General Overview Of Resource Costs By Ino González Welcome to ERCOT Nodal Market Education. This program is designed to facilitate entry into the Nodal Market, with a combination of instructor-led and web-based training courses and materials. All Nodal Market Education courses focus on nodal terms and processes, the nodal impacts on business and operations, readiness requirements and sources for additional nodal information. Nov 8, 2010 1

Proxy for marginal operating costs Resource Costs Resource Costs Proxy for marginal operating costs Fuel Costs Operation and Maintenance (“O&M”) costs. ERCOT uses Verifiable Costs as a proxy for the costs a Resource incurs when operating, either in a startup mode or at minimum-energy conditions. Verifiable Costs are a function of two types of costs: Fuel Costs and Operation and Maintenance (“O&M”) costs. 2

How are Resource Costs Used Used in the three stages of the power generation cycle: Startup to LSL Startup Fuel and Incremental O&M Operation at LSL Fuel at LSL and Incremental O&M Operation above LSL Mitigated Offer Curve for Incremental Cost Above LSL The use of Verifiable Costs, rather than Protocol-defined generic amounts capped according to Resource Category, is optional for Resources that do not receive RUC instructions. Replace offer caps used in the Day-Ahead Market Costs are determined and allocated according to the three discrete stages of the power generation cycle: Startup to LSL; Operation at LSL; and Operation above LSL 3 3 3

Use of Resource Costs in Three-Part Supply Offers Startup Offer Minimum-Energy Offer Energy Offer Curve $ to Startup $/MWh to operate at sustained level <This is an animated slide. Click as described below:> As you may recall, the Three-Part Supply Offer contains three components: Click 1: The Startup Offer reflects all costs incurred by a Generation Resource in starting up and reaching breaker close. It is expressed in dollars per start. The Start-Up Offer can only be submitted as part of the Three-Part Supply Offer. Click 2: The Minimum-Energy Offer reflects the costs incurred by a Resource in producing energy up to and including Low Sustained Limit (LSL). It represents a proxy for the costs incurred by a Resource in producing energy up to and including the Resource’s LSL after breaker close. The Minimum Energy Offer, like the Start-Up Offer, can only be submitted as part of the Three-Part Supply Offer. Click 2: The Energy Offer Curve is a proposal to sell energy at a Settlement Point at a monotonically increasing price with increasing quantity. It is resource specific and can be submitted independently of the Startup Offer and Minimum-Energy Offer. The Energy Offer Curve remains active until it is selected or until it expires. If a QSE with a Resource chooses to submit that Resource for consideration in the DAM, the QSE has two choices. The QSE may opt to submit the Three-Part Supply Offer or just an Energy Offer Curve. We will look at both of these options over the next few slides. What the QSE actually generates and gets paid in the real-time is another matter and may be impacted by many events occurring between now and the operating hour. Key Points: Review Three-Part Offer components Offer to sell energy from a specific resource Emphasize it is a financial position only What I generate and get paid in RT is another matter $/MWh to operate at given MW quantities above sustained level

$/MWh to operate at sustained level Offer Caps – DAM and RUC Cap Supply Offers Startup Offer Minimum-Energy Offer $ to Startup $/MWh to operate at sustained level <This is an animated slide. Click as described below:> As you may recall, the Three-Part Supply Offer contains three components: Click 1: The Startup Offer reflects all costs incurred by a Generation Resource in starting up and reaching breaker close. It is expressed in dollars per start. The Start-Up Offer can only be submitted as part of the Three-Part Supply Offer. Click 2: The Minimum-Energy Offer reflects the costs incurred by a Resource in producing energy up to and including Low Sustained Limit (LSL). It represents a proxy for the costs incurred by a Resource in producing energy up to and including the Resource’s LSL after breaker close. The Minimum Energy Offer, like the Start-Up Offer, can only be submitted as part of the Three-Part Supply Offer. Click 2: The Energy Offer Curve is a proposal to sell energy at a Settlement Point at a monotonically increasing price with increasing quantity. It is resource specific and can be submitted independently of the Startup Offer and Minimum-Energy Offer. The Energy Offer Curve remains active until it is selected or until it expires. If a QSE with a Resource chooses to submit that Resource for consideration in the DAM, the QSE has two choices. The QSE may opt to submit the Three-Part Supply Offer or just an Energy Offer Curve. We will look at both of these options over the next few slides. What the QSE actually generates and gets paid in the real-time is another matter and may be impacted by many events occurring between now and the operating hour. Key Points: Review Three-Part Offer components Offer to sell energy from a specific resource Emphasize it is a financial position only What I generate and get paid in RT is another matter

