1 December CHRISTENSENASSOCIATES Real-Time Pricing and Related Successful Products Michael T. O’Sheasy Vice President Christensen Associates

2 December CHRISTENSENASSOCIATES What is Real-Time Pricing? An electricity rate structure in which retail energy prices: vary frequently (e.g., hourly), with short notice (e.g., hour-ahead or day- ahead), to reflect expected hourly costs

3 December CHRISTENSENASSOCIATES Topics  Tenets of Real Time Pricing (RTP)  RTP at Georgia Power Company  Why does an RTP Product make sense (and cents)?  Features of a Two-Part RTP and resultant prices  Price Response and Market Effects  PPP and Portfolio Pricing  Related Demand Response Products

4 December CHRISTENSENASSOCIATES Efficient RTP Pricing 1.To ration supply on anything other than price invites disaster. Price may not be the only solution but it is efficient because it recognizes that value is specific to consumers and dynamic.

5 December CHRISTENSENASSOCIATES Efficient RTP Pricing 2.Large social benefits can be achieved by offering dynamic pricing to larger customers (i.e. your grandmother need not be on RTP).

6 December CHRISTENSENASSOCIATES Efficient RTP Pricing 3. Efficient RTP pricing will inherently reorder competing players into cooperative teammates producing win-win solutions. One participant voluntarily forgoes consumption of a kWh while another participant eagerly consumes a kWh. The whole key here is that kWh value is not only user specific but dynamic in essence.

7 December CHRISTENSENASSOCIATES Electric Utility Atmosphere Georgia Power Company Early ‘90’s  Competitive Electric Suppliers  Sufficient Base Load Capacity  Peaking Requirements in 1996  Short Run Marginal Cost < Average Embedded  Competitive Region

8 December CHRISTENSENASSOCIATES RTP Pilot Highlights  Customers say they want: –Greater control over their bill – Simpler, more straightforward rates – No demand ratchet or demand charge – True real time pricing

9 December CHRISTENSENASSOCIATES  Prices based on hourly marginal cost will: –Send correct price signals that vary with time –Communicate true production and transmission cost of electricity –Lower prices to customers in most hours –Lower GPC’s costs by increasing plant utilization –Improve customer value and satisfaction RTP Pilot Highlights

10 December CHRISTENSENASSOCIATES  Tariff will contain 2 parts: –Access Charge Bridges gap between marginal revenue and embedded revenue requirements Insures revenue neutrality; protects non- participants (and GPC) –Marginal prices vary by hour (from 2 cents to 25 cents per kWh in the first year ) RTP Pilot Highlights

11 December CHRISTENSENASSOCIATES RTP Pilot Highlights  Tariff is revenue neutral if customer makes no response  Test pilot provides experience while limiting risk –Up to 25 test customers and 25 control group customers –2 year duration –Measure customer response to varying prices

12 December CHRISTENSENASSOCIATES RTP Pilot Highlights  Summary –Responds to rate needs expressed by customers –GPC will research new innovation; EPRI will participate –Large potential to benefit customers, State, and GPC

13 December CHRISTENSENASSOCIATES RTP Pilot Objectives  Reduction in System and Customer Cost  Increase Earnings Margins  Increase System Reliability  Improve Customer Satisfaction  Feedback on Price Sensitivity

14 December CHRISTENSENASSOCIATES Real Time Pricing Pilot Program Details  Hourly dynamic prices follow the changing cost of power  Service is firm  Price is per kWh for each hour. No demand charge  Each day’s prices sent the previous day via electronic mail  Access charge for (or credit) assures revenue neutrality

15 December CHRISTENSENASSOCIATES RTP in the State of Georgia Year 2001  Largest Program in the World  > 1600 Customers –> 5,000 MW –> $1 billion revenue  IRP Resource  Increasing Marginal Cost  Day-Ahead and Hour-Ahead

16 December CHRISTENSENASSOCIATES Real-Time Pricing for GPC  Two-part tariff design  Day-ahead RTP – 250 kW minimum  Hour-ahead RTP –5 MW minimum  IRP  Other rate design

17 December CHRISTENSENASSOCIATES GPC Philosophy on RTP 1. RTP is our marginal cost of producing electricity Lambda Losses Marginal Cost of Transmission Outage/ct Cost Risk Adder

18 December CHRISTENSENASSOCIATES 2.GPC prefers low prices Customers Satisfaction Economic Development Customer Choice Constant Profit Contribution per kWh Credits below CBL GPC Philosophy on RTP

