NYISO Demand Side Programs and Issues Rana Mukerji Senior Vice President - Market Structures

Markets for Demand Response Products Capacity Market Assure enough resources, including demand that can be responsive, to assure resource adequacy Reserves & Regulation Market Keep sufficient resources, including responsive demand, available in ten or thirty minutes to maintain reliable operation. Provide regulation services comparable to generators Energy Markets Schedule and dispatch resources, including price-sensitive demand, economically to meet customers’ demand 24 hours per day, 365 days per year.

NYISO Demand Response Reliability-based programs NYISO controls activation Provide load reductions to supplement generation when operating reserves are forecast to be short or actual Operating Reserve Deficiency Emergency Demand Response Program (EDRP) ICAP-Special Case Resources (ICAP/SCR) Economic-based programs Resource determines when to participate through bidding Load reduction acting as - and competing with - generation Day-Ahead Demand Response Program (DADRP) Demand-Side Ancillary Service Program (DSASP) From DR-Expo presentation 10-2007

NYISO Special Case Resources & Emergency Demand Response Program Have Added Almost 2000 MW Since 2000.

NYISO – DR Impacts on 8/2/06 MWs

Capacity - Special Case Resources Available to curtailable load & emergency backup generation of at least 100 kW per zone Activated for operating reserve deficiency Day-ahead advisory and a 2-hour in-day notification Mandatory – Penalties and derated for non-compliance Payment for capacity (kW) reduction plus payment for energy (kWh) reduction at the greater of real-time price or strike price (up to $500/MWh) for at least 4 hours. May set real time market price under scarcity pricing rules

Emergency Demand Response Available to curtailable load & emergency backup generation of at least 100 kW per zone Activated for operating reserve deficiency after SCR resources Providers notified of activation 2 hours ahead, if possible Voluntary – no penalties for non-performance Payment for energy (kWh) reduction at the greater of real-time price or $500/MWh for at least 4 hours. May set real-time energy price at $500/MWh

Day-Ahead Demand Response Available to interruptible load only of at least 1 MW / zone Loads bid curtailment in Day-Ahead Market with $75/MWh minimum bid Providers notified by 11 AM for following day schedule Mandatory – Penalties assessed for non-compliance (penalized for buy-through at greater of DAM or RT price) Payment for energy (kWh) reduction at the greater of DAM price or bid for actual interruption (also allowed lower credit requirements by curtailment amount) May set DAM energy marginal price

Demand-Side Ancillary Service Demand resources capable of at least 1 MW of curtailable load may provide Regulation or Operating Reserves Demand resources with local generation may only provide non-synchronous reserves Demand resources selected based on economics of day-ahead and/or real-time offers Modeled as suppliers in the ancillary services markets Real-time telemetry required Performance measured relative to load at start of dispatch Payments based on interval-level performance index

Real-Time Demand Response Pricing FERC NOPR on DR Pricing Proposal would require full Locational Marginal Price (LMP) payment for demand reduction in response to price signals Are DR and Generation comparable? “…the challenge of setting appropriate demand response compensation inherently includes a consideration of retail rates.” - Professor William Hogan, Harvard Electricity Policy Group A more economically efficient approach is “LMP-G” G = “an imputed amount reflecting some (or all) components of the retail rate” Provides the correct economic price signal to curtail Avoids the need for complicated and contentious net benefits test and cost allocation rules Full LBMP “subsidy” endangers development of dynamic retail pricing 11

Current Demand Response Issues Evaluation of alternative demand response baseline approaches Direct telemetry to demand response resources (including aggregated resources) providing ancillary services Rules for demand response participation in real-time energy markets (major issue is settlements) Implementing Demand Response Information System Dynamic Pricing vs Demand Response

NYISO Dynamic Pricing Study Purpose Estimate the wholesale market impacts of expanded dynamic pricing No recommendation for particular rate design Approach Wholesale market simulation using proxy demand elasticity for New York under multiple scenarios Conservation case High capacity price High demand elasticity 13

Demand Reductions Dynamic rates encourage shift to off-peak usage Impact of Dynamic Pricing on Hourly Loads Dynamic rates encourage shift to off-peak usage Reduced capacity requirement drives savings: potential 10-14% reduction in system peak Additional benefits with significant Plug-In Electric Vehicle (PEV) deployment Supports renewable resource integration Effects of Dynamic Pricing on Peak and Average Demand Dynamic Pricing Scenario Change in System Peak Change in New York City Peak Change in Long Island Peak Change in Average Load All Hours 150 Hours w/Max ∆ Load (MW) (%) Base Case (3,418) (10%) (1,514) (13%) (590) (11%) 84 0.4% (1,897) (6%) Conservation (3,751) (604) (288) (1.5%) (2,158) (7%) High Capacity Price (4,282) (1,671) (14%) (776) 176 1.0% (3,147) High Elasticity (4,603) (1,961) (16%) (779) 130 0.7% (3,606) (12%) 14

Cost Savings Change in Annual Market-Based Customer Costs Change in Annual Resource Costs Dynamic Pricing Scenario Change in Energy Production Cost Change in Capacity Cost Total Change in Resource Cost (Million $) (%) Base Case 10.6 0.3% (153.6) (11%) (143.0) (2.6%) Conservation (188.2) (4.5%) (163.3) (12%) (351.5) (6.3%) High Capacity Price 60.3 1.4% (569.0) (13%) (508.8) (6.0%) High Elasticity 22.5 0.5% (204.1) (15%) (181.6) (3.3%) Change in Annual Market-Based Customer Costs Change in Annual Market-Based Consumer Costs Dynamic Pricing Scenario Change in Market Based Energy Costs Change in Capacity Costs Total Change in Market Based Customer Costs All Hours (Million $) (%) Base Case (17.8) (0.2%) (153.6) (11%) (171.3) (1.6%) Conservation (415.6) (4.3%) (163.3) (12%) (578.9) (5.2%) High Capacity Price 62.1 0.6% (569.0) (13%) (507.0) (3.6%) High Elasticity (4.5) (0.0%) (204.1) (15%) (208.6) (1.9%) Total resource cost reduction of 3 to 6 percent ($143 to $509 mm) for the year Market-based customer cost reduction of 2 to 5 percent ($171 to $579 mm) per year, excluding AMI deployment costs 15

How do we achieve these savings ?

