lower than scheduled OR Also deployed to resolve Congestion Market Clearing Price for Energy (MCPE) Exclusively Arranged by ERCOT Example: Load Imbalance (LI) settles at BES MCP LI: Difference between scheduled and metered load TOPIC 2: Ancillary Services

42. 42 Ancillary Services Summary Option to Self Arrange OR Purchase from ERCOT No Option to Self Arrange: Exclusively provided by ERCOT TOPIC 2: Ancillary Services

43. 43 A FULL SERVICE QSE Markets and Schedules WATTSco power generation. Wholesale Supplier and Scheduler for POWERMART and EZWatts, retailers. Qualified to provide Ancillary Services. Provide Power Marketing Services. INTRODUCING!! SQSE TOPIC 2: Ancillary Services

44. 44 A/S Obligation – Load Ratio Share ERCOT calculates the “load-ratio share” (LRS) of each Load Serving Entity (LSE). QSE’s Load Ratio Share is the aggregate total of the LSE LRS that it represents. QSE’s A/S Obligation is its LRS of the Total ERCOT-wide requirement. SQSE TOPIC 2: Ancillary Services

45. 45 Example: Day-Ahead A/S Obligation for 4/26/04 SQSE represents POWERMART [88] and EZWatts [55], LSEs. On April 12, 2004 (14-days ago) the aggregated load for these two LSEs came to: SQSE April 12 Load LRS TOPIC 2: Ancillary Services

46. 46 A/S Obligation – For Example! For intervals “hour-ending” 1000 through 1200 the A/S obligations are determined by taking the LRS times each ERCOT-wide obligation, rounded to a whole MW. SQSE TOPIC 2: Ancillary Services

47. 47 A/S Obligation – For Example! represents LSE_ 88 and LSE_ 55 - SQSE represents LSE_ 88 and LSE_ 55 - - SQSE A/S Obligation = sum of the obligations of LSE_ 88 and LSE_ 55 : SQSE TOPIC 2: Ancillary Services 26-Apr-04

48. 48 Day-Ahead Obligation: Based on the Load Ratio Share of the Load from the Initial Settlement data, for the Operating Day that is 14 days before the day in which the Obligation is being calculated. After the Operating Day: (PRR 451) The AS Obligation calculations are adjusted (trued-up) based on the most up-to-date Load Data for each settlement run. SQSE A/S Obligations: Recent Change! TOPIC 2: Ancillary Services

49. 49 Ancillary Service Obligations – Portal View - Posted by 6 AM one day prior to the Operating Day - Obligation is under “Required Mw” column Legend: DRS: Down Regulation Service NSRS: Non Spin Reserve Service RRS: Responsive Reserve Service URS: Up Regulation Service TOPIC 2: Ancillary Services

50. 50 Ancillary Service Scheduling: Keep in Mind… A/S Scheduling Options Self-Arrangement Bilateral purchase from another QSE If QSE is using its own resource, purchase from self Purchase from ERCOT Bilateral purchase from ERCOT TOPIC 2: Ancillary Services

51. 51 Topic 3: Congestion Management

52. 52 Congestion Management Definitions and Key Concepts Zonal vs. Local Congestion Cost of Congestion Transmission Congestion Rights TOPIC 3: Congestion Management

53. 53 Constraint A transmission element or group of elements that limit the free flow of energy. Constraints are typically thermal, voltage stability, and angular stability limitations. These constraints are the result of defined contingencies such as the trip of a generating unit or transmission circuit. Commercially Significant Constraint (CSC) A constraint in the ERCOT Transmission Grid that is found to limit the free flow of energy a commercially significant degree. Key Definitions TOPIC 3: Congestion Management

54. 54 Congestion The situation that exists when scheduled power flows, when netted, are projected to exceed the capability of a Transmission element or set of elements. TOPIC 3: Congestion Management Congestion Zone A grouping of busses that create a similar Shift Factor on CSCs CSC Limit Maximum flow allowed across a CSC to maintain reliable operation Key Definitions

55. 55 Shadow Price (SP) The marginal price of the constraint ~ it indicates the change in the overall cost, in $/MW. TOPIC 3: Congestion Management Shift Factor (SF) Measure of power flow impact on a transmission element Key Definitions

