Regional Reliability Commitment RRC

1
Regional Reliability Commitment (RRC)

• Reliant Resources, Incorporated
• presentation for the
• Public Utility Commission of Texas
• Project 24255 Workshop, April 11, 2002

2
Discussion Points

• Regional Reliability Commitment (RRC) Overview
• Trigger Mechanism
• Appendix
• RRC Detail
• RRC Example
• Other Reserve Margin Material

3
General Comments

• Markets should be allowed to function in order to
  meet future capacity needs
• Market should focus on demand participation
• If the Commission concludes that a market failure
  has occurred, then a reasonably designed capacity
  market mechanism should be introduced when the
  trigger point is reached, which RRI believes
  should be 10
• Implementing a capacity market will split the
  one price market, thus the price to beat
  adjustment mechanism will need to be modified to
  reflect the new market structure

4
ERCOT Reserve Margins2002 - 2005
5
Trigger Mechanism
Total 7x24 Market Clearing Price for Different
Reserve Margins (2008)
39.82-38.68 1.14/MWh
Load of 363,000,000 MWhs
Energy Payment
Results in Increased Costs
Plus Capacity
to the comsumer by more
Payment when needed
than 400 Million.
50.00
38.89
39.82
38.68
39.19
39.66
39.47
41.33
45.00
40.00
0.00
0.94
2.81
1.63
3.20
2.27
35.00
30.00
/MWh
25.00

20.00
37.20
37.95
36.62
36.85
41.33
38.68
37.56
15.00
10.00
5.00
0.00
8RM
10RM
11RM
12RM
13RM
14RM
15RM
Reserve Margin
Based on an analysis using Henwood Energy
Services (HESIs) production cost model,
PROSYM, and HESIs ERCOT database in their
Energy Payment
Capacity Payment
Electric Market Simulation System (EMSS)
6
Key Design Criteria

• Ensure new generation can participate
• Ensure demand can participate
• Ensure that capacity is there when called upon
• Ensure that consumers get value for what they are
  buying
• Ensure customers are not forced to pay for
  unnecessary reserves
• Ensure that all retailers/customers are treated
  fairly, and that new retailers do not bear
  inappropriate entry costs
• Do not restrict market participants right of
  contract

7
RRC Overview

• LSEs make payments for a 2-year forward
  commitment for capacity equal to projected load
  plus a reserve margin
• Payments would be based upon prices in an
  ERCOT-conducted auction
• Resource bidders must show availability in the
  year capacity is needed in order to bid
• Resources agree to be paid only if available, to
  abide by 1,000 strike price (offer cap) and to
  must offer requirement into energy/AS markets
• LSE payments not made until after the prompt
  month and allocated on actual customer load

8
RRC Benefits

• Ensures generation adequacy decreases price
  volatility
• Forward commitment will result in new capacity
  resources when needed
• Least intrusive for the market
• Pricing determined by the market
• Not confiscatory against retail suppliers (all
  are treated equally, price is known in advance
  and they get value for the payment
• Provides incentives compatible with efficiency
  and resource conservation
• Eliminates need for retailers to game their
  forecast
• 2-year lead time eliminates market power concerns

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Appendix
11
RRC Detail

• The RRC proposal would have Load Serving
  Entities (LSEs) make payments for a two-year
  forward commitment for capacity equal to
  projected load plus a reserve margin. Payments
  would be based upon prices in an ERCOT-conducted
  auction, payments would not be made until after
  the prompt month and allocated based on actual
  customer load. Below are details that could be
  used to implement the proposal
• A 1 year capacity market, sold forward two years
• Capacity product to take the form of a call on a
  generator (or interruptible demand), unless it is
  otherwise selected to provide energy or ancillary
  services, to be replacement reserve at a
  pre-designated strike price for all energy
  delivered. This strike price should be set at
  the bid cap price, e.g., 1,000/mwh.
• The generator, if it is available, will also have
  a must offer requirement to offer a bid into the
  energy or ancillary markets.
• The call will be limited to a set number of hours
  per year, expected to be 2 based on the shape of
  the ERCOTs load duration curve.
• ERCOT will hold an auction each year to set the
  price for this product. Quantity will be (1
  reserve margin) multiplied by the ERCOTs load
  forecast for the auction year. Self-provision
  will also be allowed.

12
RRC Detail (continued)

• One price clearing market for the product.
• Payment by the LSEs to the generators or load
  providing resource will be allocated by month
  based on the need for generation (peak months
  will have the highest prices) for the region.
• Generators will be paid according to their
  availability during the applicable month, so
  there are incentives for good maintenance
  practices.
• LSEs will pay after the fact based on their
  load-ratio share for the month.
• Generators would qualify for capacity payments if
  they can demonstrate their availability or
  ability to begin construction at the time the
  auction is held (e.g., status of interconnection
  study or permits, or security). Load resources
  would have to demonstrate their ability to
  interrupt load within the same period.
• Since new entrants can bid into the auction and
  plants can be constructed within two years, there
  should be no market power concerns for the
  two-year auctions.
• Credit for the forward payments is provided by
  the market. The payments are essentially
  uplifted to the entire load market, if not
  otherwise self-provided.

13
Cumulative ERCOT Generation Additions
Delays/Cancellations Since 2000
35,000
ERCOT Total Additions Since 2000
ERCOT Total Delayed or Cancelled Since 2000
29,576
29,576
30,000
27,291
25,000
20,179
20,000
Capacity (MW)
16,179
15,000
9,695
9,695
10,000
8,416
7,735
5,000
1,478
535
0
0
0
0
2000
2001
2002
2003
2004
2005
2006
Year
14
RRC Example
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