$/MWh to operate at given MW quantities above sustained level Real Time Mitigation Cap Supply Offer Energy Offer Curve in SCED $/MWh to operate at given MW quantities above sustained level <This is an animated slide. Click as described below:> As you may recall, the Three-Part Supply Offer contains three components: Click 1: The Startup Offer reflects all costs incurred by a Generation Resource in starting up and reaching breaker close. It is expressed in dollars per start. The Start-Up Offer can only be submitted as part of the Three-Part Supply Offer. Click 2: The Minimum-Energy Offer reflects the costs incurred by a Resource in producing energy up to and including Low Sustained Limit (LSL). It represents a proxy for the costs incurred by a Resource in producing energy up to and including the Resource’s LSL after breaker close. The Minimum Energy Offer, like the Start-Up Offer, can only be submitted as part of the Three-Part Supply Offer. Click 2: The Energy Offer Curve is a proposal to sell energy at a Settlement Point at a monotonically increasing price with increasing quantity. It is resource specific and can be submitted independently of the Startup Offer and Minimum-Energy Offer. The Energy Offer Curve remains active until it is selected or until it expires. If a QSE with a Resource chooses to submit that Resource for consideration in the DAM, the QSE has two choices. The QSE may opt to submit the Three-Part Supply Offer or just an Energy Offer Curve. We will look at both of these options over the next few slides. What the QSE actually generates and gets paid in the real-time is another matter and may be impacted by many events occurring between now and the operating hour. Key Points: Review Three-Part Offer components Offer to sell energy from a specific resource Emphasize it is a financial position only What I generate and get paid in RT is another matter

How are Startup Offer Caps Calculated Startup Offer Cap ($/Start) Startup Offer Cap = Fuel Costs + O&M O&M = Operation & Maintenance Costs Calculated for each Startup Type Cold Start Hot Start Intermediate Start This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 7 7

How are Min Energy Offer Caps Calculated Minimum Energy Offer Cap ($/MWh) Minimum Offer Cap = Fuel Costs + O&M Costs at LSL This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 8 8

Startup Offer and Min Offer Caps Using Generic Costs 9

How are Startup Offer Caps Calculated Startup Offer Cap ($/Start) – Using Generic Costs Startup Offer Cap = Fuel Costs + O&M O&M = Generic value in the Protocols by technology Same value for each start type Cold Start Hot Start Intermediate Start This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 10 10

How are Startup Offer Caps Calculated Generic Startup Offer Cap ($/Start) for CCP > 90MW Startup Offer Cap = $6,800/Start Startup Offer Cap applies to all configurations Same value for each start type Cold Start Hot Start Intermediate Star Use as default value by ERCOT if no other costs are filed Note: CCP = Combined Cycle Plant This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 11 11

How are Min Energy Offer Caps Calculated Min Energy Offer Cap ($/MWh) – Using Generic Costs Minimum Offer Cap = Fuel Costs + O&M Costs at LSL This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 12 12

How are Min Energy Offer Caps Calculated Generic Min Energy Offer Cap ($/MWh) for CCP > 90MW Minimum Offer Cap = 10 MMBtu/MWh * FIP Costs at LSL Fuel costs based on generic heat rate Use as default value by ERCOT if no other costs are filed This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 13 13

Startup Offer and Min Offer Caps Using Verifiable Costs 14

Permissible Verifiable Cost Verifiable Costs include: Fuel consumption rates (actual) Incremental Operation & Maintenance (O&M) costs Variable O&M Emission credit costs Nodal Surcharge Factor Verifiable Costs also include: Fuel consumption rates during startup or while operating at minimum energy conditions. Incremental Operation & Maintenance costs during startup or while operating at minimum energy conditions The cost of purchasing emission credits required to satisfy environmental conditions. The Nodal Surcharge imposed by ERCOT 15

How Verifiable Costs are Used Startup Fuel and Incremental O&M Verifiable Startup Offer costs Replace generic caps on Startup Offers Are calculated using FIP/FOP Verifiable fuel rates Incremental O&M The Verified Startup costs will be used to set the Cap on Startup Offers by the QSE. If a Resource does not have approved Verifiable Startup costs, the Cap on Startup Offers will be set by the Generic Startup Costs in the Nodal Protocols for the specific resource technology. QSE’s Startup Offer _ < Startup Offer Cap calculated using verifiable costs 16

