1. Pricing Enabled by AMI What Types? What are the Benefits? Dr. Steven D. Braithwait Christensen Associates Energy Consulting EUCI Webinar September 12, 2006

2. September 2006 2 CA Energy Consulting Christensen Associates Energy Consulting Economic and engineering consulting for electric utility industry for 30 years Economic and engineering consulting for electric utility industry for 30 years 1980s – Evaluation of TOU pricing 1980s – Evaluation of TOU pricing 1990s – Design and evaluation of RTP 1990s – Design and evaluation of RTP 2000s – Market-based cost-of-service and rate design; measuring customer price response; assessing benefits of CPP, RTP, DR 2000s – Market-based cost-of-service and rate design; measuring customer price response; assessing benefits of CPP, RTP, DR

3. September 2006 3 CA Energy Consulting Background: Brief History of Time-based Pricing 1970s: NARUC encouraged study of marginal cost-based TOU pricing. Conclusions and outcomes: 1970s: NARUC encouraged study of marginal cost-based TOU pricing. Conclusions and outcomes: Residential consumers responded to TOU prices Residential consumers responded to TOU prices Business case for TOU – marginal due to metering costs Business case for TOU – marginal due to metering costs TOU pricing implemented widely for large customers TOU pricing implemented widely for large customers 2005: EPAct encouraged states to review time- based pricing and demand response 2005: EPAct encouraged states to review time- based pricing and demand response Price responsive demand needed for efficient wholesale market operations Price responsive demand needed for efficient wholesale market operations New positive business case for advanced metering New positive business case for advanced metering What are implications for time-based pricing? What are implications for time-based pricing?

4. September 2006 4 CA Energy Consulting Background: Brief History of Time-based Pricing (2) 2006: FERC report on DR and AMI – based on new survey of utilities 2006: FERC report on DR and AMI – based on new survey of utilities AMI market share – 6% of electric meters in U.S. AMI market share – 6% of electric meters in U.S. Pennsylvania:52% Pennsylvania:52% Wisconsin: 40% Wisconsin: 40% Time-based pricing & DR: 5% of customers (most common – direct load control) Time-based pricing & DR: 5% of customers (most common – direct load control) DR capacity by NERC region: 3 – 7% of summer peak (majority is likely interruptible service or emergency programs) DR capacity by NERC region: 3 – 7% of summer peak (majority is likely interruptible service or emergency programs)

5. September 2006 5 CA Energy Consulting Background: The Need for Price-responsive Demand Existing energy market inefficiencies: Existing energy market inefficiencies: Varying hourly marginal costs – many low-cost hours; few very high-cost hours (e.g., 1 – 2%) Varying hourly marginal costs – many low-cost hours; few very high-cost hours (e.g., 1 – 2%) Fixed retail prices Fixed retail prices Result in: Result in: Non-responsive electricity demand Non-responsive electricity demand Extra generation capacity and higher-than- necessary costs to meet non-responsive demand Extra generation capacity and higher-than- necessary costs to meet non-responsive demand

6. September 2006 6 CA Energy Consulting How to Improve Economic Efficiency? Dynamic pricing that reflects market costs: Dynamic pricing that reflects market costs: All the time: Real-time pricing All the time: Real-time pricing When most important: Critical peak pricing, Day-type TOU When most important: Critical peak pricing, Day-type TOU Demand response (DR) programs – payments for load reductions when reliability endangered or market cost is high: Demand response (DR) programs – payments for load reductions when reliability endangered or market cost is high: Interruptible/Curtailable service Interruptible/Curtailable service Buy-back programs Buy-back programs ISO DR programs (PJM, NYISO, ISO-NE) ISO DR programs (PJM, NYISO, ISO-NE) Peak reductions and load shifting from high-cost to low-cost hours produce cost-saving benefits Peak reductions and load shifting from high-cost to low-cost hours produce cost-saving benefits

