Framework for Demand Response Participation in Energy Market

1. Framework for Demand Response Participation in Energy Market June 10, 2009 Herb Healy

2. Outline • Background • Sources of Demand Response in ISO-NE • Energy Market design for Demand Response resources • Guiding Principles for Market Design • ISO’s Supply-side approach – Positive step forward • Shortcomings in proposed ISO structure • Payments • Bidding parameters • EnerNOC’s Payment Structure Recommendations • Energy payments for FCM Demand Response resources

3. Background – Sources of Demand Response Results from FCA #1 (source: ISO-NE data) Demand Response • Merchant providers represented 80% of total active demand response cleared in • FCA #1 • - Majority of that by providers that are NOT commodity suppliers

4. Energy Market Design for Demand Response Resources

5. Guiding Principles for Market Design • DR Resources integrated into the ISO- NE energy market as supply-side resource • Predicated on comparability of the product/ service to other resources participating in those markets • Consistent with ISO IMMU recommendation • DR Resources set DA and RT energy prices • Bids into supply price, takes obligations in DA market • Symmetric DA obligations and RT delivery—similar to generation • Makes up deviations at RT pricing

6. ISO’s Supply-Side Approach • ISO’s recent suggested approach of supply-side integration into energy market represents significant positive progress toward resolution • Product definition– MWhrs • Eligibility • All types of customers – LMP, fixed retail • Allows for aggregation • Includes FCM DR resources • Bidding • Bids into DA and can establish marginal clearing prices • Permits participation across full range of prices • Customers to decide when to participate; i.e., no “threshold” for participation a la DALRP • Commitments and Deviations • Measurement and Verification • Incorporates Customer Baseline EnerNOC appreciates and supports this fundamental integration approach

7. ISO’s Payment Structure Shortcomings • ISO proposes to pay LMP – Cost of Generation included in retail rate (i.e., “LMP – G”) • Does not recognize that • Demand Response customers incur costs to reduce loads • Demand Response Providers incur costs to implement demand response – tools, manpower, time, risk • Does not provide adequate price signals to overcome barriers to Demand Response • Many customers do not have sufficient information about how the wholesale markets work and how to curtail load. • Many customers do not have the necessary technologies: • Advanced meters, automated load curtailment systems, energy management systems, etc. • Many customers require technical support to help manage and dispatch curtailment operations. • Many customers do not have sufficient incentive to curtail load, given size of electric bill and other budget priorities • Insufficient to incent demand response to participate at appropriate, desirable levels in market • Proven in PJM Market – see PJM experience with compensation value

8. Compensation Experience in PJM Source- PJM Members Committee Meeting, 6/4/2009

9. Recommended Payment Structure • Payment structure to facilitate achievement of the optimal level ofdemand resources in the wholesale market • “includes those demand resources whose energy bids are less than the energy bids of the marginal supply resources (i.e., the energy market test)” [Ref: T Woolf, Pres to MC, 5/13/2009]

10. Recommended Payment Structure (con’t) 2 alternative approaches predicated on LMP payments • Closed “elegant” clearing algorithm approach, i.e., Don Sipe/ CDRI • DR bids only clear if net benefit to all load in terms of cost • Good ideas should be reasonably considered, but, represents clearing algorithm with no experience / skepticism / acceptance hurtle implications • May require DR to accept “as bid” prices • Proxy approach • Use proxy trigger designed to assure that benefit DR provides to system (in terms of lower cost to load) is GREATER than incentive paid to DR providers • Bifurcated payment structure • At or above proxy trigger, DR providers are paid LMP for load reductions • Below proxy trigger price, no incentive (i.e., payment limited to LMP- G) • Practical, ease of implementation (relatively) • E.g.., Current DALRP uses a proxy threshold for participation • Similar approach under consideration in PJM EnerNOC recommends the proxy approach

11. ISO’s Bidding Construct Shortcomings Problems • Bidding does not address barriers to participation by DR customers • Many customers need bidding flexibility above simple daily LMP bid • Reflect need to be able to curtail for minimum block of hours • Reflect need to be able to include fixed costs for shut-down and re-start costs • Reflect need for some load shaping capability (akin to changes in Eco-min and/ or Eco-max for generators) • Bidding does not address barriers to participation by DR customers and does not provide comparability to generation Recommendation • Include bidding parameters; as a minimum: • Minimum load reduction time • Bid fixed costs in addition to “strike” price (bid price for clearing purposes is combination of two) • Where strike price is the LMP at which customer will reduce • Other bidding parameter approaches might provide needed flexibility

