Proposal for Performance Incentives

Michelle C. Gardner NextEra Energy Resources

Markets Committee October 29, 2013

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A Three-Part Package

• No Phase-In of the Performance Payment Rate– $5,455 starting with FCA-9

• Revisions to Monthly Stop Loss – “Minimum Hour Rule”

• Transmission Exemption– Full outages

NextEra is sponsoring a package of amendments needed to improve Performance Incentives

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PPR Should Remain at $5,455 with No Phase-In

• PPR set at $5,455 for FCA-9 with no further changes

• PPR and LMP together need to provide the right incentives to deliver energy and reserves during scarcity conditions (ISO-NE Memo, September 4, 2013)

• If PPR is too low, ISO-NE concludes that the following can occur (ISO-NE Memo, September 4, 2013):– Resources with poor performance may clear in the FCA,

displacing competing resources with substantially better performance

– The market produces a worse-performing resource mix, which lowers the amount of energy and reserves the ISO can expect to obtain during tight system conditions when reliability is at heightened risk; and

– Perversely, with a lower PPR, suppliers find poor performance can be more profitable than better performance

Changing the PPR will significantly alter investment incentives and the system’s resource mix

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Revisions to Monthly Stop Loss

• Create a “Minimum Hour Rule” to provide greater management of risk during low capacity clearing prices

• For the capacity clearing price:– At or below $4/kW-month, the monthly stop-loss is $10/kW

minus the capacity clearing price

– Between $4/kW-month and $6/kW-month, the monthly stop-loss is 1.5 times the capacity clearing price

– At or above $6/kW-month, the monthly stop-loss is $15/kW minus the capacity clearing price

• NextEra supports ISO-NE’s Annual Stop Loss Construct, provided NextEra’s monthly stop loss limits are adopted

Stop Loss (and exemption) should limit risk – not PPR

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Revisions to Monthly Stop LossPPR at $5,455 with Balancing Ratio at 0.75 for 100 MW Unit

ISO-NE’s proposed monthly stop loss places unreasonable economic risk on capacity suppliers, particularly when capacity clearing prices are low

Capacity Clearing

PriceMaximum Net Loss

Total Net Loss Revenue

Net Missed Hours

Maximum Net Loss

Total Net Loss Reveue

Net Missed Hours

1 14.0 $1,500,000 3.7 9.0 $1,000,000 2.42 13.0 $1,500,000 3.7 8.0 $1,000,000 2.43 12.0 $1,500,000 3.7 7.0 $1,000,000 2.44 11.0 $1,500,000 3.7 6.0 $1,000,000 2.45 10.0 $1,500,000 3.7 7.5 $1,250,000 3.16 9.0 $1,500,000 3.7 9.0 $1,500,000 3.77 8.0 $1,500,000 3.7 8.0 $1,500,000 3.78 7.0 $1,500,000 3.7 7.0 $1,500,000 3.79 6.0 $1,500,000 3.7 6.0 $1,500,000 3.7

10 5.0 $1,500,000 3.7 5.0 $1,500,000 3.711 4.0 $1,500,000 3.7 4.0 $1,500,000 3.712 3.0 $1,500,000 3.7 3.0 $1,500,000 3.713 2.0 $1,500,000 3.7 2.0 $1,500,000 3.714 1.0 $1,500,000 3.7 1.0 $1,500,000 3.715 0.0 $1,500,000 3.7 0.0 $1,500,000 3.7

NextEra Proposal

Monthly Stop-loss

ISO Proposal

Monthly Stop-Loss

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Transmission Exemption

• If a Capacity Resource cannot be committed because of a Transmission Outage, it will be excused from paying any PI penalties during the term of the Transmission Outage– PI is intended to provide incentives for capacity suppliers to have

their resources operating during periods of greatest needs. Since transmission outages are beyond the control of capacity suppliers, it is unclear what reliability benefit could occur by charging PI payments when transmission outages keep a Capacity Resource off-line

• Exemption from PI payments applies during a Capacity Shortage Condition if that resource was not committed solely as a result of a transmission outage or transmission de-rating

• Exemption does not apply when transmission congestion on the intact transmission system results in a resource not being committed or dispatched

The stop loss alone does not mitigate potentially catastrophic transmission outage risk