19 December CHRISTENSENASSOCIATES Product Characteristics Create Risk  Cost Risk  Load Shape Risk Expected Ave ¢/KWH Hours Target Customers Load Shape KW Off Peak On Peak Target Customers Actual Load Shape Target Customers Forecasted Load Shape On peak and off peak prices* based upon forecasted load shape On peak and off peak prices* based upon actual load shape Hours ¢/KWH TOU Prices Scenarios *Assume Actual Hourly Prices equal Forecasted Hourly Prices

20 December CHRISTENSENASSOCIATES Electricity Product Characteristics  Storage/Inventory  Cost Volatility  Historical Purchasing “rights”  Transportation Constraints

21 December CHRISTENSENASSOCIATES Customer Risk Propensity Drives Portfolio Pricing  Flat and Blocked Energy  Customer Energy Demand (CED)  Hours Use of Demand (HUD)  Time of Use (TOU)  Interruptible Service (IS)  Real Time Pricing (RTP)

22 December CHRISTENSENASSOCIATES Risk on Seller 100%, 100% 100% 0 HUD CED TOU 1 Part RTP 2 Part RTP Curtailable Energy Load Shape Risk on Seller Cost Risk on Seller Flat Bill Flat Energy

23 December CHRISTENSENASSOCIATES

24 December CHRISTENSENASSOCIATES Features of “Two-Part” RTP  Customer pays for a baseline level of usage (e.g., recent historical usage) at standard tariff prices  Differences in usage from the baseline (increases or decreases) are billed at RTP prices

25 December CHRISTENSENASSOCIATES Features of “Two-Part” RTP  Customer revenue neutral at baseline usage  Demand response benefits the RTP customer, the utility, and all other customers

26 December CHRISTENSENASSOCIATES Two-Part RTP Bill Customer’s bills change from their “Standard” Bill only when they change their hourly loads from the “Baseline” load shape RTP Bill = Standard Bill Load Hour + M.C. Hour x 

27 December CHRISTENSENASSOCIATES Implicit Contract Under Two-Part RTP Part One – Baseline load Payment for baseline load: Billed at standard tariff CONTRACT Current 1 24 Baseline Charge kWh

28 December CHRISTENSENASSOCIATES Implicit Contract Under Two-Part RTP Part Two – Incremental load Incremental energy charge: Differences between baseline and actual usage are billed at RTP prices that reflect wholesale costs CONTRACT Market Incremental Energy Charge 1 24 kWh

29 December CHRISTENSENASSOCIATES Example of Incremental Energy Charges (Relative to Baseline) MWh 124 Actua l load Customer “sells” load at high RTP prices Customer “buys” load at low RTP prices CBL Hour of Day

30 December CHRISTENSENASSOCIATES Summary of Two-Part RTP Structure  Customer buys their CBL at standard tariff prices according to mutually agreed upon contract  Customer buys or sells electricity (relative to the CBL) to suit their needs in each hour at prices based on a forecast of the wholesale market prices

31 December CHRISTENSENASSOCIATES How are RTP Prices Calculated?  Fuel plus variable O&M of incremental generator or a purchase (system lambda) –Stable in most hours –Higher on high-load days  Losses between generator and customer meter –Varies by hour –Greater in high-load and/or hot weather

32 December CHRISTENSENASSOCIATES How are RTP Prices Calculated?  Four (4) mills per kWh contribution to fixed costs –Helps recover fixed costs –Compensates for risks –Protects non-participants

33 December CHRISTENSENASSOCIATES How are RTP Prices Calculated?  Incremental transmission cost –Occurs on summer weekday afternoons –Expect 200 to 300 hours per year –About 2-10 cents per kwh –Reflects transmission capital costs –Assigns costs to appropriate hours –Assigns costs to those causing it  Reliability (or scarcity) value –“Loss of load probability” –Realized in “capacity constrained” hours –Expect about 50 hours per year

34 December CHRISTENSENASSOCIATES Economy Weather Fuel Price Unit Availability Tie Lines Wholesale Market RTP Prices Factors with Major Influence on RTP Prices

35 December CHRISTENSENASSOCIATES GPC’s RTP-DA Prices *Hour at end of interval HR*cent/kWhstatus A A A A A A A A HR*cent/kWhstatus A A A A A A A A HR*cent/kWhstatus A A A A A A A A

