1. Building the Energy Markets of Tomorrow... Today The Market Value of Demand Response Aaron Breidenbaugh Demand Response Program Coordinator New York Independent System Operator Prepared for: PLMA Fall 2004 Conference September 30, 2004

2. Building the Energy Markets of Tomorrow... Today 2 Reliability Programs  Emergency Demand Response Program  ICAP Special Case Resources Program Economic Program  Day-Ahead Demand Response Program NYISO’s Demand Response Programs

3. Building the Energy Markets of Tomorrow... Today 3 Emergency/Reliability Program Response is Purely Voluntary Minimum Resource Size: 100 kW, may aggregate within Zones Activated in Response to Operating Reserve Deficiency Payment Only for Actual Energy (kWh) Reduction Provided Provider notified of activation 2 hours ahead, if possible  Paid the greater of real-time marginal price or $500/MWh & guaranteed 4 hour minimum  May set real-time market price at $500 Available to interruptible load & emergency backup generation (including generation in excess of host load) Activated after ICAP SCR resources if deemed necessary by Operators Emergency Demand Response Program (EDRP)

4. Building the Energy Markets of Tomorrow... Today 4 Emergency/Reliability Program Response is Mandatory Minimum Resource Size: 100 kW, may aggregate within Zones Activated in Response to Operating Reserve Deficiency Payment for Capacity (kW) Commitment plus Payment for Actual Energy (kWh) Reduction Provided Provider advised 21 hours ahead with 2 hour in-day notification during Operating Reserve deficiency  Paid for energy reduction: real-time market price or Strike Price (maximum $500/MWh), whichever is greater & guaranteed 4 hour minimum  May set real time market price under scarcity pricing rules Available to interruptible load & emergency backup generation (including generation in excess of host load) Activated prior to Emergency Demand Response resources ICAP Special Case Resources (SCR) Program

5. Building the Energy Markets of Tomorrow... Today 5 Economic Program Response is Expected, Energy Not Reduced is Bought Back at Higher of Day-Ahead or Real-Time Price Minimum Resource Size: 1 MW, may aggregate within Zones Load bids interruption in Day-Ahead Market just like a generator - if chosen, can set marginal price. $75/MWh minimum bid. Payment for Actual Energy (kWh) Reduction Provided Parties submitting accepted bids get:  Notified by 11:00 a.m. of schedule for the next day (starting at midnight)  incentive credit (fixed load bid reduced by amount of curtailment provided) Available to interruptible load only (generation excluded) Activated prior to Emergency Demand Response resources Mandatory Response – Penalties Assessed for Non-Compliance  penalized for buy-through at Day-Ahead or Real-Time marginal price, whichever is greater Day-Ahead Demand Response Program (DADRP)

6. Building the Energy Markets of Tomorrow... Today 6 Experience with DR Emergency Programs 2001-2003  Activated ~22 hours each summer  ~700 MW load reduction provided  ~$3-$7 million in energy payments  Neither program activated in 2004 (so far) Economic Programs  > 350 MW registered  < 30 MW bids accepted at any given time  ~5 MW of curtailment typical  $50/MWh bid floor price in effect, slated to increase to $75 November 1, 2004 (change is pending at FERC)

7. Building the Energy Markets of Tomorrow... Today 7 Market Impacts of Reliability Programs (EDRP & SCR)

8. Building the Energy Markets of Tomorrow... Today 8 The standard practice Establish a range of representative Value Of Lost Load (VOLL) values rolling blackouts tend to temper costs of those effected lower range of values ($1 – $2.5/kWh may be most reasonable) Establish LOLP improvement associated with DR curtailments Generally confined to short periods Estimate load at risk Usually relatively confined - 2-5% Result Value = LOLP improvement * load at risk * VOLL Emergency Curtailment Valuation (1)

9. Building the Energy Markets of Tomorrow... Today 9 System rebuild situation Customer without power VOLL reflects extension of an already long period without power at their premise, and at any local or convenient premise Higher VOLL is more appropriate ($3-5/kWh For customers without power LOLP = 1 Load at risk is their entire load System rebuild situation Customer with power An outage after restoration would be more costly than a typical rolling, short duration blackout LOLP change might be greater than under typical curtailments due to lack of system stability Load at risk may be localized, but higher than normal, and subject to a full curtailment Emergency Curtailment Valuation (2)