56. 56 TOPIC 3: Congestion Management Schedule Impact (SI) The MW impact that bilateral energy schedules have on a CSC. TCR’s Transmission Congestion Rights are a financial instrument that enables QSEs to hedge against the risk of incurring congestion charges. Key Definitions

57. 57 Four Congestion Zones Five CSCs Five CSCs 1.South to North 2.South to Houston 3.North to Houston 4.West to North 5.North to West Zones and CSCs TOPIC 3: Congestion Management North West South Houston

58. 58 Managing traffic on the electric grid: Safe operating limits on the transmission system are projected to be exceeded. QSEs can modify schedules to avoid congestion. Action is taken if the physical flow approaches transfer limits. Resources are re-dispatched (“INC / DEC”) TOPIC 3: Congestion Management

59. 59 Congestion must be managed, and it costs $$$! Even when the flow on the constraint is brought down below the limit by redispatch, we are in a congestion situation Or ELSE - Equipment may be damaged - System may become unstable ERCOT Objective Keep flows under limits, TOPIC 3: Congestion Management

60. 60 Local Congestion a.k.a. INTRA-zonal congestiona.k.a. INTRA-zonal congestion Occurs within a congestion zoneOccurs within a congestion zone Cannot be resolved with Zonal balancing energyCannot be resolved with Zonal balancing energy Unit-specific deployments and OOM Energy are utilizedUnit-specific deployments and OOM Energy are utilized Types of Congestion TOPIC 3: Congestion Management North West South Houston

61. 61 Zonal Congestion a.k.a. INTER-zonal congestiona.k.a. INTER-zonal congestion Occurs between congestion zonesOccurs between congestion zones Resolved using Zonal Balancing Energy (Merit Order)Resolved using Zonal Balancing Energy (Merit Order) Types of Congestion TOPIC 3: Congestion Management North West South Houston

62. 62 How does congestion affect a QSE with load? Local Congestion Total ERCOT cost Uplifted at Load Ratio Share All QSEs with load pay for local congestion if it exists anywhere Zonal Congestion Direct Assignment to ALL QSEs with schedules impacting congested CSCs Cost = Schedule Impact on each CSC * Shadow Price TOPIC 3: Congestion Management Cost of Congestion

63. 63 How does congestion affect a QSE that has no load? Local Congestion No effect, no charges. No effect, no charges. Zonal Congestion Direct Assignment to ALL QSEs with schedules impacting congested CSCs Cost = Schedule Impact on each CSC * Shadow Price Cost of Congestion TOPIC 3: Congestion Management

64. 64 South Houston 10MW 2 MW Zonal Shift Factor S-H Zone 0.2South -0.3Houston 10MW 3 MW Aggregate Generation = 10 MW South-Houston CSC Zonal shift factor is the average effect that changing generation in a zone has on a particular CSC constraint TOPIC 3: Congestion Management

65. 65 Known transmission conditions Expected transmission conditions for the next day Resource Plans for next day Bilateral Schedules for next day Congestion Studies – Day-Ahead TOPIC 3: Congestion Management

66. 66 Procurement of RPRS (Zonal/Local Congestion). Procurement of OOMC / OOME RMR Delivery Plan is completed Congestion Studies – Day Ahead and before each Operating Hour The Studies Result in: TOPIC 3: Congestion Management

67. 67 Scheduling, Pricing and Dispatch = SPD Executes every 15 minutes to deploy Balancing Energy Calculated CSC flows Calculated flow for OC2 constraints Portfolio Balancing Awards and resource specific instructions Zonal MCPEs InputsOutputs Telemetered Generator MW output Shift factors Forecasted load QSE Energy Schedules QSE Resource Plan data OC1 and OC2 constraint limits ERCOT Market Operating System * Note: Real time (Physical) limits are not visible to SPD Scheduling, Pricing & Dispatch TOPIC 3: Congestion Management

