1. Wholesale Market Subcommittee Texas Interconnection Long-Term Study Update Warren P. Lasher April 8, 2011

2. 2 Long-Term Study Update Project Background ERCOT received a grant in early 2010 from the Department of Energy to improve our Long- Term Study process. The intent of this effort is to: Improve the existing ERCOT long-range planning process by developing new sustainable tools and processes Develop a long-range transmission strategy for the ERCOT region Enhance stakeholder involvement in the long-range planning process

3. 3April 8, 2011Long-Term Study Update Deliverables for DOE-Funded Study Assessment of fundamental drivers of system needs Development of potential future scenarios Evaluation of likely resource development by private market investment for each of the potential future scenarios Development of technology-neutral ancillary services (A/S) analysis Development of long-term (20-year) transmission strategy for ERCOT grid

4. 4April 8, 2011Long-Term Study Update Stakeholder/Policy Input Long-Term Study Task Force (LTSTF) - “Sub- group” of RPG –Continued participation by traditional planning stakeholders –Enhanced participation by representatives of state government (Governor’s office, PUCT, TCEQ, SECO, RRC, TWDB, …) –Facilitated participation by NGOs (environmental, landowner, consumer, etc. groups) LTSTF serves two purposes: –Provide input INTO planning process on scenarios, assumptions, etc. –Provide insight on policymakers’ need for information FROM planning process You too can join in the fun!

5. 5April 8, 2011Long-Term Study Update Long-Term Study Task Force – 2011 Meeting Dates 2011 Meeting Dates January 10July 11 February 1August 2 March 1September 12 April 5October 4 May 3November 1 June 7December 6

6. 6April 8, 2011Long-Term Study Update Overview of the Resource Expansion Process The long-range transmission needs of the ERCOT system will be defined by system load and by the available resources. By developing different future scenarios, we can evaluate transmission system needs under different potential future outcomes. In order to determine future transmission system needs for each potential future scenario, additional resources, commensurate with expected market conditions, must be added to the model database.

7. 7April 8, 2011Long-Term Study Update Purpose of Resource Expansion ERCOT has a deregulated, energy-only wholesale market. Under this market design, resources will be developed by independent parties based on their own assessment of market conditions and economic resource investment opportunities. The intent of the resource expansion analysis is not to devise an optimal expansion plan for each scenario. Rather, the intent is to determine which resource alternatives would likely be viewed by developers as being economically competitive. By evaluating the competitiveness of different resource technologies under specified market conditions, a potential set of expansion resources can be developed.

8. 8April 8, 2011Long-Term Study Update Example System modeling provides a forecast of hourly market prices, thus defining market opportunities for new generation.

9. 9April 8, 2011Long-Term Study Update Example – Coal Plant A coal plant with a variable operating cost of $25/MWh would be expected to operate in all hours of this week in August, since its variable operating cost is below the system marginal cost in all hours:

10. 10April 8, 2011Long-Term Study Update Example – Coal Plant And the profit from operating the generic coal plant would be the difference between its variable operating cost ($25/MWh) and the system marginal cost: The generation expansion analysis is based on determining whether the expected operating profit would create ample returns over the life of the unit to justify private market capital investment.

11. 11April 8, 2011Long-Term Study Update Financial Criteria Fixed cost assumptions for future resources have been derived from 2011 Energy Information Agency Annual Energy Outlook) – see back slides for details Investment Capital Assumptions Debt/equity ratio (55/45%) Cost of debt (8%); Cost of equity (15%) Tax Rate (35%) Revenue projections from system modeling results Initial evaluations based on a profitability hurdle rate of 10% return on investment

12. 12April 8, 2011Long-Term Study Update Initial Analysis Currently evaluating a Business-As-Usual Scenario (market conditions remain as they are today) Expansion Plan through 2020 has resulted in 5 Advanced CC and 28 Advanced CT units No other technologies have been economic Current Modeling Considerations -No transmission constraints -Average weather year -Marginal cost bidding only -No Ancillary Services Revenues -Limited scarcity pricing

13. 13April 8, 2011Long-Term Study Update Request for Feedback We would appreciate feedback on input assumptions to the study (capital costs for resources, financial assumptions, etc.) and methodology Send comments to: Longtermstudy@LISTS.ERCOT.COM Questions?

14. 14April 8, 2011Long-Term Study Update Generic Generating Resource Assumptions (2010$) Operating characteristics for existing generating resources

15. 15April 8, 2011Long-Term Study Update Generic Generating Resource Assumptions (2010$) Characteristics for new resources

16. 16April 8, 2011Long-Term Study Update 2011-2020 Preliminary Resource Expansion Details