7. September 2006 7 CA Energy Consulting Examples of Dynamic Pricing (Dispatchable pricing that reflects market conditions) Large customers: RTP Large customers: RTP Georgia Power (2,500 customers, 80% of C&I load) Georgia Power (2,500 customers, 80% of C&I load) Duke Power (50 – 100 very large customers) Duke Power (50 – 100 very large customers) Competitive retail providers (NY, NJ, Texas) Competitive retail providers (NY, NJ, Texas) Residential customers: Residential customers: Gulf Power – permanent CPP (GoodCents Select) Gulf Power – permanent CPP (GoodCents Select) CPP pilots – CA, NJ, MO, Idaho, DC CPP pilots – CA, NJ, MO, Idaho, DC RTP pilot in Chicago RTP pilot in Chicago Critical-day rebate pilot – Anaheim, CA Critical-day rebate pilot – Anaheim, CA Day-type TOU – EdF (France) Day-type TOU – EdF (France)

8. September 2006 8 CA Energy Consulting Common Technology Features to Support Dynamic Pricing and DR Metering to record hourly (or TOU) usage Metering to record hourly (or TOU) usage Communicate price changes Communicate price changes Provide customer access to usage information Provide customer access to usage information Control devices to facilitate load response Communication & control devices increase price response, but are more costly Control devices to facilitate load response Communication & control devices increase price response, but are more costly

9. September 2006 9 CA Energy Consulting Economic Benefits from Price- Responsive Demand Fundamental source of economic benefits: Fundamental source of economic benefits: Cost savings from load reductions at high prices Cost savings from load reductions at high prices Load reductions replace the need for a comparable amount of peaking capacity (see M. Reeder, Elect. Jl., July ’06) Load reductions replace the need for a comparable amount of peaking capacity (see M. Reeder, Elect. Jl., July ’06) Expanded net value from increased usage at low prices Expanded net value from increased usage at low prices Factors that affect amount of benefits: Factors that affect amount of benefits: Price variability (greater benefits with more high-price & low-price opportunities) Price variability (greater benefits with more high-price & low-price opportunities) Customer price responsiveness (achieving benefits requires customers to modify usage) Customer price responsiveness (achieving benefits requires customers to modify usage)

10. September 2006 10 CA Energy Consulting Summary of Findings on Customer Price Responsiveness Customers on average respond to prices, in reasonably consistent ways (TOU, CPP & RTP price elasticities) Customers on average respond to prices, in reasonably consistent ways (TOU, CPP & RTP price elasticities) A minority of customers (10 – 20%) appear to respond much more than average A minority of customers (10 – 20%) appear to respond much more than average Many consumers appear unresponsive to modest prices Many consumers appear unresponsive to modest prices Some consistent indicators of most responsive customers Some consistent indicators of most responsive customers Energy-intensive industrials Energy-intensive industrials Enabling technology Enabling technology Easy product storage – rock crushing, water utilities Easy product storage – rock crushing, water utilities Automated controls Automated controls

11. September 2006 11 CA Energy Consulting Price-Responsive C&I TOU Customers Percent by Size and Business Type

12. September 2006 12 CA Energy Consulting Quantitative Estimates of DR Benefits Based on evaluation of dynamic pricing potential Typical net benefits small relative to total bill Typical net benefits small relative to total bill 0.5 – 2% of consumers’ original bills 0.5 – 2% of consumers’ original bills Analogous to productivity increase Analogous to productivity increase Note that consumers incur costs to respond – benefits are net of these costs Note that consumers incur costs to respond – benefits are net of these costs Residential customer: $10 – 50 / year Residential customer: $10 – 50 / year Industrial customer (5 MW): $20,000+ Industrial customer (5 MW): $20,000+ System (10,000 MW): $50 million System (10,000 MW): $50 million

13. September 2006 13 CA Energy Consulting DR Benefits vs. Metering Costs If metering costs must be justified by DR benefits alone: If metering costs must be justified by DR benefits alone: Dynamic pricing for medium to large customers can be justified relatively easily Dynamic pricing for medium to large customers can be justified relatively easily More difficult business case for mass-market More difficult business case for mass-market If business case for AMI can be made on operational savings and other benefits: If business case for AMI can be made on operational savings and other benefits: Much lower hurdle for dynamic pricing Much lower hurdle for dynamic pricing Benefits from DR can help support a marginal business case Benefits from DR can help support a marginal business case