How Verifiable Costs are Used Minimum-Energy Fuel and Incremental O&M Minimum Operating Costs Replace generic caps on Minimum Energy Offers Are calculated using FIP/FOP Verifiable fuel rates at LSL Incremental O&M The Verified Minimum Energy operating costs will be used to set the Cap on Minimum Energy Cost Offers by the QSE. If the Resource does not have approved Verifiable Minimum Energy Costs, the Cap on Minimum Energy Offers will set by the Generic Minimum Energy Costs in the Nodal Protocols for the specific resource technology. QSE’s Minimum Energy Offer Minimum Energy Offer cap calculated using verifiable costs _ < 17

How are Verifiable Costs used Verifiable Startup Costs ($/Start) Startup Offer Cap = Fuel Costs + O&M O&M = Verifiable Operation & Maintenance Costs Calculated for each Startup Type Cold Start Hot Start Intermediate Start This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 18 18

How are Verifiable Costs used Verifiable Fuel Cost to Start ($) Fuel Quantity = MMBtu Fuel Quantity Price = $/MMBtu Fuel Cost = Fuel Quantity x Fuel Price x Fuel Percentage FUEL COST AT LSL ($/MWh) FCLSL = [VFCLSL/LSL] X [FIP X Gasperme% + FOP X Oilperme% + SFP X Sfperme Where: FCLSL = Fuel cost at LSL ($/MWh) VFCLSL = Verified fuel consumed at LSL (MMBtu/hr) LSL = Low Sustained Limit of Resource (MW) FIP = The fuel price index for gas($/MMBtu) FOP = The fuel price index for oil($/MMBtu) SFP = The price index for solid fuel = $1.50 ($/MMBtu) GASPERME = Percent of gas used at LSL OILPERME = Percent of oil used at LSL SFPERME = Percent of solid fuel used at LSL 19 19

How are Verifiable Costs used Verifiable O&M to Start ($) O&M Cost = O&M costs + Emissions Costs + Nodal Surcharge FUEL COST AT LSL ($/MWh) FCLSL = [VFCLSL/LSL] X [FIP X Gasperme% + FOP X Oilperme% + SFP X Sfperme Where: FCLSL = Fuel cost at LSL ($/MWh) VFCLSL = Verified fuel consumed at LSL (MMBtu/hr) LSL = Low Sustained Limit of Resource (MW) FIP = The fuel price index for gas($/MMBtu) FOP = The fuel price index for oil($/MMBtu) SFP = The price index for solid fuel = $1.50 ($/MMBtu) GASPERME = Percent of gas used at LSL OILPERME = Percent of oil used at LSL SFPERME = Percent of solid fuel used at LSL 20 20

How are Verifiable Costs used Verifiable Minimum Energy Costs ($/MWh) Minimum Offer Cap = Fuel Costs + O&M Costs at LSL This slide shows the final results of the calculation of startup O&M including the costs of emission credits. Note the effect of verifiable O&M due to the inclusion of the cost of emission credits. For instance, at cold startup, the O&M costs increase from $15,000 to $19,280, using the assumption regarding emission rates and emission price indices. 21 21

How are Verifiable Costs used Verifiable Minimum Energy Fuel Cost at LSL ($/MWh) Fuel Quantity = MMBtu/MWh Fuel Cost = Fuel Quantity x Fuel Price x Fuel Percentage FUEL COST AT LSL ($/MWh) FCLSL = [VFCLSL/LSL] X [FIP X Gasperme% + FOP X Oilperme% + SFP X Sfperme Where: FCLSL = Fuel cost at LSL ($/MWh) VFCLSL = Verified fuel consumed at LSL (MMBtu/hr) LSL = Low Sustained Limit of Resource (MW) FIP = The fuel price index for gas($/MMBtu) FOP = The fuel price index for oil($/MMBtu) SFP = The price index for solid fuel = $1.50 ($/MMBtu) GASPERME = Percent of gas used at LSL OILPERME = Percent of oil used at LSL SFPERME = Percent of solid fuel used at LSL 22 22