12. Sourcing Energy Payments Suggested resolution to “missing money” cost allocation • Bifurcated allocation of cost of Demand Response compensation • Non-incentive portion (i.e., LMP – G) allocated to host LSE • Incentive portion allocated to network load

13. Energy Payments for FCM Demand Response Resources

14. Problem Statement • Under current FCM rules, Demand Resources, including active Demand Response resources, with a CSO that are dispatched do not receive any energy payments • Issue of energy payments was punted at time of FCM Settlement, to be part of the discussion of how Demand Response is to participate in the wholesale energy market in FCM era • Because the Demand Response wholesale energy market initiative has been extended, Demand Response is at risk of losing opportunity to secure energy payments for FCM resources come the start of the FCM in 2010

15. Energy Payments – Road to Comparability • Demand response dispatched in FCM should obtain energy payments • It’s the way Demand Response programs work today • Expectation by Demand Response providers that energy payments would continue • Comparability with generation • Comparability with other open energy markets (PJM, NYISO)AND • ISO IMMU is recommending energy payments in its report to FERC re DR in FCM • Subject to Peak Energy Rent (PER) adjustments

16. “Comparability of DR and Generation IMMU Recommendations * D LaPlante presentation to Markets Committee, May 22, 2009 “An Evaluation of the Performance of New England’s Forward Capacity Market” DRAFT FOR INTERNAL REVIEW 16 • Benefits of Recommendations • Makes the Capacity Market Compensation More Comparable for Demand and Generation Resources • Increases Incentives for Demand Resources to be Available • Improves Efficiency in both the Energy Market and Capacity Markets”

17. Distinction – DALRP vs. FCM Energy Payments • DALRP - Economic; voluntary price response program • FCM - Capacity adequacy/ reliability; mandatory response if dispatched DALRP does provide possibility for energy payments for FCM events only if resource bids & clears in DA DALRP Events FCM Events • Exposure for FCM resources during FCM • Events • all RTEG • RTDR that does not clear in DA Extension of DALRP does not encompass energy payments for DR resources dispatched in FCM events

18. Approaches for Energy Payments Starting 2010 Given: • Energy payments for FCM events should be an integral component of the energy market initiative for demand response; but • Energy market initiative has been extended and resolution will not be implemented by June, 2010 Then how to secure FCM energy payments starting June, 2010? Two approaches: • Extend current Transition Period energy payments for FCM capacity resources; or • Implement phased roll-out of energy market implementation, to start with energy payments for FCM events on 6/1/2010 • Assuming supply-side general construct Previous EnerNOC Position

19. How Does It Work in Current Transition Period? • Demand Response resources that are registered, and are dispatched in reliability event, receive energy payments based on their load reduction over the event window • Payment structure: greater of RT energy price, or $500/MW-hr * * For 30 minute RT resources, which are the only type of DR resource that can participate in the FCM

20. How Interim Extension Would Work • Extend the current TICAP payment structure for energy for Demand Response resources that have a CSO and that are dispatched in the FCM • Similar, but separate, to proposed extension of the DALRP • Source of payments same as TICAP • Does not prejudice the broader, on-going stakeholder initiative of price-responsive demand participating in the wholesale market • Only interim payments until broader issue resolved and implemented • Would sunset commensurate with implementation of stakeholder initiative • Extending status quo should be easily implemented

21. Alternative: Phased Roll-Out of Integrated Solution Basis: • Agreement on supply-side integration approach for DR in the wholesale energy market • Agreement of appropriateness of paying incentive to demand response when it benefits all load Approach: • Phase-in supply-side implementation in doable increments: • 1st increment by June, 2010: energy payments for FCM dispatches • 2nd increment: integrated bidding into DA and RT energy markets • Allows ISO to mange time its resources for the most difficult part of the integration • If ISO not able to implement phased roll-out, then current Transition Period status quo remains as option

22. Recommendations for Phase-In Approach • Payments • LMP during FCM dispatch events • Indicative of high likelihood of scarcity pricing • Consistent with recommended payment structure for energy market • PER deduction • Cap energy payments at the proxy determinant for PER deductions • Energy payments at lesser of LMP or PER proxy price • Ensures load does not pay above PER proxy for any DR performance during FCM events • Provides appropriate market comparability • Recognizes likely dispatching of DR resources at partial resource CSO • Convergence with DALRP • Committed capacity in DALRP paid its DA committed price • Incremental FCM performance about DA commitment paid per above

23. Summary Key principles for participation of Demand Response in ISO-NE energy markets • Comparable accessibility • Comparable obligations • Comparable revenues Comparable Opportunity