Organized Markets in WECCStatus Update and Implications for Planning 2/1/18

• Regional Markets Update• Regional Market Activity

• EIM

• CAISO

• Mountain West

• Peak Reliability / PJM

• Implications for 2018 Plan• Capacity requirements

• Resource types / ancillary services

• Other

Agenda

Regional Market Activity

• Realtime markets such as the EIM:• Make more efficient use of the transmission system

• Take advantage of load diversity as well as weather diversity (VERs)

• Optimize available resources

• Enhance reliability through market signals

• In addition to the above, RTOs and ISOs:• Greatly enhance efficient use and planning of transmission system

• Commit resources much more efficiently than can be done on an hour-ahead basis

• Eliminate transmission rate pancaking

• Save costs by operating under a single OATT

Why markets?

• Operating since 2014 and continuing to add new members

• Organized market that aims for economically efficient dispatch of resources on a sub-hourly basis

• Each EIM Entity must be Resource Sufficient coming into each hour (must have ability to meet its own balancing needs)

• Participants offer resources into the market• Resources are dispatched based on economics regardless of whether an imbalance

exists• Automated balancing of load and generation

• Unlike RTOs and ISOs, the EIM does not:• Provide ancillary services• Administer an OASIS site• Take on reliability responsibility

Western Energy Imbalance Market (EIM)

• Current members:• PacifiCorp• NV Energy• Arizona Public Service• Portland General Electric• Puget Sound Energy

• Planned members:• Idaho Power• Powerex• BANC/SMUD• LADWP• Seattle City Light• Salt River Project

Western Energy Imbalance Market (EIM)

Cost Summary (Utilicast)• Project costs of $10.9 million

• Ongoing annual costs of $1.1 million

Benefits Summary (E3)• Annual dispatch savings ranged from $1.3 to $3.0 million

• Base case annual savings of $1.8 million

�Presented to MPSC on 3/1/17• Not a compelling case to proceed

NWE Analysis of EIM

• Efforts (in conjunction with PacifiCorp) to expand the footprint of the CAISO have stalled

• Multiple efforts to pass legislation allowing this have failed

• Even if that effort is revived, governance and other issues remain

• CAISO has floated the idea of extending the EIM to a day-ahead market

• There are significant challenges to this idea, particularly in regard to day-ahead transmission

• More to come from CAISO on this

Other CAISO Activity

Mountain West Transmission Group and SPP

• 11 Entities, primarily in CO and WY

• Announced plans to join SPP

• Targeting go-live in 2019

• Basin Electric Power Cooperative

• Black Hills Energy

• Black Hills Power

• Black Hills Colorado Electric

• Cheyenne Light, Fuel and Power

• Colorado Springs Utilities

• Platte River Power Authority

• Public Service Company of Colorado

• Tri-State Generation and Transmission Association

• Western Area Power Admin.

• Loveland Area Projects-RMR

• Colorado River Storage Project

MWTG Proposal• The parties are targeting a go-live date of 10/1/19

• The intention is for SPP to operate a single market, optimizing across the DC ties. Other than accommodating the ties, the market design will remain virtually unchanged.

• SPP will operate separate East and West Balancing Authorities and will be the Reliability Coordinator (RC) for the entire footprint.

• SPP will have separate East and West transmission planning regions, but will coordinate modeling assumptions

MWTG / SPP

Status• MWTG has requested some changes that would result in different treatment

for the West footprint.• Regional cost sharing of transmission upgrades

• Cost shift mitigation

• Some governance issues

• To date, the negotiations have occurred in private and the details have been discussed in executive sessions of SPPs BoD and Strategic Planning Committee

• We expect this to change in the coming weeks as the process moves to consideration of specific issues in various SPP work groups

MWTG / SPP

• On December 7, Peak Reliability and PJM Connext announced a partnership to develop a market in the West

• Peak Reliability currently provides RC services to all Balancing Authorities in the WECC (with the exception of Alberta)

• PJM Connext is a subsidiary of PJM Interconnection, which operates the PJM market

• There is very little definition available at this time• Promise is “a market for the West by the West”

• Will make a specific business case proposal by the end of March or early April

• Execute non-binding MOU with initial participants

• April-June is the “participant commitment phase”

Peak / PJM

In addition to the market development activity:• Mountain West participants elected to take RC services from SPP

• Peak and PJM announced their partnership

• CAISO announced that they were withdrawing as a funder of Peak and that they would provide RC services for their own footprint, as well as offering those services to other Balancing Authorities in the WECC

• SPP announced that they would offer RC services to other BAs in the WECC in addition to the Mountain West parties.

Reliability Coordination

Planning Implications

• Given all of the above, we think it is more likely than not that NWE will be in an RTO or ISO at some point in the planning horizon (probably fairly early in that period)

• Discussion: What does this mean for the development of the 2018 Plan?

• Resource adequacy

• Resource selection

• Other?

What are the implications for the 2018 Plan?

• In an RTO, Resource Adequacy requirements are specifically defined• Details differ from market to market

• Specific planning reserve margin• Calculation of capacity contribution of VERs• Calculation of capacity contribution of hydro• Identification of peak load (coincident vs. non-coincident)• Whether RTO hosts a capacity market

• Those details will ultimately matter, but for planning purposes, we can do one of the following

• Adopt the requirements of SPP as a proxy• Adopt “representative” requirements of the potential markets (more difficult since neither

Peak/PJM nor the CAISO expansion are defined)• Other?

Resource Adequacy

• Annual process with a 10-year look ahead

• Planning Reserve Margin (PRM) = 12%

• PRM is applied to non-coincident forecast peak load hour

• Wind and Solar capacity contribution determined through historical exceedance methodology

• Hydro capacity contribution determined based on historical flows

• Can meet up to 25% of responsibility through “Short Term” purchases (Short Term is defined as being at least 4 months)

SPP Resource Adequacy Process

• As a Balancing Authority, NorthWestern must maintain enough flexible capacity to meet its NERC requirements

• Regulation, load following (“INC” and “DEC”), and Contingency Reserves

• In an RTO, NorthWestern would no longer be a BA, and these services would be provided through the market

• We would be required to purchase these products from the market to meet the requirements of our load, and we could offer them into the market from the resources we control that can provide them

• Being an RTO member could change the selection resources• If the ancillary services market prices are relatively high, this could indicate that

NorthWestern should meet its capacity requirement with more flexible resources• Conversely, if the ancillary service market prices are relatively low, this indicate that

less flexible resources would be more cost-effective

Resource Selection