Transforming the Electricity Market Promoting Sustainable Energy Efficiency Programs

1. Transforming the Electricity MarketPromoting Sustainable Energy Efficiency Programs Institute for Regulatory Policy Studies 10 May 2007 Springfield, Illinois

2. Who is Constellation Energy? • FORTUNE 200 competitive energy company headquartered in Baltimore, Maryland • North America’s No. 1 supplier of energy to wholesale and to retail commercial and industrial customers in competitive markets • A major generator of electricity with a diversified fleet of power plants located throughout the United States • A regulated distributor of electricity and natural gas in Central Maryland Vision: To be the first-choice provider for customers seeking energy solutions in the complex and changing marketplace

3. We serve customers across the energy value chain

4. Contradictions??? Vertically Integrated Utility

5. Average Retail Rate Trends Compared to Other Retail Products • After run-up of prices during energy crisis, electricity rate increases have been significantly below inflation rates until late 1990s • Even recent rate increases have been modest compared to sharp increases in prices for other consumer energy products Courtesy of The Brattle Group

6. Change in Electricity Rates Compared to Other Consumer Products: 1985-2005 • Despite recent increases, compared to other consumer prices, electricity rates have decreased in real terms (increased less than CPI) over the last 20 years • Rate increase is less than one quarter of price increases for other consumer energy products Courtesy of The Brattle Group

7. Average Rates in Restructured and Non-Restructured States • Significant rate increases prior to initiation of restructuring efforts • In 1997, rates in restructured states were approximately 35% above rates in non-restructured states • Very similar rate trends since restructuring commenced in 1997 Courtesy of The Brattle Group

8. Relative Rate Trends in Restructured and Non-Restructured States Since 1997 • Since restructuring discussions were initiated in the early-to-mid 1990s, rates in restructured and non-restructured states have trended similarly • Less-noticed increases in non-restructured states due to “routine” rate adjustments Courtesy of The Brattle Group

9. Energy Policy Act of 2005 • Promotes energy efficiency and renewable power, clean coal, nuclear, alternative fuels, hybrid vehicles and hydrogen. • Incentives for Bio-based industry: grants for research and demonstrations, tax incentives, market assurance or standards, loan guarantees. • Offers federal financial assistance for clean energy technologies (Title XVII) and tax incentives for renewable energy, clean coal, industrial gasification, nuclear, energy efficiency, alternative fuels and vehicles (Title XIII). • Addresses Climate Challenge through sound voluntary actions and acceleration of technology.

10. Energy Policy Act of 2005: Incentives to Propel Policy THE LOGIC • Address the “Energy Investment Challenge” • Enhance energy security • Address Climate Challenge THE CARROT THE STICK • Incentives for Bio-based industry: grants for research and demonstrations, tax incentives, market assurance or standards, loan guarantees. • Offers federal financial assistance for clean energy technologies (Title XVII) and tax incentives for renewable energy, clean coal, industrial gasification, nuclear, energy efficiency, alternative fuels and vehicles (Title XIII). • The EPAct 2005 mainly focuses on the carrot. • RPS and GHG Initiatives and mandates largely left to the states.

11. Oil & Natural Gas Price Volatility Creates Opportunities Natural Gas Natural gas volatility, varying more than 80% within a 12 month period, has aggravated industries dependent on gas as a primary feedstock or heating fuel, such as chemicals, fertilizers, metalworking and cement. LNG terminals are facing stakeholder resistance. Crude Oil Ascent of crude oil prices in 2004–2005 threatens economic growth, and provides a painful reminder of U.S. commercial vulnerability due to import of more than 60% of our crude oil, the primary fuel for all transport modes.

12. Exploring Technology Deployment Initiatives Energy Security, Economic and Environmental gains arise from commercial use of advanced energy technologies. But, Market Failures Hinder Deployment • Advanced energy technology systems face skepticism. • Owners of early units face “first mover” penalties (higher cost and technology risk, market and regulatory uncertainties, than later movers). • Customers of early units also face “first mover” penalties from higher cost and lower reliability. • Classic externalities (e.g., renters don’t make energy decisions) hinder action by prospective users. • Regulatory bias in rates (de facto) impacts technology choice — PUCs allow generators to pass through marginal fuel cost price spikes, but restrict cost recovery of capital. • Regional differences are vast (fuel use, urban v. rural…) • Solving issues requires collaborative, risk-oriented approach, nationally. Solution: Identify key market barriers (e.g., pricing, information, finance, capital stock turnover rates, regulatory uncertainty, inefficient market structures, consumer perceptions); characterize risks; shape appropriate measures for market development.

