Recommendations for Finalizing RGGI Model Rule Mark Buzel – AES May 2, 2006

1) Contracted Plants Some facilities with long term contracts do not have a compliance cost pass-through mechanism. Possible solutions include: Power off-taker is responsible for CO2 requirements Contracted plants are exempted during the life of the contract Contracted plants are provided with full allowance allocation until the contract expires Contracted plants should be required to provide a clear demonstration of the lack of compliance pass-through to the appropriate designated regulatory agency

2) Conversion to 100% Biomass Model Rule covers biomass cofiring, but not conversion of a unit to 100% biomass Providing credit for conversion of a unit to 100% biomass should be a legitimate and encouraged compliance mechanism Recommendation: Biomass conversion should be treated as a compliance mechanism, and the unit treated as being fossil-fired for its entire life cycle. In a fuel-specific allocation approach, the unit’s allocation should be based on the fossil fuel historically used As in biomass cofiring, CO2 emissions from 100% biomass firing should be considered to be CO2 neutral.

3) Allowances Withheld for Consumer Benefit or Strategic Energy Purposes Frequency of distribution into the market Liquidity of the allowance market is critical to support the liquidity of energy market and the ability to do longer term energy deals Due to the at least 25% set aside it can be anticipated that all generators will be in a significantly short allowance position Set aside allowances should be distributed into the market on a monthly basis (but no less frequently than quarterly) All states should distribute set aside allowances into the market together to promote needed liquidity Length of term for allowance stream should be a minimum of a 5-year block to allow long term energy transactions Should have a stakeholder conference to provide guidance on how auction or other mechanism for introducing set aside allowances into the market should be conducted. Should include energy marketing traders and allowance traders

Withheld Allowances, con’t. Allowance distribution into the market should be limited to affected sources Generators will need to acquire significant allowances to allow for continued operation and electric system reliability Generators MUST be assured they will have access to allowances withheld for consumer benefit or strategic energy purposes Rule should limit initial allowance offering to affected fossil generators Need to evaluate how allowances allocated under the RGGI program would be handled if the program is replaced by a national program. This is needed to maintain the integrity of already entered energy deals

4) New Units Current ISO reports (NY, NE, PJM) indicate the need for new generation capacity in the 2006 to 2008 timeframe. Assume 1,500 MW of new clean coal fired generation and 2,500 MW of new combined cycle generation is added in the 7 RGGI states ~16 million tons/year = 13% of the Phase 1 CO2 budget of 121 million tons Question: How can new units be developed with sufficient level of certainty to provide incentive for necessary investment (both debt and equity) while still providing for maintenance of needed existing generation resources? Consider establishing a working group to evaluate this matter

5) Energy Output Based Allocations Power needed to run air pollution control equipment needs to be factored into allocation FGDs and SCRs use significant power Without factoring in this consideration a well-controlled unit will receive significantly fewer allowances than an uncontrolled unit Not an issue with heat input based allocations

Energy Output Allocations, con’t. The title of Subpart XX-8.8 should be changed to: “Additional requirements to provide output data,” deleting reference to net output data. Subpart XX-8.8(b) addresses use by a state of gross output data The model rule should not be prescriptive in defining the form of output data that a state can use If a state uses net energy output the rule should provide for an adjustment due to the parasitic load used to power air pollution control equipment The MWHs used to power FGD and/or SCR should be added to the unit’s net energy output in allocation determinations