1 Demand Response and Resource Adequacy in Midwest ISO Markets 24 September 2007

2 Objective:  Resource Adequacy Plans are created to help  Ensure reliability, and  Promote investment (resource adequacy)  Midwest ISO faces the opportunity to design the resource adequacy features of its market  Understanding the costs and benefits of tradeoffs between capacity markets, forward contract cover and vigorous demand response is important for the design.  Choosing an inappropriate design can have long lasting consequences (e.g., plants built in the wrong place of the wrong type can last a long time) Demand Response and Resource Adequacy in Midwest ISO Markets

3 Methodology:  Experimental Economics  Midwest ISO has hired August Systems to conduct experimental research that examines alternative institutional scenarios (market design elements) that may be implemented to avoid supply shortages efficiently.  The research should demonstrate to state regulators and other stakeholders that the market design is not likely to lead to reliability failures or unhedged exposure to price spikes. Demand Response and Resource Adequacy in Midwest ISO Markets

4 Contractors:  August Systems: Drs. Vernon Smith, Stephen Rassenti, Lynne Kiesling, Michael Giberson, Karel Nolles and Hugh Outhred and others.  Vernon Smith (George Mason University) shared the Nobel Prize in Economic Sciences in 2002 for his contribution in laying the foundation for experimental economics research. Demand Response and Resource Adequacy in Midwest ISO Markets

5 Data Analysis: the work requires the following activities: 1.Design, program, and test of software to be used to conduct laboratory controlled, network-based experimental markets for the transfer of electrical power from producers to those who benefit by its purchase under the various scenarios and environmental conditions dictated by the experimental design. 2.Hire cash-motivated human subjects to make decisions as wholesale energy suppliers and demanders who inject and withdraw power from a grid, competing through the experimental market process. 3.Analyze data collected during the experiments for the purpose of comparing the welfare effects under alternative market structures or under various market conditions for a particular market structure. 4.Conduct workshops with target industry and government organizations (e.g., NARUC, OMS, FERC, USAEE, HICSS, UC-Berkeley Power Conference) that demonstrate the laboratory trading environment and disseminate the research results discovered. Demand Response and Resource Adequacy in Midwest ISO Markets

6 Status and timeline:  Step 1 is just about complete. Spot and forward markets have been completed. Demand resources have been modeled. Capacity markets (as one alternative in the experiment) are still be coded and tested, but expectations are that it will be complete by month’s end.  Midwest ISO still is finalising the cells (simulations/cases) that it desire to run; i.e., which combination of demand response, forward contract cover, energy only or capacity markets should be looked at. Meeting is scheduled onsite at GMU in early October to finalise.  First two cells expected to be complete by year’s end, with initial analysis. Demand Response and Resource Adequacy in Midwest ISO Markets

7 Results:  Expect results by spring 2008  Step 4 (conduct workshops with target industry and government organizations) in late winter 2007/2008 or early spring 2008 Demand Response and Resource Adequacy in Midwest ISO Markets