How are Verifiable Costs used Energy Offer Curves may be subject to mitigation in Real-Time operations using a Mitigated Offer Cap ERCOT will construct an incremental Mitigated Offer Cap Curve Generating Resources online after January 1, 2004 the Mitigated Offer Cap Curve will be the greater of (point by point): 14.5 MMBtu/MWh x minimum of FIP or FOP OR Resource’s IHR Curve x ((percentage of FIP x FIP) + (percentage of FOP x FOP))/100 + verifiable variable O&M costs times a multiplier For Resources online before January 1, 2004 the Mitigated Offer Curve will be the greater of (point by point)10.5 MMBTU/MWh or the IHR curve Mitigated Offer Curve 23 23

Where Verifiable Costs are Used Protocol Requirements for Calculating Make-Whole Payments Price used for Make-Whole payments is as follows: Before ERCOT Approval After ERCOT Approval Generic Startup Offer Cap for the Resource Category; and Startup Offer Cap based on approved verifiable unit-specific costs; and Generic Minimum-Energy Offer Cap for the Resource Category Minimum-Energy Offer Cap based on approved verifiable unit-specific costs Protocol Requirements 5.6.1: Make-Whole Payments for a Resource are based on the Startup Offers and Minimum-Energy Offers for the Resource, limited by caps. Until ERCOT approves verifiable unit-specific costs for that Resource, the caps are the Resource Category Startup Generic Cap and the Resource Category Minimum-Energy Generic Cap. $ 24 24

Standard Costs 25

Permissible Standard Costs Standard Costs Include: Fuel consumption rates (actual) Operation & Maintenance (O&M) costs As defined in the Protocols Verifiable Costs also include: Fuel consumption rates during startup or while operating at minimum energy conditions. Incremental Operation & Maintenance costs during startup or while operating at minimum energy conditions The cost of purchasing emission credits required to satisfy environmental conditions. The Nodal Surcharge imposed by ERCOT 26

Differences Between Generic Costs Verifiable Costs Standard Costs 27

Differences in Cost Categories Type of Cost Filing with ERCOT Generic Not required Verifiable Required* Standard Required** Verifiable Costs also include: Fuel consumption rates during startup or while operating at minimum energy conditions. Incremental Operation & Maintenance costs during startup or while operating at minimum energy conditions The cost of purchasing emission credits required to satisfy environmental conditions. The Nodal Surcharge imposed by ERCOT * For Resources receiving 5 RUC deployments in a year ** May substitute Standard Costs (O&M) in lieu of actual verifiable O&M ** Only valid through 12/31/2011 unless Board approves changes/extension Note: Cannot mix costs, part generic, part verifiable or part Standard 28

Differences in Cost Categories Start Up Cost Startup Fuel Rate (MMBtu) O& M ($) Generic None Protocol value (4.4.9.2.3.1) Verifiable Resource actual Standard (5.6.1.6) Verifiable Costs also include: Fuel consumption rates during startup or while operating at minimum energy conditions. Incremental Operation & Maintenance costs during startup or while operating at minimum energy conditions The cost of purchasing emission credits required to satisfy environmental conditions. The Nodal Surcharge imposed by ERCOT 29

Differences in Cost Categories Min Energy Cost Heat Rate (MMBtu/MWh) O& M ($/MWh) Generic Protocol value (4.4.9.2.3.2) None Verifiable Resource actual Standard (5.6.1.6) Verifiable Costs also include: Fuel consumption rates during startup or while operating at minimum energy conditions. Incremental Operation & Maintenance costs during startup or while operating at minimum energy conditions The cost of purchasing emission credits required to satisfy environmental conditions. The Nodal Surcharge imposed by ERCOT 30

Differences in Cost Categories RT Mitigation Fuel Rate (MMBtu/MWh) O& M ($/MWh) Generic Generic Heat Rate (4.4.9.4.1) None Verifiable Resource actual Standard Verifiable Costs also include: Fuel consumption rates during startup or while operating at minimum energy conditions. Incremental Operation & Maintenance costs during startup or while operating at minimum energy conditions The cost of purchasing emission credits required to satisfy environmental conditions. The Nodal Surcharge imposed by ERCOT 31

Any Questions? Note to instructor: Inform the class that there is a time limit to the Q&A session, depending on where we are at in the course. Before we proceed to the next Module are there any questions on this Module of the course? 32

Verifiable Costs template Module Summary Related Links Verifiable Costs template http://nodal.ercot.com/readiness/golive/kd/Verifiable_Costs_Submission_Template_v9.xls Verifiable Costs Manual http://nodal.ercot.com/readiness/golive/ 33