Achieving Price-Responsive Demand in New England Henry Yoshimura Director, Demand Resource Strategy ISO New England National Town Meeting on Demand Response and Smart Grid July 13, 2009

Challenges for New England High cost of electricity in New England. Potential cost, risks, and opportunities associated with carbon-emitting resources. Potential for substantial growth in energy and peak demand as plug-in electric vehicles penetrate the market. Integration of greater renewables and demand resources. Interest in a smarter grid. 2 © 2009 ISO New England Inc.

3 New England Allows Demand Resources to Participate in the Wholesale Capacity Market Has successfully stimulated DR growth in region Notes: Merchant = includes competitive (non-regulated) demand-response providers, energy-service companies, retail suppliers, and non-government customers. Public Sector = includes government and quasi-government entities. Does not include municipal utilities. Utilities = includes all utility companies (investor-owned and public power). Values include Transmission and Distribution and Reserve Margin. Forward Capacity Market Cleared Demand Resources – Results of the Second Forward Capacity Auction (Total MW) © 2009 ISO New England Inc.

Real-Time Wholesale Power Costs What was the cost of wholesale power for a typical large industrial/commercial customer in New England? –About 10.8¢ per kWh in © 2009 ISO New England Inc.

Price-Responsive Demand Could Further Improve New Englands Energy Market Price-responsive demand: changes consumption in response to changes in wholesale power costs. –Consumers add and reduce consumption as prices decrease and increase, respectively. –Promotes more efficient use of energy, and further improves capacity utilization in the New England system. Uniform retail rates do not provide customers with price response incentives. Need for expanded advanced metering infrastructure in New England. Perception of risk related to volatile wholesale prices creates a disincentive for most customers to consider dynamic pricing. –Lack of information makes it difficult for customers to assess the risk/reward tradeoffs. 5 © 2009 ISO New England Inc.

Approaches to Achieving Price- Responsive Demand (PRD) ISO initiated stakeholder process in October 2008 to review PRD. –Parties seeking consensus on: The best approach to encouraging price-responsive demand. –Should DR be reflected on demand- or supply-side of the wholesale energy market. The basis for price-response incentives. If incentive payments are made, who should pay. Two general approaches being discussed: –Supply-side approach: Allow consumers to enter load reduction offers into the energy market in a manner similar to supply offers of traditional generation resources. –Demand-side approach: Give consumers opportunity to change consumption levels in response to different energy prices in a manner similar to the demand bids of load serving entities. 6 © 2009 ISO New England Inc.

ISO New England Proposed Approach ISO New England is proposing two complementary approaches to achieve price-responsive demand – a demand-side and a supply- side approach: –Demand-side: ISO would develop and make available a voluntary wholesale energy product at an all-in, hourly real-time price (RTP). –Supply-side: ISO would allow market participants to offer load reductions into the wholesale energy markets as though such offers were an offer to supply energy. The two-program approach developed in recognition of the range of customer tolerance to price volatility and the implications of different customer load shapes on incentives to stay on uniform pricing. Customers with Smart Grid applications would be in position to benefit from these approaches. 7 © 2009 ISO New England Inc.

Background: Estimated Demand Response Impact by Pilot Program Source: Ahmad Faruqui and Sanem Sergici, The Power of Experimentation, Discussion Paper, The Brattle Group, May 11, 2008, Slide 6. 8 TOU = Time Of Use PTR = Peak Time Rebate CPP = Critical Peak Pricing CAC = Central Air Conditioning

Demand- and Supply-Side Approaches Complement Each Other 9 RTP program sends efficient price signals in every hour. Promotes peak shaving, load shifting, off-peak load building (e.g., plug-in electric vehicles). There is exposure to price volatility, so customers, particularly risk-averse and fixed-budget customers may choose not participate (at least initially). Supply-side program encourages peak shaving. Customers who are averse to price volatility or benefit from flat rate pricing would be given an incentive to reduce load when LMPs are higher than their retail energy rate. –To avoid double counting, payments for load reductions should be based on the LMP minus a proxy of the retail energy rate. RTP (the riskier approach) results in lower overall customer energy bills than the supply-side approach over time. Estimated savings for the period for typical C&I: –20% under RTP. –10% under a supply-side approach. © 2009 ISO New England Inc.

10 Questions and Discussion © 2009 ISO New England Inc.