68. 68 Real-time Will be created by Simultaneous Feasibility Test (SFT) software Local - Future Use OC3 Real-time Limit may be changed in adjustment or operating period based on impending congestion conditions LocalOC2 Real-time SPD limit may be changed in adjustment or operating period based on impending congestion conditions Setting of 9999 indicates constraint not active Zonal CSC / CRE OC1 Monthly Based on planning studies taking into account planned outages, flow patterns Basis of TCRs and CSC congestion notifications Suppressed in favor of OC1 in Real-time Balancing Zonal CSC OC0 FrequencyDescriptionApplicabilityLimit Types of Constraints used by SPD TOPIC 3: Congestion Management

69. 69 Sees What the Operator Sees TOPIC 3: Congestion Management

70. 70 What the Operator Does TOPIC 3: Congestion Management

71. 71 BES Deployment Principles QSEs shall first meet the specific resource deployment and then meet the BES deployment instruction. In the event that a QSE is unable to provide the BES due to a specific resource deployment then the QSE will follow the notification procedures established in Section 5, Dispatch. TOPIC 3: Congestion Management

72. 72 Balancing Energy Deployments (BES) When zonal transmission constraints are NOT in effect: The BES bid curves submitted by QSEs are used to establish a bid stack.The BES bid curves submitted by QSEs are used to establish a bid stack. The ERCOT EMS uses this stack to competitively select up or down balancing energy, whichever is needed in the next interval for zonal balancing or inter-zonal congestion.The ERCOT EMS uses this stack to competitively select up or down balancing energy, whichever is needed in the next interval for zonal balancing or inter-zonal congestion. Stack’m UP! TOPIC 3: Congestion Management

73. 73 North South MW $ $ MCPE – No Congestion MW $ One consolidated bid stack for Balancing Energy MCPE TOPIC 3: Congestion Management

74. 74 Balancing Energy Deployments (BES) When zonal transmission constraints ARE in effect: The BES bid curves are separated out into prospective zonal bid stacks for the EMS to competitively select up or down balancing energy to unload the inter-zonal congestion.The BES bid curves are separated out into prospective zonal bid stacks for the EMS to competitively select up or down balancing energy to unload the inter-zonal congestion. The resulting zonal BES deployment is the incremental MW increase (UBES) or decrease (DBES) each QSE awarded BES needs to move their portfolio of resources in addition to their planned schedule.The resulting zonal BES deployment is the incremental MW increase (UBES) or decrease (DBES) each QSE awarded BES needs to move their portfolio of resources in addition to their planned schedule. North Zone South Zone TOPIC 3: Congestion Management

75. 75 North South MW $ $ Congestion MCPE – Congestion MCPE North MCPE South MCPESPC S-N TOPIC 3: Congestion Management Note - MCPEs might be higher than the $1500 bid cap.

76. 76 Total Transfer Capability The maximum power that may be transferred across a transmission corridor while maintaining reliability Calculated on an annual basis Updated monthly TTC for each CSC establishes the number of Transmission Congestion Rights (TCRs) to be auctioned TOPIC 3: Congestion Management

77. 77 Transmission Congestion Rights (TCRs) Financial instruments Financial instruments Can be a hedge against congestion charges Can be a hedge against congestion charges Revenues from TCR auctions go to QSEs @ LRS! Revenues from TCR auctions go to QSEs @ LRS! TCR Auction Distribution:  Annual - 40%  Monthly - 60% TCR Auctions TOPIC 3: Congestion Management

78. 78 TOPIC 3: Congestion Management ERCOT sells TCRs TCR auction revenues to QSEs at LRS TCR Auction Process Winning TCR bidder pays ERCOT and receives TCR. TCR Price = Clearing price X Number of Hours in period

79. 79 Total transfer Capability Amount Collected from CSC Congestion charges Amount Paid to clear congestion Amount Paid to TCR Holders Scheduled transfer amount Congestion Cash Flow TOPIC 3: Congestion Management

80. 80 Review Who determines daily Ancillary Service requirements? ERCOT Who schedules Ancillary Services? QSE Who pays for Local Congestion? QSEs at LRS What is a TCR? Transmission Congestion Right ( a financial hedge) Bonus – What is the connection between Shadow Prices and MCPEs?

81. 81