1. Demand Response: Keeping the Power Flowing in Southwest Connecticut Presented by: Henry Yoshimura Manager, Demand Response ISO New England September 30, 2005

2. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Background (the Problem) ISO New England is responsible for maintaining reliability of the entire New England electricity grid –Can not allow a serious threat to the region’s reliability to go unresolved Prefer the market to address resource scarcities Wholesale markets not yet sending the right locational price signals to encourage new investment Load growth in SWCT has exceeded the capacity of local generation and transmission to serve load reliably New local resources and transmission lines are badly needed, but delayed, creating a “reliability gap”

3. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Southwest Connecticut 16 Preferred Towns

4. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Solving the Problem Preferred Method: –ISO New England defines the problem (opportunity), gives the right price signals, gets out of the way and lets the market solve the problem Last Resort: –ISO New England intervenes in the market, issues a RFP and contracts for new resources to solve the problem

5. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Emergency RFP RFP issued in December 2003 for up to 300 MW of new emergency resources in Southwest Connecticut for 4 years Eligible resources included: –Quick Start Generation –Demand Response –On-Peak Energy Conservation (CLM) 34 Proposals (1,084 MW) Received on January 21, 2004 –Many offered multiple projects and options

6. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Selection of Projects 8 Suppliers Selected by March 2004 –Selection criteria: cost, project viability, reliability benefit –Project viability: Demand response and CLM: the quality of customer acquisition plan, certainty of savings per customer, acceptability of the plan for reporting savings, persistence of savings over the period Generation projects: stage of site acquisition and approval, permitting status, interconnection status, technology risk, and experience of the bidder –Reliability benefits determined by testing project performance under different scenarios and contingencies –The final choice of resources was made integrating the results of the cost rankings with project viability and reliability benefits

7. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Contract Terms All Selected Resources are either Demand Response or On-Peak Conservation (CLM) Performance Based Contracts with 6 Suppliers –260 MW by Summer of 2007 Performance Based Payments –$/kW per Month and $/kWh Penalties for Failing to Deliver and Perform 4 Year Term with 5 th Year Option Monitoring and Verification Plan Cost: Approximately $128 Million over 4 years

8. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Selected Suppliers and Technologies SupplierTechnologies ComvergeLoad Reduction by Residential and Small Commercial Air Conditioner Direct Load Control Pinpoint PowerEmergency Generation and Load Reduction Conservation Services Group (CSG) On-Peak Conservation (CLM) CMEECEmergency Generation and Load Reduction United IlluminatingEmergency Generation and Load Reduction EnerNOCEmergency Generation and Load Reduction

9. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Summary of Selected Resources

10. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Why did Demand Response do so well? Location, Location, and Location –Resources located in the load pockets –No interconnection issues Price –Mostly incremental investments in metering, communications and controls Permitting –Not an issue for Load Reduction –DEP Regulations in Connecticut made it easier for emergency generators to participate

11. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Comparing Different Resource Types Resources designed to be dispatched for only a few hours over the course of the year are typically the most economic resources to provide reserves –Combustion turbines –Dynamic demand response Resources designed to provide energy for many hours are typically too expensive to compete as a contingency reserve resource –Combined-cycle –Energy efficiency

12. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Issues to Address in Order to Allow Energy Efficiency to Compete While a potentially valuable resource, energy efficiency does not perform in the same manner as other quick-start capability (i.e., generators or dynamic demand response) –Not dispatchable in real time when needed –Resource performance is typically not measured in real-time –Performance and payment is usually in the form of $/kWh saved Such differences in performance makes apples-to- apples comparisons among differing resources challenging

13. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Placing Energy Efficiency of a Level Playing Field with Quick-Start Capability The efficiency projects that reduce load across the entire SWCT peak period should compete –If loads are permanently reduced across the entire peak period, the need for dispatchable resources to cover operational reserve requirements that are driven by peak load is reduced –Reducing loads in off-peak periods will not help avoid the need for additional capability –Since energy efficiency is not dispatchable, loads must be reduced across the entire peak period in order to avoid the need for additional resources to cover the “holes”

14. Integrating Demand Response into the Wholesale and Retail Markets © 2005 ISO New England Inc. Placing Energy Efficiency of a Level Playing Field with Quick-Start Capability (cont) Bids by project proponents must be on a $/kW-month basis –Submission of bids from energy efficiency projects must be comparable to the bids made by other resource types –No explicit payment for energy savings (i.e., $/kWh saved) as these savings are “paid” through bill reductions –Payment for verified savings is made on a $/kW- month basis, which is comparable with other resources

15. Henry Yoshimura ISO New England Office: 413-540-4460 hyoshimura@iso-ne.com