10. Building the Energy Markets of Tomorrow... Today 10 System Rebuild State  In the case when the system was not entirely recovered, and unsaved load exceeds the DR curtailed  Change in LOLP = 1  High (~4-5/kWh) VOLL applies  Load at risk = Amount of DR curtailments Recovered System state  When the system had been fully re-energized, DR contribute to reestablishing and maintaining design reserve margin  Utilize the same methods that were employed in previous years  Change in LOLP < 1 but higher than “normal”  Lower ($1-2.5/kWh) VOLL applies  Load at Risk = ~2-5% Emergency Curtailment Valuation (3)

11. Building the Energy Markets of Tomorrow... Today 11 Total August event curtailment payments = $7.5 Million System State Fully Recovered Recovering $1,000/MW $11.5 Million $13.6 Million $2,500/MW $28.7 Million $34.1 Million $5,000/MW $57.4 Million $68.1 Million Outage Cost Gross Benefits of August DR Curtailments Fully Recovered value places a lower bound on the value of DR curtailments Recovering places an upper bound on the that value Benefits Net of Payments Fully recovered and low VOLL yields B/C = 1.5 Recovering and high VOLL yields B/C = 9.0 Estimates of Reliability Benefits

12. Building the Energy Markets of Tomorrow... Today 12 Market and Reliability Benefits Prior to 2003, EDRP benefits did not distinguish between EDRP and ICAP/SCR program registration EDRP participants received $500/MWH: ICAP/SCR participants received higher of their bid, or LBMP 2001 2002 2003 EDRP ICAP 8,159 6,632 6,138 6,576 13.0 0.5 NA 20.1 4.8 28.0 26.3 4.2 3.3 4.0 3.3 3.9 0.3 NA EDRP Curtailed MWh Collateral Savings ($M) Reliability Benefits ($M) Program Payments ($M) Reduced Hedge Cost ($M) 4.8 1.5 7.0 11.0 Impact Ratio

13. Building the Energy Markets of Tomorrow... Today 13 Value When Programs Not Called EDRP  No payments unless activated so $0 paid out  Does Not mean value is zero  Insurance value regardless of whether program is called  NYISO is considering valuation approaches SCR  Same is true from an energy standpoint  SCR resources paid for capacity whether called or not  Additional capacity in the market makes the market more competitive Need to understand NYISO’s capacity markets…….

14. Building the Energy Markets of Tomorrow... Today 14 What is ICAP ? New York’s method to insure that energy is available today, tomorrow and in the future. Who Buys Capacity? All Load Serving Entities (LSE’s) in NYCA Marketers/Traders (resellers) ICAP Suppliers with a capacity shortfall Who Sells Capacity ? Generators Special Case Resources Marketers/Traders ICAP Buyers with Excess Capacity

15. Building the Energy Markets of Tomorrow... Today 15 How do they Sell It? Bilaterally (No NYISO Involvement) Three NYISO Auctions  Capability Period Auction (“Strip Auction”)  A six month price for an equal amount of monthly MWs  Monthly Auction  May purchase or sell for any month(s) remaining in the Capability Period  Spot Market Auction (SMA)  Auction is for the upcoming month only  SMA held to secure capacity for deficient LSEs (failure to procure) and Suppliers (inability to supply)  NYISO submits bids on behalf of all LSEs at a level determined by applicable ICAP Demand Curve

16. Building the Energy Markets of Tomorrow... Today 16 ICAP Demand Curve Demand Curve is defined by two points:  Reference Price: Set price point for 100% of requirement  Percentage of requirement for price to be $0.00  NYCA Demand Curve: 112%  LI & NYC Locational Demand Curves: 118%  Max. Demand Curve Clearing Price set at one and one-half times the localized levelized embedded cost of a gas turbine (not a trivial task to determine) Benefits  Increases system & resource reliability  Values additional capacity above NYCA & Locational Requirements  Reduces price volatility

17. Building the Energy Markets of Tomorrow... Today 17 $13.30 % of Require- ment $/kW/Mo 0% 100% (Reference Price) $0.00 Reference Price Maximum Clearing Price 118% $10.86 112% $5.93 2004 Summer Demand Curves *all $/kW/Month values in terms of UCAP $13.30$20.99NYC $10.86$18.28LI $ 5.93$11.20NYCA $20.99 $18.28 $11.20 NYCLI NYCA

