Energy regulation training

1. Energy regulation training The Power of Dynamic Price Signals – a review of peak pricing approaches in North America and the UK, and their possible application in selected systems the Middle East ندوه التعريفات الكهربائية – المملكة العربية السعوديه -- الرياض في 15 -16 من فبراير2008 Amr Ibrahim, PhD

2. Purpose of the Presentation • The presentation aims at exploring three main themes, namely: • How electricity markets in the US and the UK create dynamic price signals through different tariffs and Demand Response programs to the benefit all users of the system • Can the systems in the regions benefit from the application of dynamic pricing • If so, how it may look like

3. Structure of the Presentation • What is Demand Response and Dynamic Pricing? • Potential Benefits from Demand Response and Dynamic Pricing • Schematic benefits from Demand Response in Saudi Arabia and Egypt • Dynamic Pricing in USA, UK, New Zealand and Australia

4. What is Demand Response and Dynamic Pricing? Demand Response reflects: ”Changes in electric usage by electricity users from theirnormal consumption patternsin response tochanges in the priceof electricity use at times of high wholesale market prices [procurement cost], or when system reliability is jeopardized” Demand Response may be perceived differently than Demand Side Management (DSM) that aims at reducing consumption inall hours.

5. Demand response is not new to tariff design • Seasonal and time of use rates • Send a price signal to reflect variation in cost of procurement between seasons and diurnal time of use. • Tariff Vert in France (early 1950’), UK and USA. • Curtailable Load and Critical Peak Pricing • Direct Load Control (common for all customer classes) • Critical Peak Pricing (extra high price in some peak hours associated with very expensive cost or reliability concerns--relatively new approach).

6. Demand response is not new to tariff design • Real time pricing Customers—usually with very large loads—see an hourly price for energy that follows the market clearing price, or the hourly procurement cost Important Procurement cost in the unbundled energy markets may also see hourly variation in transmission costs because of marginal system losses and congestion costs (usually associated with locational marginal pricing)

7. Structure of the Presentation • What is Demand Response and Dynamic Pricing? • Potential Benefits from Demand Response and Dynamic Pricing • Schematic benefits from Demand Response in Saudi Arabia and Egypt • Dynamic Pricing in USA, UK, New Zealand and Australia

8. Benefits from Dynamic Pricing and Demand Response Programs • Cost Savings • Short term • Cost savings to participants • Cost savings to non-participants • Long term • System Reliability Savings • External Benefits Savings

9. Cost savings are both for participants and non participants • Slight reduction in load during system peak is bound to reduce procurement costs during those hours. Dispatching of expensive peakers is avoided because of DR. • Short term benefits • Participants (short term) • The amount Q2Q1xP1 which are the benefits that participants expect to see for their changed behaviour • Non Participants (short term) • The amount Q2xP2P1 is the reduction in cost to all other participants as a result of not contracting for this portion, or “strip” dedicated to serve the peak use. • Long Term Benefits • Deferring capacity additions as additional investments are no longer as urgently needed

10. Reliability and Externalities benefits from DR could be substantial • Reliability Benefits • Improved reliability during high load hours because planning reserves more adequate and operational reserves more secure. • Better ability to mitigate brown system blackouts • Potentially provide more economic options for ancillary services • External Benefits • mitigating the potential exercise of market power by peakers • reduction in energy price volatility and improve the investment environment in the electricity business, • improvement in resource utilization resulting from a much better system load factor, and • environmental improvement as dispatch of often more polluting peakers is less likely

11. Cost Associated with Demand Response and Dynamic Pricing programs Costs associated with Demand Response are often grouped into two types. • Participant costs: Investment related to the technologies necessary to respond to the price signal. Participants costs may be event specific like costs of foregone business, etc. • System costs: These are related to additional metering & communication systems to permit usage, monitoring and billing. • Recent costs for residential interval meters are now between $100 and $150 dollars, while it is $2000 for large customers served at high voltage levels. • Other benefits from more accurate and technologically capable metering (e.g., AMR, more accurate billing) should also be factored and netted out from costs.

12. Structure of the Presentation • What is Demand Response and Dynamic Pricing? • Potential Benefits from Demand Response and Dynamic Pricing • Schematic benefits from Demand Response in Saudi Arabia and Egypt • Dynamic Pricing in USA, UK, New Zealand and Australia

13. Schematic benefits from DR programs. Why Saudi Arabia and Egypt as examples? • Broad estimates of the potential benefits of Price Response programs in Saudi Arabia and Egypt for 2005 and 2006 are possible to account for: • Cost savings • Short Term – for participants and non participants • Long term • Reliability Savings (some components) • Externalities ---not possible to estimate schematically • Saudi Arabia and Egypt are chosen because: • relatively large electricity systems • can benefit from economies of scale when DR initiatives are introduced, All systems in the region are bound to secure similar benefits proportionally

14. Assumptions for short term cost savings for participants and non participants • DR initiatives will be called upon for only the peak 120 hours a year • DR initiatives will result in peak reduction during these hours equal to 5% of the days’ peak (sensitivity for 7%) • DR programs will defer the dispatch of the relatively inefficient peak units that will result in reduction in procurement cost. • Estimating the energy price during system peak requires an assumed heat rate for peakers, an assumed price for natural gas, and an assumed cost for O, M &A. It is also important to assume the heat rate of the decremental units as load is reduced by 5% and 7%. • The heat rate for the peaker units is a conservative 10,800 MMBTU per MWh, and the decremental units heat rate for the marginal units at 5% and 7% reduction are 10,400 and 10,200. The assumed natural price is a conservative $4.5 per MMBTU + and a reasonable $30 per MWh for O, M &A.

