1. BUILDING WESTERN MARKETS PART 1 – MARKET DESIGN SESSION GOALS: UNDERSTAND THE BREADTH OF MARKET ISSUES IDENTIFY IMPORTANT ISSUES FOR CLEAN ENERGY GUIDING QUESTIONS: ARE MARKETS GOOD FOR CLEAN ENERGY? ARE MARKET IMPROVEMENTS NEEDED? WHAT IS THE PATH FORWARD?

2. INFORMAL WORKING GROUP DISCUSSIONS REFLECTED IN THIS SESSION AND IN THE “MARKET OPTIONS” OUTLINE. Dave Olsen Mark Ahlstrom Steve Beuning Doug Larson Western Grid Group Ron Lehr Brian Parsons Amanda Ormond Kate Maracas

3. WHY THIS SESSION? Advocates are strong on planning, utility operations We are less familiar with markets, market design, market operations, and market monitoring Lots of interesting implications, many TBD Get ready to support EIM expansion, PAC merger with CAISO, and emerging RSO. “we support these markets” “we understand opportunities to improve them”

4. Advantages of Organized Market Expansion 1.Geographic/Resource Diversity Less overall RE variability, Non-coincident peak demands and load shapes More generation diversity (e.g. for flexibility) Lowest marginal cost dispatch from a larger pool of generators 2.Reduced reserve needs 3.Better use of existing transmission 4.Higher resolution sub-hourly dispatch, facilitating a transition away from block and bilateral transactions 5.Better grid coordination and awareness improves reliability 6.Can enable access to market by distributed generation and demand response

5. BROAD FOOTPRINTS AND PARTICIPATION IN NEAR-REAL TIME MARKETS ARE THE KEYS TO EFFICIENT GRID INTEGRATION AND ECONOMIC OPERATIONS WITH LARGE AMOUNTS OF WIND AND SOLAR POWER Market expansion can also provide… Improved opportunities for non-traditional sources of grid services Expanded opportunities for stakeholder input … IF regulators and market operators require them to be included

6. KEY FACTORS AND QUESTIONS How to implement wind and solar dispatch for least cost integration Implement some features thru standard practices or additional market products? Proactively requiring advanced capabilities, and access/compensation mechanisms for actual use Should customer-side PV, storage and demand response be included in markets? What issues are better addressed now thru internal reforms, rather than in transition to a regional system operator? Role of regional operator staff and/or stakeholders in market design and reform Is the 2002-2005 FERC Standardized market design useful for features and lessons learned?

7. MANY OTHER OPEN TOPICS Seams Distributed energy resources - is aggregation & dispatch eventually needed? Are interconnection queues and system impact study approaches fair to VERs? Once markets are established, what “disruptions” are reasonable? Legislatively-mandated large block purchases (i.e, HQ into New England) Is this conceptually the same as a major new import or transmission line?

8. REGIONAL SYSTEM OPERATION AND GOVERNANCE A CLEAN ENERGY IMPROVEMENTS CHECKLIST MARKET OPTIONS 3.5 A READER’S GUIDE

9. THREE PARTS 1. Principles to apply to “regional system operator” 2. Reforms for RSO expansion “Market Options Supply Curve” Support EIM expansion Support RSO, recognizing needed reforms 3. Ideas to “leapfrog” RTO problems, implement EIM and RSO expansion

10. RSO PRINCIPLES Covers mainly market design and operations Maintain California climate policies All resources, all tools Planning and investment Flexibility and curtailments Transmission costs and rates Market power and market monitoring

11. RSO REFORM OPPORTUNITIES Expand EIM and RSO—good for clean energy Reduce oversupply, decommit fossil Include DERs, aggregation, communications and control Encourage VERs with grid capabilities Highlight seams coordination issues Improve planning for regional perspective Use state of the art grid technology