36 December CHRISTENSENASSOCIATES Events of Last July LoadSpotHA Price DayHour(MW)($/MW)(¢ents) 7/ , , , , , , ,

37 December CHRISTENSENASSOCIATES Do Customers Respond to RTP? Summary of Findings  Portion of customers found to respond significantly to RTP prices: 60-75%  Range of flexibility parameters: (Approximately equal to negative of own- price elasticity) A short-period price spike of 10 to 20 times the typical price can yield load reductions of 10 to 20% (e.g., 150 MW from 1,000 MW of load)

38 December CHRISTENSENASSOCIATES Typical Load Response Increased Usage in All Hours 0:004:008:0012:0016:0020:00 24: Increased Usage In Low-Priced Hours and No Response in High-Price Hours (Hiding behind the Baseline Load) 0:00 4:00 8:00 12:0016:0020:0024:

39 December CHRISTENSENASSOCIATES Demand Profile

40 December CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities SIC 20 Food Products

41 December CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Commercial Office Buildings

42 December CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Schools and Universities

43 December CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Supermarkets

44 December CHRISTENSENASSOCIATES Load at highest prices Highest prices Reference Load Load at moderate prices Reference prices Moderate prices RTP-DA Prices and Load Response, by Price Day-type

45 December CHRISTENSENASSOCIATES Price/Load Response RTP-DA

46 December CHRISTENSENASSOCIATES Load at highest prices Highest prices Reference Load Load at moderate prices Reference prices Moderate prices RTP-HA Prices and Load Response, by Price Day-type

47 December CHRISTENSENASSOCIATES Price/Load Response RTP-HA

48 December CHRISTENSENASSOCIATES Georgia Power’s RTP Load Response Model developed by Christensen Associates January, 2001 Prices ($/MWh): Hour IndexHourDay-AheadHour-Ahead 112 am - 1 am am - 2 am am - 3 am am - 4 am am - 5 am am - 6 am am - 7 am am - 8 am am - 9 am am - 10 am am - 11 am am - 12 pm pm - 1 pm 1, pm - 2 pm 1, pm - 3 pm 1, pm - 4 pm 1, pm - 5 pm 1, pm - 6 pm 1, pm - 7 pm 1, pm - 8 pm 1, pm - 9 pm 1, pm - 10 pm pm - 11 pm pm - 12 am Enter Time Period: July 16 - Aug 15 Enter Day Type: Monday Maximum Temp (deg F): 95 Minimum Temp (deg F): 78

49 December CHRISTENSENASSOCIATES Predicted Load Change

50 December CHRISTENSENASSOCIATES Implications for Demand-Side Strategies market prices sensitive to demand at high demand levels (elasticity  12) $70, Retail Retail Demand MWs $400 $200 Supply Demand response – e.g., RTP – an essential market feature

51 December CHRISTENSENASSOCIATES What Customers Like About RTP  Access to competitive market prices  Low expected energy cost  Certainty of cost of consumption changes

52 December CHRISTENSENASSOCIATES What Do Customers Think?  This chemical company’s threshold is around the 6¢/kWh range. At times they will “buy through” some higher priced hours when they have to meet a customer’s order. They love the rate.  This mining company responded heavily to pricing in July. When the price were over 20¢/kWh, they would curtail below their SE threshold by a couple of mW.

53 December CHRISTENSENASSOCIATES What Do Customers Think?  This paper manufacturer’s threshold is above 9¢/kWh for short periods. Their profit margins are low so they are fairly aggressive about saving money.  This mining company cranks up self generation when the price trend shows that the RTP price will be above 8-10 cents.

54 December CHRISTENSENASSOCIATES What Do Customers Think?  This wood product company break point is around 3.0 cents per kWh. At 3.0 cents or lower, they maximize RTP purchases. At 8.0 cents per kWh, they maximize self generation.  This aggressive commercial facilities manager cuts back florescent fixtures by 1/3, adjusts thermostat, reduces chillers in the afternoon, turns down water heating, and allows the temperature to float on chilled water loop.

55 December CHRISTENSENASSOCIATES Why Offer RTP?  Lowest priced product based upon sound risk principles  Provides a connection between wholesale and retail energy markets –Retail prices reflect wholesale costs –Demand response to high prices provides needed capacity relief and reduces wholesale prices –Mitigates market power

56 December CHRISTENSENASSOCIATES  Two-part feature provides: –Customer bill stability at baseline usage levels –Conservation incentive on decrements Why Offer RTP?

