1 Demand Side Response In An Energy Only Market Presentation To EILP Task Force October 31, 2006 R.Jones, Dir., Market Design-Texas Power Region, Calpine Corporation

2 Observations Two types of capacity shortfalls:  Transient: Sufficient capacity, but unavailable Ice storms, maintenance outages, etc.  Sustained: Insufficient capacity to meet load requirements during system peak ERCOT needs “tools” to prevent capacity shortfalls Demand response is ERCOT’s preferred mechanism

3 Key Considerations Proposed solutions should:  Achieve specified reliability goals  Maintain/enhance long-term adequacy goals  Minimize price distortions  Provide appropriate price signals  Encourage appropriate behavior

4 Fundamentals Of Proposal Establish flexible demand curve  Inadequacy results from supply not meeting demand Adequacy falls only on supply Demand does not participate  Inelastic demand curve What happens when supply cannot meet demand?  Flexible (elastic) demand curves allow supply and demand to meet at an appropriate market price

5 Developing The Flexible Demand Curve Load submits emergency curtailment prices ($/MWh)  Based on load’s indirect & direct costs of power interruption Offers are stacked and become a merit order of curtailment  ONLY used in EECP events A price is selected for firm load shed  Proposed “cap” to load offers $10,000/MWh used in Steven Stoft work 1 US dept of energy found the northeast blackout’s cost to customers was $6,530/ MWh 1. Power System Economics, Designing Markets for Electricity, Chapter 2-5, IEEE Press, 2002

6 Flexible Demand Curve Development

7 Operation Of The Market ERCOT will exhaust all available capacity  Including LaaRs EECP declared  Readiness alert sent out to all EILP bidders Voluntary measures sought If additional capacity needed  ERCOT determines quantity  Strikes the EILP load stack MCPE is administratively set at emergency curtailment  Price of marginal EILP load deployed If firm load shed is required  MCPE is set at the ECP of firm load

8 Curtailment Example Assume a warmer than expected day in April  Actual load is expected to hit 55,000MWs Including deployment of LaaR RRS  Total resources including NSRS deployment is 54,000MWs  EECP has been declared  Operations expects to need 1,000MWs of demand response

9 Curtailment Example

10 Benefits Of Plan System reliability enhanced! No cost if there are no stage 3 EECP events! ERCOT is not locked in to interrupting a fixed amount of capacity procured ERCOT not required to select among a group of responsive load  Trips in merit order established by load’s willingness to be interrupted Plan does not limit or require participation  Allows additional load participation other than LaaRs

11 Benefits Of Plan (Con’t) Firm load shed price caps exposure  Limits market power abuse Loads/ERCOT not locked into contract Loads can reflect current process conditions  Increase offer during sensitive production periods  Withdraw offers during maintenance MCPE reflects true value of marginal MWh Price signal maintained for generation or load resources Reasonably simple implementation

12 Fulfills Goals Plan would:  Aid in achieving the reliability goals specified During transient events During periods of resource inadequacy  Maintain or enhance long term adequacy goals  Provide little distortion to the energy and A/S markets  Provide more accurate price signals during scarcity conditions No capacity payment for isolated resource class suppressing prices for all resources  Encourage appropriate behavior No capacity payment creating perverse incentives for isolated class of resources

13 Considerations Compliance measurement criteria for loads  Do they have to be on at all times an active bid is in the stack?  Timeframe to shed load  Timeframe to return load (if needed)  Monitoring criteria (IDR meter, SCADA?) Market power concerns? Minimum downtime requirements Frequency of bids  Weekly Provides more flexibility for loads  Monthly or yearly Easier for ERCOT to manage

14 Considerations (Con’t) Complexity of system changes  May need stepwise process (zonal/nodal) Striking a balance between ERCOT’s needs and load’s needs is key  ERCOT costs  ERCOT feasibility  Load’s risk (high risk = high prices) How to manage firm load shed settlement  UFE very costly at $10,000/MWh

15 Answer the Questions Please!!! Qualifications and requirements:  IDR & SCADA preferred, but not absolutely necessary  Depends on level of direct control desired by ERCOT Operations and desired settlement accuracy  Structure is based on balancing energy eliminating most compliance issues  There is no need to eliminate 4CP, LaaR or other loads from the potential bidders list

16 Answer the Questions Please!!! Dispatch and Recall:  Dispatch would occur at “EECP 2b” point  Load may be dispatched via communication with QSEs  Direct load control may be desired  Recall should be performed at a point when EECP is being lifted  Care should be taken so that Reg Down and BES Down providers are not harmed  Recall can be refined based on load capabilities

17 Answer the Questions Please!!! Who gets paid/How are they paid/Who pays?  This proposal moves all payments to the imbalance market and is handled through existing settlements  Those with positive energy imbalance (length) will be paid (load or generation)  Those with negative energy imbalance (short) pay (load or generation)  Process is clean and simple  Reduces gaming opportunities/perverse incentives  Costs are not assigned to entities whose positions are covered

18 Answer the Questions Please!!! Effect on clearing price:  MCPE would be administratively set at the load curtailment price  Should be allowable as load values are not BES bids and not restricted by BES offer caps  Some value of firm load shed will be required  VOLL would be the MCPE used for all imbalance settlement

19 Answer the Questions Please!!! Compliance Issues:  This proposal eliminates most if not all compliance requirements: “it hurts when I do that” principle  Loads could be monitored to make sure instructions followed (artificially low price setting)  However, non compliance should simply extend ERCOT further down the bid stack to a higher price  Big benefit over other proposals

20 Answer the Questions Please!!! Coordination with other A/S:  Care must be taken not to penalize Reg Down and BES Down providers if load over responds  “Holy Cow, Look What They’re Doing to Me Now!” factor  Otherwise there is no coordination required with other A/S

21 Answer the Questions Please!!! Self Provision:  Proposal uses imbalance, so QSEs can self provide by providing sufficient generation and load response to cover their load  Significant benefit over other proposals as it maintains cost causation assignment rather than general uplift  Uplift discourages forward contracting

22 Answer the Questions Please!!! Procurement – Contracting vs. Auction:  Contracting for A/Ss is appropriate for site-specific services securing the system for the ISO as part of an integrated planning function, ex.: RMR/Exit Strategies, Black-Start, RMR…unit specific/locational, protect N-1 secure, voltage support Black-Start…unit specific/locational, strategic transmission corridor/s, displays location specific next-start capabilities,  Contracting is not necessary for system-wide services deliverability of load shed relief is not an issue (1MW in North looks just like 1MW in South), restores/maintains load-gen balance and is a system-wide phenomenon, EILP is analogous to NSRS (portfolio based, non-specific), it is nothing like Black-Start or RMR.

23 Answer the Questions Please!!! Procurement - Contract vs. Auction:  Other contract problems More likely to become barrier to entry for smaller load entities due to less flexibility in annual turnaround planning, More likely to lead to higher imbedded/guaranteed costs to those paying for it due to ISO’s lack of flexibility in procuring it, Direct contracting between the ISO and loads stifles price discovery and any chance of competition to exert downward pressure on pricing in the instant period.

24 Answer the Questions Please!!! Procurement solution:  Short term auction – prefer daily or weekly allows flexibility for small loads in participating-outage planning/non-availability of load for EILP, allows ISO to procure as-needed based on monthly/weekly probabilities (~NSRS), More likely to yield lowest cost to those paying for it, less likelihood of “rocking chair dollars” being paid, “competitive procurement”(auctions) always preferable to contracting where possible for A/Ss.

25 QUESTIONS?