15. Assumptions for long term cost savings • Consistently effective DR programs over time shall assist in deferring capacity additions in both generation and transmission assets. • Focusing only on generation expansion, both the Saudi and the Egyptian electricity systems are growing at aggressive rates, but for conservative reasons are assumed to be 5% per annum. • Assuming DR programs will differ only 10% of the required annual addition (i.e., 150 MW in Saudi Arabia and 80 MW in Egypt). • Deferred capital cost will be calculated at 20% carrying charge on the acquisition cost of $800,000 per MW (turn key basis). That is $0.8 million x 20% x 150 MW (or 80 MW).

16. Assumptions for reliability savings • Estimates of Reliability Benefits from successful DR programs are possible in one area, namely, their potential impact on reducing the percentages of planning reserves that an electric system must maintain • Assuming that the two systems are maintaining planning reserves closer to the lower end of the margins kept elsewhere (e.g. 12%), Saudi Arabia and Egypt would be maintaining in 2006 reserves close 3700 and 2070 MW, respectively • If DR would cause a reduction in this planning reserve by even 1%, (i.e., 1% of the 12%) the deferred capital cost carrying charges would add additional benefits of $5 million in the case of Saudi Arabia and $3 million for Egypt in 2006

17. Schematic savings in KSA and Egypt • Total Savings can reach close to SR 200 million, and LE 150 million in 2006 • Benefits from Externalities can be substantial and should be estimated

18. Costs to DR programs in KSA & Egypt are not expected to be prohibitive • Studies to estimate exact cost for introducing DR programs in KSA & Egypt are certainly needed—but • Most DR benefits shall accrue from large customers who are few in number and savvy about their use. Accordingly, metering and training costs are not expected to be high. • Associated metering & billing for the DR programs offer an excellent opportunity to seek the participation of investor owned entities to offer this service on competitive bases

19. Possible Steps to develop DR potentials • Strengthening DR analysis and valuation • Mandating the implementation of time of use, and other dynamic pricing options (e.g., critical peak pricing) to larger customers. • Mandating customer education programs • Including DR into resource planning

20. Structure of the Presentation • What is Demand Response and Dynamic Pricing? • Potential Benefits from Demand Response and Dynamic Pricing • Schematic benefits from Demand Response in Saudi Arabia and Egypt • Dynamic Pricing in USA, UK, New Zealand and Australia

21. Types of DR Programs DR programs send a price signal that be bundled or unbundled with tariffs. Tariff (Bundled) Options: These rate options are based on a price signal bundled with the rate. • Time of Use Rates, • Critical Peak Pricing Incentive-based (Unbundled) Options:These are programs that are independent and unbundled from the applicable rates that could be offered by either the incumbent utility or the system operators. Examples include: • Direct load control, and Interruptible/Curtailable Services • Demand bidding/Buyback programs • Emergency Demand Response programs

22. Examples of DR Programs in the US -- Unbundled • Unbundled programs are offered by system Operators like ISO-NE, PJM NYISO, and ERCOT. CAISO shall implement similar programs soon. • Unbundled programs are also offered by incumbent utilities. Emergency Demand Programs

23. Examples of DR Programs in the US – Bundled and Unbundled Some utilities provide unbundled programs that are offered in addition to time of use rate, then • Demand Bidding Program, and • Base Interruptible Program Large number of utilities in the Pacific Northwest offer critical peak pricing. Same designs are offered in other states in the east of which NY is the most prominent.

24. Demand Response in the UK • DR in the UK is offered to the National Grid Company through the balancing mechanism. For example, demand reduction of 3 MW or more competes with generators for contracts through a competitive tender to provide the BM with short term operating reserves • Demand Response can also provide: • Active power from reductions of 25 MW through bilateral contracts. • Fast Reserves through demand reduction of 50 MW or greater within 2 minutes of receiving instructions.

25. Demand Response in Australia and New Zealand • In both these countries generation, transmission, distribution and retail are fully unbundled. While generation investment is market driven, transmission development is based on demand forecasts and assumptions regarding new generation development. • In both countries, investment in the transmission grid is regulated, and is governed by a cost benefit assessment. • For DR to be considered a resource to meet demand as a-not-transmission-solution it must : • A minimum amount of load to be reduced when called on • A certain level of reliability must be met, and • Demonstrate that mechanisms have been put in place to measure the response.

26. Questions • Amr IbrahimEdinburgh - London - Abu Dhabi - Melbourne 41 Manor PlaceEdinburghScotlandEH3 7EBTel : +44 (0) 131 240 0840Fax : +44 (0) 131 220 6440EMail : Amr.Ibrahim@ipaenergy.co.ukWeb : http://www.ipaenergy.co.uk