Results and Implications of the First Forward Capacity Market Auction National Town Meeting on Demand Response June 3, 2008 Henry Yoshimura Director, Demand Resource Strategy ISO New England Inc.

2 Forward Capacity Market Procure enough capacity to meet New Englands forecasted Installed Capacity Requirement (ICR) three years in the future. Promote new investment by providing a long-term (up to 5 year) commitment to New Supply and Demand Resources. Allow new capacity projects to compete in the market and set the price: –Select a portfolio of Supply and Demand Resources through a competitive Forward Capacity Auction (FCA) process: Proposed resources must be pre-qualified to participate in the auction. Proposed resources must participate and clear in the auction to be paid for capacity. © 2008 ISO New England Inc.

3 Summary of FCA #1 The first FCA was held February 4-6, 2008 as scheduled: –39,155 MW of qualified new and existing demand- and supply- side resources competed. –Procurement met regional ICR (i.e., 32,305 MW) for Commitment Period. Capacity market clearing price –FCA starting price was $15.00/kW-mo. –FCA ending price was $4.50/kW-mo. Floor price negotiated as part of Settlement Agreement. Over 1,800 MW of new resources cleared the auction, including both Supply and Demand Resources. © 2008 ISO New England Inc.

4 New Resources Cleared in FCA-1: Markets Have Shown Demand Resources to be a Cost- Effective Resource Values represent MW and percent © 2008 ISO New England Inc.

5 Notes: RTDR = Real-Time Demand Response RTEG = Real-Time Emergency Generation. All RTEG is treated as existing resources in the auction. Use of RTEG resources to meet the Installed Capacity Requirement is limited to 600 MW – the 600 MW cap has not been applied on this table. 2,279 MW counting towards ICR = 2,554 MW less 275 MW of excess RTEG that cleared in FCA#1. FCA#1 Demand Resource Cleared MW by Measure Type and Load Zone – TOTAL (Existing and New) LOAD ZONE Distributed Generation Fossil Fuel Distributed Generation Renewable Energy Efficiency RTDR & Load ManagementRTEGTotal Cleared MW CT ME North East MA (NEMA) NH RI South East MA (SEMA) VT West/Central MA (WCMA) Grand Total © 2008 ISO New England Inc.

6 Observations FCM worked as designed. –Attracted significant investment in new resources while maintaining needed existing resources. –Allowed Demand Resources to compete with generation resources. Demand Resources are a significant and growing proportion of New Englands total capacity. –Almost twice as many New Demand Resources cleared (1,188 MW) compared to New Supply Resources (626 MW) in FCA #1. –Including Existing Demand Resources, a substantial amount of Demand Resource capacity cleared in FCA #1: 2,554 MW. –Interest in participating in FCA #2 among New Demand Resource projects continues to be substantial: 1,781 MW. FCA #2 to be held in Dec 08. © 2008 ISO New England Inc.

Challenges for the Future Demand Resources are now replacing a significant amount of Supply Resources. –Indicates that FCM was successful. More Demand Resources sooner than expected: The total of Demand Resources in FCA #1 and those showing interest in FCA#2 is over 4,200 MW –This would represent approximately 12% of ICR in the 2011/12 commitment period. –Active DR would represent approximately 9% of the ICR in the 2011/12 commitment period. The large amount of Active DR – i.e., Real-Time Demand Response – clearing in FCA #1 and expressing interest in FCA #2 raises operations and planning questions. 7 © 2008 ISO New England Inc.

Operable Capacity Analysis – Observation #1 As the quantity of Active DR increases, the dispatch frequency increases. 8 © 2008 ISO New England Inc.

Operable Capacity Analysis – Observation #2 Active DR Will Be needed during Off Peak months. –Increasing amounts of DR displace generation. –DR needed when generators are unavailable. © 2008 ISO New England Inc. 9

Operable Capacity Analysis – Observation #3 There Are Few Hours When 100% Of Active DR Is Needed. 10 © 2008 ISO New England Inc.

Operable Capacity Analysis – Observation #4 In Extreme Load Conditions, More Active DR Will Be Called Upon For More Hours. 11 Comparison of 50/50 and 90/10 Forecasts August 2011 (Intermediate Case) 50/50 Forecast90/10 Forecast # of Hours Load & Operating Reserve exceeds Available Generation 3986 Corresponding # of Days in August 89 Maximum # of Consecutive Days in August 55 Average MW that Load and Operating Reserve exceeds Available Generation 8352,843 Maximum MW that Load and Operating Reserve exceeds Available Generation 2,3844,504 © 2008 ISO New England Inc.

Next Steps As Active DR grows, the frequency of dispatch increases. –If the performance of Active DR diminishes in response to a higher frequency of dispatch, system reliability will diminish. –Active DR resources have not been tested under the FCM performance requirements and the frequency of dispatch expected in 2011/12. A strategy is needed to balance the goal of allowing Active DR to freely participate in the FCM with the risk that higher participation of Active DR in the FCM may impact system reliability. Continue stakeholder process to these issues. 12 © 2008 ISO New England Inc.