14. September 2006 14 CA Energy Consulting Illustrations of Dynamic Pricing CPP compared to traditional TOU CPP compared to traditional TOU RTP with financial hedge for risk management RTP with financial hedge for risk management Regulated utility Regulated utility Competitive provider in restructured states Competitive provider in restructured states

15. September 2006 15 CA Energy Consulting CPP/TOU Rate Design Weekday price profile 0 0.1 0.2 0.3 0.4 $0.5 1814182024 Critical price TOU Peak Price Standard Rate Peak price w/ CPP Off-peak Mid-peak

16. September 2006 16 CA Energy Consulting Real-time Pricing (RTP) Hourly prices – Day-ahead, hour-ahead, real- time Hourly prices – Day-ahead, hour-ahead, real- time Prices reflect marginal cost of energy and reserves (wholesale energy prices/LMP) Prices reflect marginal cost of energy and reserves (wholesale energy prices/LMP) Most successful form – two linked contracts Most successful form – two linked contracts Hourly pricing for all usage, plus Hourly pricing for all usage, plus Financial contract-for-differences – guarantees fixed price for fixed contract quantity Financial contract-for-differences – guarantees fixed price for fixed contract quantity Success story at regulated utility – Georgia Power Company Success story at regulated utility – Georgia Power Company

17. September 2006 17 CA Energy Consulting Example of RTP with Hedging in Competitive Retail Energy Markets Constellation NewEnergy has 6,000 MW of large customer load on similar RTP products Constellation NewEnergy has 6,000 MW of large customer load on similar RTP products Customers face hourly prices indexed to RTO day-ahead or real-time prices (e.g., PJM, ERCOT) Customers face hourly prices indexed to RTO day-ahead or real-time prices (e.g., PJM, ERCOT) Customer selects amount of load to be covered by fixed- price contracts (typically less than expected usage) Customer selects amount of load to be covered by fixed- price contracts (typically less than expected usage) Balancing loads (above and below contract level) are settled at indexed prices Balancing loads (above and below contract level) are settled at indexed prices Consumers have incentive to respond to hourly prices, but manage their price risk Consumers have incentive to respond to hourly prices, but manage their price risk Natural pricing product for a commodity with price volatility and forward markets Natural pricing product for a commodity with price volatility and forward markets

18. September 2006 18 CA Energy Consulting kWh Price PBPB KBKB Demand RTP with Financial Hedge: Fixed hourly load (K B ) billed at fixed price P B Base bill Fixed price can be TOU peak and off-peak, with values set by forward power contracts.

19. September 2006 19 CA Energy Consulting kWh Price PBPB KBKB Demand Added Customer Value at Low RTP Prices Base bill Added net value from load increase P RTP KAKA low Bill for incremental usage

20. September 2006 20 CA Energy Consulting kWh Price PBPB KBKB Demand High RTP Price: Bill Increase for Usage Beyond Contract Quantity If No Response Base bill P RTP KAKA norm Potential bill for normal usage beyond K B

21. September 2006 21 CA Energy Consulting kWh Price PBPB KBKB Demand Benefit from Load Response at High RTP Price: Bill savings > Curtailment cost Base bill P RTP KAKA norm Net benefit from load reduction Curtailment cost Total bill savings – full rectangle

22. September 2006 22 CA Energy ConsultingConclusions Dynamic pricing can improve market efficiency and provide cost-saving benefits Dynamic pricing can improve market efficiency and provide cost-saving benefits Benefits may be shared by consumers and providers (through margins or premiums) Benefits may be shared by consumers and providers (through margins or premiums) Potential benefits from dynamic pricing can enhance the business case for AMI Potential benefits from dynamic pricing can enhance the business case for AMI If the business case for AMI can be made without DR, then the cost barriers to dynamic pricing are reduced substantially If the business case for AMI can be made without DR, then the cost barriers to dynamic pricing are reduced substantially

23. September 2006 23 CA Energy Consulting Contact Information Steven Braithwait SDBraithwait@caenergy.com608-231-2266