12. MARKET OPTIONS SUPPLY CURVE Expand and Improve Markets EIM and RSO Planning, Seams Coordination Forecasting and Scheduling Reduce Clean Energy Barriers Less self scheduling, must run Faster, deeper fossil turn down Engage Demand Response Resources Grid and Operations Reforms Analysis and options for Inertial and frequency response, load following Demonstrate, then deploy state-of-the-art grid technologies Demonstrate, then deploy dynamic, flow based path ratings Network transmission service and rates replace pancaked rates Contingency resources for reserve sharing VERS as system resources Capacity valuation AGC, communications, control and response Provides regulation, down and up

13. “LEAPFROG” AND INCREMENTAL TARGETS Leapfrog Ideas Regional Planning Perspective Regional Open Season Carbon Planning, Operations, Markets, Dispatch CPP Trading Market Incremental Targets EIM expansion Pacificorp merges with CAISO

14. NEXT STEPS Who can help? Can we expand our coalition? Does the discussion outline reflect your understanding and concerns? Would continuing conference calls help to refine our analysis? What next steps do you support?

15. HISTORY - STANDARD MARKET DESIGN 2002 - FERC Notice of Proposed Rulemaking Proposed that transmission operators be required to join an RTO Described a uniform market design for all RTOs 2003 - Wholesale Power Market Platform White Paper (2003) In 27 pages, describes the market design largely as used today by MISO, NYISO, PJM http://www.hks.harvard.edu/hepg/Standard_Mkt_dsgn/FERC%20SMD%203-02.PDF

16. REASONS FOR TERMINATING ORDER (2005) “Overtaken by events” such as formation of MISO as a voluntary RTO Strong objections to the proposed rule Infringed on state jurisdiction Transition would not provide sufficient protection for existing customers Too prescriptive and did not sufficiently accommodate regional differences Insufficient clarity on cost recovery for investment in new transmission facilities https://www.ferc.gov/EventCalendar/Files/20050719123006-RM01-12-000.pdf

17. THE RTOS OF TODAY Voluntary membership, divergent designs, significant complexity Wholesale tariff of about 2000 pages plus 13,000 pages of business practice manuals Wholesale market settlements may involve over 100 different charge types Many advantages have been demonstrated Voluntary growth of membership, even from public power entities (MISO examples) Flexibility to accommodate wind dispatch and wind market participation In non-RTO regions, we still hear the same objections as in 2002-2005

18. PHILOSOPHICAL DIFFERENCES BETWEEN RTOS Two-settlement approach (DA and 5-minute RT) versus other approaches VERs as true power plants versus must-take and largely uncurtailable Nature of stakeholder process and influence Approaches to reserves and ancillary product design Approaches to long-term capacity procurement/capacity markets

19. RELIABILITY TRENDS Should all new generation resources have the capability for frequency and voltage support? The assumptions matter when modeling future high-renewable scenarios Rapidly growing concerns at NERC and RTOs Potentially a (red herring) issue for modest renewables scenarios (i.e., Clean Power Plan) Compensation issues must also be addressed New ancillary products, identifying and procuring the needed amounts, etc.

20. CAPACITY PAYMENTS AND CAPACITY MARKETS Is a capacity market for long-term procurement or medium-term tuning? Does the price signal facilitate entry of demand response and non- conventional resources? To what extent do capacity markets or out-of-market capacity payments depress energy prices and affect renewables Does this matter? Merchant plants versus IPP and utility business models

21. DOES ORDER 764 REQUIRE A 15-MINUTE MARKET? No Requires 15-minute interchange scheduling (in non-RTO regions or at seams) Only CAISO elected to interpret the rule as needing a 15-minute market Other RTOs are compliant while retaining their two-settlement market design

22. CONCERNS WITH CAISO 15-MINUTE MARKET? Effectively creates barriers that favor conventional resources and imports over true integration of VERs, demand response and distributed energy resources Longer gate closing window for forecast/schedule (compared with other RTOs) results in higher error/imbalance for variable resources Longer period (15 versus 5 minute) favors flat output, long-duration resources versus those that can better shift energy or predict energy for shorter time periods Diminishes the free flexibility and elegance of well-developed security constrained economic dispatch methods that are proven to work well in other RTOs