57 December CHRISTENSENASSOCIATES What Support Activities are Required for a Successful RTP Program  Reliable and accurate communication of prices  Strong customer support network; education on RTP  Limits on price risk

58 December CHRISTENSENASSOCIATES Wholesale Markets Employ Vehicles to Mitigate Risks  Few can tolerate the level of price risk; forwards and options essential to electric markets PRICES DAYS $140 $ 30 $ 18 SPOT FORWARD

Price Protection Products

60 December CHRISTENSENASSOCIATES Price Protection Products  Allows RTP customer to manage RTP price risk and volatility  Financial hedge contracts that lock in a price for a specific time period  3 Types of CfDs (Contract for Differences): –Standard CfD –Range CfD –Limited CfD

61 December CHRISTENSENASSOCIATES  Caps, Collars, Indexes  Customer still benefits by reducing load in response to high RTP prices in specific hours Price Protection Products

62 December CHRISTENSENASSOCIATES Standard CfD A CfD is a fixed price on GPC’s average offered RTP price over a specific time period. CfD is an acronym for Contract for Differences. No upfront premium is required. You select the Time Period and the amount of load to contract. CfD GPC pays Customer Cents/kWh High Avg. Low Avg. Customer pays GPC

63 December CHRISTENSENASSOCIATES CfD Example:

64 December CHRISTENSENASSOCIATES Settlement for High Average Price: = ( ) * 744,000 = $29,760. GPC pays Customer $29,760. -OR- Settlement for Low Average Price: = ( ) * 744,000 = ($14,880). Customer pays GPC $14,880. CfD Example:

65 December CHRISTENSENASSOCIATES “Range” CfD GPC bills customers Low Avg. Price Max Payout Price Very High Avg. Price GPC pays customer ¢/kWh “Range” CfD Price Payout Range “Standard” CfD Price Range CfDs are different from Standard CfDs in two ways. 1) Range CfDs have lower prices. 2) Range CfDs have a maximum payout price. The customer benefits from a lower price. And, payouts to the customer may only be made within the payout range as opposed to the Standard CfDs which have no upper boundary on the payout. Range CfD Example

66 December CHRISTENSENASSOCIATES “Limited” CfD Protection is limited to hours in which the RTP price is less than a “RTP price limit”, e.g., $1/kWh. Protection Limit

67 December CHRISTENSENASSOCIATES “Limited” CfD Prices $1/kWh (100 cents/kWh) and greater are excluded from the settlement calculation. Since the price protection does not include RTP prices of $1 or greater, the CfD price is lower. Here is a potential settlement comparison for a Standard CfD and a Limited CfD. () indicate a payment to the customer.

68 December CHRISTENSENASSOCIATES Summary of Products (Prices below are examples intended to be used only for illustration)

69 December CHRISTENSENASSOCIATES How Do They Work? Cap A Price Cap is a ceiling price on GPC’s average RTP price over a specific time period. You pay an upfront premium for the product. You select the Cap Price, the Time Period, and the amount of load to contract. Cap GPC pays Customer Cents/kWh High Avg. No Settlement Necessary for Low Average Price

70 December CHRISTENSENASSOCIATES How Do They work? Collar A Collar is a Cap and a Floor price on GPC’s average RTP price over a specific time period. No upfront premium is required. Each Cap Price has a Floor Price associated with it. You select the Cap Price, the Time Period and the amount of load to contract. Cap GPC pays Customer Cents/kWh High Avg. Low Avg. Customer pays GPC Floor No Settlement Necessary

71 December CHRISTENSENASSOCIATES Real Time Pricing Summary Benefits Coupled with PPP  Participants –Provides industrial and commercial customers the cost-based pricing they want and gives them more control over their bill and lower unit costs  Non-participants –Protects them from revenue erosion and benefits them by allowing Utility to operate more efficiently at a lower cost to all ratepayers

72 December CHRISTENSENASSOCIATES  Utility Company –Provides more efficient pricing and a more competitive position  State –Attracts new business and rewards business expansion, resulting in increased employment and tax revenues. Real Time Pricing Summary Benefits Coupled with PPP

73 December CHRISTENSENASSOCIATES Portfolio Pricing on Risk Principles: Expected Customer Cost vs. Price Risk Profile FIP RTP-DA VIP RTP w/ Adjustable CBL RTP w/ PPP RTP-HA PLL