DAM Overview: Processes & Tools in the DAM Shams Siddiqi, Ph.D. Crescent Power, Inc. (512) April 2, 2008

© Crescent Power, Inc., Day-Ahead Market  Voluntary Financial Market – chance to trade DA  Co-optimizes AS, Energy, and CRR  Allows NOIEs to offer PTP Options up to 110% of their peak load – these are settled in real-time if not cleared in the DAM  All other CRRs held just prior to DAM are settled on DAM prices  Allows energy trading  Allows purchase of PTP Obligations that are settled on Real-time prices  Allows 3-part energy offers by resources (start- up cost and minimum-energy cost parts are capped at verifiable costs)

April 2, 2008© Crescent Power, Inc., DAM Products  Three-Part Offer (TPO): Startup Offer ($/start) and Minimum Energy Offer ($/MWh) (both capped at verifiable cost) and Energy Offer Curve (EOC in $/MWh)  EOC-only offer: a TPO with null for both Startup Offer and Minimum Energy Offer  Ancillary Service (AS) Offer: may be AS-only or linked (inclusive/exclusive) to TPO or EOC-only offers  PTP Obligation Bid: bid to buy PTP Obligation in DAM for hedging congestion risk in Real-Time  PTP Option Offer: offer to sell PTP Option by NOIEs

April 2, 2008© Crescent Power, Inc., DAM Features  Every QSE that has any congestion risk MUST participate in DAM to hedge their Real-Time congestion risk  TPO and EOC-only offers are Resource-specific but financial in nature in DAM – QSE free to commit or not after DAM  AS offers are Resource-specific and physical in nature in DAM – QSE must commit Resources providing AS  DAM PTP Obligation Bids are equivalent to “scheduling” in other markets but allows for greater flexibility by specifying an “up to” congestion charge  If “DAM Committed”, QSE cannot change TPO but can replace EOC with Output Schedule  SFT performed prior to DAM to derate oversold CRRs  MCFRIs allocated prior to DAM  Approximately 10% of network capacity reserved for DAM providing added incentive to participate in DAM – excess congestion rent credited to CRR Balancing Account

April 2, 2008© Crescent Power, Inc., DAM Optimization  Multi-hour MIP to maximize bid-based revenues minus offer-based costs over the Operating Day, subject to security and other constraints, and ERCOT Ancillary Service procurement requirements. Bid-based revenues include DAM Energy Bids and PTP Obligation Bids. Offer-based costs include Startup Offers, Minimum Energy Offers, EOC, DAM Energy-Only Offers, CRR Offers, and Ancillary Service Offers. Security constraints include:  Transmission constraints – Transfer limits on energy flows through the ERCOT Transmission Grid, e.g., thermal or stability limits. These limits must be satisfied by the intact network and for certain specified contingencies.  Resource constraints – the physical and security limits on Resources that submit Three-Part Supply Offers: LSL, HSL, minimum run time, minimum down time, and configuration constraints. Linked offers – the same Resource capacity cannot provide more than one AS or to provide both energy and AS in the same Operating Hour.

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 1A A1: 550MW $10/MWh A2: 200MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X owns A1 and 500 MW of load  If QSE X offers all of A1 and bids all its load: What bids and offers are awarded? What are DAM and RT LMPs and QSE X settlement? What are credit requirements? What are tax impacts? Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 1A A1: 550MW $10/MWh A2: 200MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X DAM Settlement: -550* *50 = -27, ,000 = -$2,500 QSE X must have $25,000+ credit for this DAM strategy QSE X may be subject to taxation due to appearance of selling $27,500 worth of energy in DAM  QSE X RTM Settlement (if A1=550, L=500MW): ( )*50 + ( )*50 = 0 Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 1B A1: 550MW $10/MWh A2: 200MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X owns A1 and 500 MW of load  If QSE X self-commits 500 MW and offers 50 MW: What bids and offers are awarded? What are DAM and RT LMPs and QSE X settlement? What are credit requirements? What are tax impacts? Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 1B A1: 550MW $10/MWh A2: 200MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X DAM Settlement: -50*50 + 0*50 = -2, = -$2,500 QSE X must have 0+ credit for this DAM strategy QSE X not likely to be subject to taxation due to selling $2,500 worth of energy in DAM  QSE X RTM Settlement (if A1=550, L=500MW, and Self- Schedule of 500MW): ( )*50 + ( )*50 = 0 Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., DAM Example 1 Lessons  Price outcomes and all other outcomes of DAM unchanged whether QSE X offers entire Resource or self-commits first 500 MW  Benefits of self-commitment: Avoid large credit requirement for DAM participation Avoid tax impacts  Self-commitment in DAM does not imply submitting Output Schedules in RTM