13. The Opportunities • On-Peak Demand (Efficiency, Distributed Generation) • Seasonal Peak Demand (Similar Measures) • Critical Peak Demand (Similar Measures) • Real-Time Demand (Dispatchable Measures) • Real-Time Emergency Generation

14. The Challenge: Projecting the Future • The Planning Process: • Evaluate Existing & Projected Load • Industrial – What Types? Elasticities? • Commercial – Building Characteristics? • Institutional – Beyond Back-up Generation

15. The Key Participants • Large Industrial Load • In-Depth Review • Commercial Buildings • Leverage customer base with new contract options • Institutions • Aggregation of Smaller Loads

16. Global Temp. Adjustment Duct Static Pres. Increase SAT Increase Fan VFD limit CHW temp. Increase Fan Qty. reduction Pre-Cooling Cooling Valve Limit Turn Off Light Dimmable Ballast Bi-Level Switching 0 5 10 15 20 25 # of sites Fully-Automated Manual or Semi-Automated The Strategies

17. The Benefits to Customers: Example of Buildings • Optimized building systems save 10-20% energy • Real time energy monitoring and control capabilities • Improved operation and run time conditions • Ability to positively impact load curve in three areas: • Load Shape • Demand Limiting • Smoother Bandwidth

18. Capacity Savings – Typical Load Curve Energy Chain Mission Affect Load Shape in 3 Ways: 2 Reduce kW via advanced demand limiting and peak shaving applications Peak Reduction 3 Smooth bandwidth via optimizing control applications 1 Reduce KWH via control system installations and RetroCommissioning Improve Bandwidth to 10% or Better +/-5 10 to 15% Efficiency

19. The Constellation Retail Energy Chain Local Generation Energy Supply Energy Use Energy Assets Energy Generation Energy Control Energy Consuming Devices External Energy Sources HVAC Equipment Fans / Pumps / Motors Central Plant Systems Boilers / Chillers Lighting Air Handlers Commodity Supply Electricity Gas Oil Building Automation Load Shaping Demand Limiting Energy Consumption Demand Response Control Sequences EMS / BAS / HVAC RetroCommissioning & Building Optimization Energy Use Strategies Generation Assets CoGen Units Fuel Cells GenSets

20. The Synergy of Competitive Supply Commodity Risk Management Energy Efficiency Load Response

21. Benefits to The Grid • Ability to respond to curtailment signals in minutes • Ability to utilize new and emerging energy technologies for smooth load shaping and demand responsiveness • Commercial customer operations not negatively impacted by extreme reduction applications • Consideration of regulatory issues that facilities must deal with such as emissions, environmental impact and air quality • Consideration of load shifting strategies so that load shaping is simply not load shifting • Use ISO Demand Response Program as an ongoing tool to educate and lead customers to do the right thing

22. Increasing Investment in Energy Efficiency • Key Barriers: Utility rate designs do not encourage energy efficiency; utility incentive structures where net revenue is linked to throughput; utility planning processes typically do not evaluate energy efficiency as a competitive resource; lack of information about best practices and programs that work; • PPPs (Electric and Gas Utilities; State PUCs, Energy and Environmental Agencies; Energy Consumers, Energy Service Providers) can be an effective means to address barriers and develop business solutions; • Developing National Action Plan for Utility Energy Efficiency: Promote utility resource planning and implementation programs that incorporate demand-side management and best practices; encourage use of efficient technologies and products and improve acceptance and use of energy efficiency relative to supply options; • Significant Potential Gains by decoupling utility financial health from electricity sales, fully integrating energy efficiency into state and utility planning processes and more accurately reflecting the cost of electricity through better rate designs (time-of-use, seasonal rates).

23. Contact Information Terry S. Harvill Vice President, Regional Regulatory and Government Affairs Constellation NewEnergy 1000 Town Center Suite 2350 Southfield, Michigan 48075 248.936.9004 Direct 248.936.9007 Fax 312.415.6948 Cell terry.harvill@constellation.com