ISO/RTO Role: Wholesale Level Control & Operation of bulk system (transmission system) Administration of wholesale electric markets Transparency of wholesale price signals Communications systems and smart grid devices for: ISO/RTO control centers SCADA and economic dispatch systems Generators connected to bulk system Transmission Owners’ control centers Aggregators of retail customer demand response resources

State Role: Retail Level Deployment of smart grid devices at the distribution level Distribution stations and facilities Customer owned facilities Retail rate design Real time pricing Smart meters Providing cost recovery for TOs Allowing aggregation of retail loads

Dynamic Retail Pricing Currently only a fraction of large C&I load faces dynamic prices Currently, ~6000 MW large C&I in NY has hourly pricing as the default, but only 20% of those stayed with the default. 80% went to competitive LSEs, and about half of those chose fixed rates Large untapped potential: if most/all customers faced dynamic prices, peak hour consumption could be reduced by more than 10% NYISO/Brattle study But greater participation is largely outside of NYISO’s control. Depends primarily on actions by others: The state: approve AMI deployment (for mass market dynamic pricing) & make dynamic pricing the default rate for more classes of customers EDCs: install AMI LSEs: offer dynamic rates

Dynamic Pricing Driving Smart Grid / Renewables Aggregator Evolutionary Market Design NYISO Control Center Demand Response (Real Time) Dispatch Instructions & Prices Wind Generators 20

Paradigm Shift – Load follows generation Charging Profile: EPRI/NRDC Wind Power: 2007 average normalized load

Smart Grid Future Dynamic price signals Intelligent load responding to price Plug-in hybrid vehicles Advanced consumer components Seamless integration of intermittent resources Wind, solar, hydropower Enhanced control of power grid 22

Smart Grid Building Blocks Regulatory & Market Incentives Environment Sustainability Reliability Organizational Capabilities Business Processes Roles & Responsibilities - Skills Technology Supply Side Distributed & Demand-Side Resources Interconnections and Micro-Grids Power Delivery Network Design Protection and Control Strategies Asset Management & Utilization Information Technologies Data Communications Data Management Enterprise Level Integration and Inter-operability Intelligent Applications

Smart Grid - What needs to happen? Industry standards – Uniform standards for communication and interoperability Removal of barriers – Elimination of legal and regulatory policy barriers Informed customers – Better education and timely information for consumers

Appendix

Program Feature Summary EDRP ICAP/SCR NYISO Interface Curtailment Service Provider (CSP) Responsible Interface Party (RIP) Minimum Size 100 kW Aggregations Supported Capacity Payment none Monthly Based on ICAP auction Energy Payment Greater of real-time LBMP or $500/MWh and guaranteed 4-hour minimum Greater of real-time LBMP or Strike Price (maximum $500/MWh) and guaranteed 4-hour minimum Event Notification 2-hour in-day notice Day-ahead advisory and 2-hour in-day notice Types of reduction Curtailable Load and Local Generation Penalty for Non-compliance Penalties and derated for non-compliance Credit Requirements Activation Priority After ICAP/SCR resources Prior to EDRP resources

Program Feature Summary DADRP DSASP NYISO Interface Demand Reduction Provider (DRP) Minimum Size 1 MW Aggregations Supported Capacity Payment None Payment Greater of energy marginal price or offer price Reserve market clearing price Event Notification Notified by 11:00 a.m. of scheduled commitment for the next day (midnight to midnight) Notified by 11:00 a.m. of scheduled commitment for the next day. Real-Time telemetered energy schedule Types of reduction Curtailable Load Curtailable Load and Local Generation Penalty for Non-compliance Buy-through at greater of Day-Ahead or Real-Time price Buy-through at Real-Time Reserve Market Clearing Price Credit Requirements Reduced from Generator levels Reserve/Regulation levels Activation Priority Scheduled day-ahead if economic, no real-time schedule Scheduled Day-ahead and Real-Time if economic

ISO Demand Response Programs

Dynamic Pricing -Simulation Design Define fixed and dynamic rates Dynamic rates based on LBMPs w/ capacity cost during critical hours Dynamic rate structured so that average customer’s cost would be unchanged from fixed rate if demand remained unchanged Analysis uses representative customers in four regions: Western NY (Load Zones A-E), Eastern NY (Load Zones F-I), NYC (Load Zone J) and Long Island (Load Zone K) Estimate the effects of dynamic pricing on consumer demand Elasticity of demand derived from dynamic pricing pilot programs with small customers and full scale deployments for large customers Used Brattle’s PRISM software to apply elasticities of demand to calculate hourly differences between fixed and dynamic rates Quantify changes in demand on LBMPs using dispatch simulation Conservative assumption that suppliers’ offers to supply energy remain the same despite price-responsive demand Did not evaluate long-term savings or long-term equilibrium prices 29

__________________________________________________________ The New York Independent System Operator (NYISO) is a not-for-profit corporation that began operations in 1999. The NYISO operates New York’s bulk electricity grid, administers the state’s wholesale electricity markets, and conducts system and resource planning for the state’s bulk electricity system. __________________________________________________________ www.nyiso.com