18. Building the Energy Markets of Tomorrow... Today 18 Value of Additional Capacity ICAP prices in NYC and Long Island are set by price caps on divested generating units. Markets nearly always clear at cap values. NYCA (a.k.a. “Rest of State”) markets are competitive and liquid  More supply -> lower market clearing prices  Spot market prices are effectively determined by demand curve, which in turn reflect amount of supply  Economists say “Monthly and strip prices should converge with spot market prices”  ergo; All NYISO markets are influenced by SMA Prices

19. Building the Energy Markets of Tomorrow... Today 19 Value of Additional Capacity Rest of State Demand Curve means that:  100 MW of new supply = Price decrease of approximately $0.15/kW-mo

20. Building the Energy Markets of Tomorrow... Today 20 Market Impacts of Economic Program (DADRP)

21. Building the Energy Markets of Tomorrow... Today 21 J F I G C E K D H B A F G H I J DADRP Analysis Pricing Zones West Hudson-Capital NYC Long Island

22. Building the Energy Markets of Tomorrow... Today 22 Price flexibility = % change in price due to a 1% change in the load served Low flexibilities in 2003, 2004 due to lack of price volatility and no extreme price spikes No “hockey-stick” shaped supply curve observed in 2003, 2004 West Hudson/Capital New York City Long Island 9.4 5.1 / 11.8 9.4 5.1 2001 4.2 3.9 / 5.0 3.6 6.5 2002 1.4 1.9 3.5 1.2 2003 Comparison of DAM Price Flexibilities 2004 1.8 1.6 0.7 0.6 (preliminary)

23. Building the Energy Markets of Tomorrow... Today 23 2001 2002 2003 2004 2,694 MWh 1,468 MWh 1,752 MWh 439 MWh Scheduled DADRP $892,140 $236,745 $45,773 $4,245 Collateral Savings $682,358 $202,349 $161,558 $28,577 Reduction in Hedge Cost $217,487 $110,216 $121,144 $27,357 Program Payments Benefits clearly depend upon size of price responsiveness and scheduled curtailments DADRP Market Price Impacts 2001-2003 (Preliminary)

24. Building the Energy Markets of Tomorrow... Today 24 For load above LD supply price above value to customer  DWL: a + b Payment: b + c  NSW: a – c = DWL – Payment = (a+b) – (b+c) Positive  NSW when a>c Price Load DADRP Strike Price LBMP Est. LBMP S D LDL b a c Welfare Effects of DADRP (1)

25. Building the Energy Markets of Tomorrow... Today 25 a As supply curve becomes flatter, e.g. smaller flexibility, area a can be smaller than area c, and as a result total welfare (a – c) is decreased Price Load DADRP LBMP and strike price Est. LBMP S D LDL c Welfare Effects of DADRP (2)

26. Building the Energy Markets of Tomorrow... Today 26 Est. Welfare Effects of DADRP 2001 - 2004 Net Welfare increase in 2001 largely due to bids being scheduled during hours with higher price flexibilities in both regions Negative NSW change due to large number of bids scheduled in low-priced hours Smaller negative NSW change in 2004 due to very small number of bids scheduled West Hudson-Capital -$752 $43,489 2001  NSW -$8,628 -$63,643 2003  NSW -$3,287 -$20,632 2002  NSW -$4,519 -$12,083 2004  NSW (preliminary)

27. Building the Energy Markets of Tomorrow... Today 27 NYISO Response to NSW Results Increase Bid Floor from $50/MWh to $75/MWh Try to Make DADRP look more like emergency programs  Explore implementation of “standing bids”  Explore automated notification system when bids accepted Increased floor should mitigate most NSW losses while other changes help retain bids and response during relatively rare high priced hours

28. Building the Energy Markets of Tomorrow... Today 28 Questions? Aaron Breidenbaugh abreidenbaugh@nyiso.com518-356-6023www.nyiso.com

29. Building the Energy Markets of Tomorrow... Today 29 Demand Response Statistics/Info

30. Building the Energy Markets of Tomorrow... Today 30 Historic EDRP/SCR Participation

31. Building the Energy Markets of Tomorrow... Today 31 RIP/CSP/DRP Type EDRP/SCR MW 13 Aggregators412.7MW 3 Direct Customers140.9MW 8 Transmission Owners698.1MW EDRP/SCR Breakdown Effective September 15, 2004 9 LSEs321.5MW DADRP MW 46.5MW 8.0MW 334.4MW 0.0MW DR Participation by Provider Type

32. Building the Energy Markets of Tomorrow... Today 32 Breakdown Effective September 15, 2004 DR Participation by Zone

33. Building the Energy Markets of Tomorrow... Today 33