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 2A A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X owns A1 and sells 500 MW bilaterally to QSE Y at A; QSE Y has 500MW of load  If QSE X offers all of A1 in the DAM: What bids and offers are awarded? What are DAM and RT LMPs and QSE X settlement? What are credit requirements?  What would QSE Y do? Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 2A A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X DAM Settlement (QSE Y does nothing in DAM): -550*20 = -11,000 QSE X must have 0+ credit for this DAM strategy  QSE X RTM Settlement (if A1=550 and Energy Trade of 500MW sale to QSE Y): ( )*50 = 25,000 [QSE X bilateral unhedged]  QSE Y RTM Settlement: -500* *50 = 0 Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 2B A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X owns A1 and sells 500 MW bilaterally to QSE Y at A; QSE Y has 500MW of load  If QSE X offers 50 MW of A1 in the DAM: What bids and offers are awarded? What are DAM and RT LMPs and QSE X settlement? What are credit requirements?  What would QSE Y do? Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 2B A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  QSE X DAM Settlement (QSE Y does nothing in DAM): -50*50 = -2,500 QSE X must have 0+ credit for this DAM strategy  QSE X RTM Settlement (if A1=550 and Energy Trade of 500MW sale to QSE Y): ( )*50 = 0  QSE Y RTM Settlement: -500* *50 = 0 Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., DAM Example 2 Lessons  Price outcomes and all other outcomes of DAM impacted when QSE X offers entire Resource in DAM  QSE X should either self-commit the first 500 MW (i.e. not offer it in DAM) or offer all of A1 and buy back 500 MW at A – the later has large credit and possible tax impact  If A1 is not allowed to offer Energy and AS from excess 50 MW capacity, then this capacity may not be made available to the DAM leading to higher Energy and AS prices

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 3A A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 400MW  QSE X owns A1 and 500 MW of load  If QSE X offers all of A1 and bids all its load: What bids and offers are awarded? What are DAM and RT LMPs and QSE X settlement? What are credit requirements? What are tax impacts? Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 3A A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 400MW  QSE X DAM Settlement: -550* *40 = -11, ,000 = $9,000 QSE X must have $20,000+ credit for this DAM strategy QSE X may be subject to taxation due to appearance of selling $11,000 worth of energy in DAM  QSE X RTM Settlement (if A1=550, L=500MW): ( )*20 + ( )*40 = 0 Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 3B A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 400MW  QSE X owns A1 and 500 MW of load  If QSE X self-commits 500 MW and offers 50 MW and (schedules) bids 500 MW of PTP Obligations: What bids and offers are awarded? What are DAM and RT LMPs and QSE X settlement? What are credit requirements? What are tax impacts? Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 3B A1: 550MW $10/MWh A2: 500MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 400MW  QSE X DAM Settlement: -50*20 + 0*40 = -1,000 (Energy) 500*(40-20) = $10,000 (PTP Obligations) QSE X must have 10,000+ credit for this DAM strategy  QSE X RTM Settlement (if A1=550, L=500MW, and Self- Schedule of 500MW): ( )*50 + ( )*50 = 0 (Energy Imbalance) 500*(40-20) – 500*(40-20) = 0 (Congestion charge & credit) Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., DAM Example 3 Lessons  Price outcomes and all other outcomes of DAM unchanged whether QSE X offers entire Resource or self-commits first 500 MW and buys 500 MW of PTP Obligations to hedge congestion risk  Benefits of self-commitment: Avoid large credit requirement for DAM participation Avoid tax impacts  Self-commitment in DAM does not imply submitting Output Schedules in RTM  If QSE X does not buy PTP Obligation in DAM, it is unhedged against RTM congestion charges – this would also open the opportunity for speculators to buy the PTP Obligation for cheap or to sell Energy at A for a profit thus forcing convergence

April 2, 2008© Crescent Power, Inc., Day-Ahead Market Example 4 A1: 550MW $10/MWh A2: 200MW $20/MWh B1: 950MW $50/MWh B2: 500MW $70/MWh T1: 10,000MW  If A1 has Startup Cost of $14,000 and Minimum Energy cost of $100/MWh for 100 MW: What bids and offers are awarded? What are the DAM LMPs? Do LMPs cover A1’s costs? Calculate make-whole payment to keep A1 whole Who pays to keep A1 whole? Load Zone: 1000MW B A 1/32/3

April 2, 2008© Crescent Power, Inc., DAM: AS & Energy Cooptimization  Assume that ERCOT needs to procure 1 MW of RUS and 1 MW of RRS and only 2 QSEs provided offers (2 MW each from one resource) for each service and energy and 1 QSE bids for 1 MWh of energy at the following prices: QSE AQSE BQSE C  RUS$10.00$11.00  RRS$ 5.00$ 9.00  Energy$25.00$30.00$40.00 (bid)  Under a simultaneous solution, the following would result: QSE B provides RUS at a cost of $11.00 with MCPC of $11.00/MW QSE A provides RRS at a cost of $5.00 with MCPC of $6.00/MW QSE A sells 1 MWh of energy to QSE C at $26/MWh Total bid-based revenue minus offer-based cost =-$1.00

April 2, 2008© Crescent Power, Inc., DAM: AS & Energy Cooptimization  If QSE C bid for 2 MWh of energy, then the following would result: QSE B provides RUS at a cost of $11.00 with MCPC of $11.00/MW QSE B provides RRS at a cost of $9.00 with MCPC of $9.00/MW QSE A sells 2 MWh of energy to QSE C at $29/MWh Total bid-based revenue minus offer-based cost =$10.00  If QSE B’s energy offer were at $20/MWh and QSE C bid for 1 MWh of energy, then the following would result: QSE A provides RUS at a cost of $10.00 with MCPC of $10.00/MW QSE A provides RRS at a cost of $5.00 with MCPC of $5.00/MW QSE B sells 1 MWh of energy to QSE C at $20/MWh Total bid-based revenue minus offer-based cost =$5.00.

April 2, 2008© Crescent Power, Inc., Conclusion  The ERCOT DAM is different than that of other markets – it provides the most flexibility and the greatest number of products and tools  There is no Local Market Power Mitigation in the ERCOT DAM – participants need to be aware of how the DAM works and how to (and how not to) play in the DAM in order to avoid costly mistakes  Facilitating self-committed Resource participation is essential to the success of the DAM and for competitive energy and AS pricing  Double counting energy from self-committed Resources may result in unintended consequences