1. Demand Response Workshop September 15, 2006

2. 2 Definitions are important Demand response –“Changes in electricity usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized.” US Department of Energy, Benefits of Demand Response in Electricity Markets and Recommendations for Achieving Them: A Report to the United States Congress Pursuant to Section 1252 of the Energy Policy Act of 2005, February 2006

3. 3 Important Distinctions “…lower electricity use at times of high wholesale market prices” –Focus on enabling short-term response to high prices, but will be an optional response (sometimes it may be worth it to pay more) –Can be check on/response to market power abuse “…lower electricity use… when system reliability is threatened” –Focus on use of demand reductions to provide reserves for the system – reduction must occur when needed by grid operator –Can provide short-term solution to capacity shortages while longer-term investments are being made Energy efficiency not directly included in these definitions –Long-term, more permanent demand reduction based on persistent or expected long-term higher prices and investment costs. –Does not, by itself, provide real-time response to price spikes or reliability needs

4. 4 The More Things Change….. “Robust load participation is a key element in well functioning, competitive electricity markets.” - Finding of Fact 46 – Docket 23320 “ERCOT should develop additional measures and refine existing measures to enable load resources a greater opportunity to participate in the ERCOT markets.” - Finding of Fact 47 – Docket 23320 “Load participation is a key element in well-functioning, competitive electricity markets” – Finding of Fact 40 – Docket 31540 “It is appropriate to defer further consideration of load- participation issues to a subsequent project. The investigation of load participation in wholesale and retail markets is necessary to ensure that the full benefits of these programs are included in the new wholesale market.” - Finding of Fact 42- Docket 31540

5. 5 Current load response options “Passive” load response (short-term response to high prices) –Price transparency issues Effect of price mitigation Occurrence and duration of balancing energy market price spikes is often uncertain Settlement issues for some customers –Management of demand during 4CP months Ancillary service markets (system reliability services) –Responsive reserves market – limited to 1,150 MW –Non-spinning reserves market – not much participation –Implementation of PRR 307 could allow “controllable loads” to provide other services

6. 6 So what’s the goal? Competitive wholesale and retail markets should, absent barriers, result in demand response when and where in makes sense –Economic decision valued by market –Cheaper provision of reserves/ancillary services –Check against market power What is needed to facilitate demand response? –Ensure adequate price signals –Eliminate barriers in market rules that prevent load from providing ancillary services when loads can do so reliably –Ensure regulated services (meter and settlement infrastructure) needed for effective demand response are provided in a cost- effective manner

7. 7 Another way to think about it… Market demand response –Market should value –Customers have options to curtail or not based on price, production processes, business demands, etc. –Market price is cause of curtailment. Curtailment may have reliability benefits. But that is a consequence of the decision to curtail, not the cause. –Available to all customers Reliability demand response –Provision required by ERCOT –Customers providing these products must curtail when called upon. –Reliability is cause of curtailment, although service is provided through market based mechanism. May also impact real-time price, but that is a consequence of the curtailment. –Can only be provided by customers that can provide the service.

8. 8 Things to think about – Market Load Response Price transparency –Balancing energy price Effect of after the fact adjustments Uncertainty as to duration of price spikes Effects of reserves deployment on price –Utilization of additional signals given by a day-ahead market Infrastructure needs –Access to interval metering for those who want them Possible need for real-time info for some customers –Proper settlement critical

9. 9 Things to think about – Reliability Services Not all load (or generation) was created equal –In the case of reliability products, it is critical that the resource actually be available and respond if it is needed. –Verification of response needed. Frequency/probability of deployment matters –Amount of demand response made available may depend on expected frequency and duration of curtailment –Can solve contractually A load providing ancillary services cannot curtail in response to prices (opportunity cost incurred).

10. 10 Immediate Issues Summer 2007 peak –Expectation of reserve margins at or near minimum levels (2008 projected to be even lower) –Return of additional mothballed generation? Additional mothballing? Other additional resources? –Demand response/additional resources LAAR availability – what happens if routine or repetitive deployment? Additional procurement of existing A/S (i.e. additional NSRS/RRS/RPRS)? If so, when does market need to know that’s the plan in order to evaluate possible return to service of gen/additional load response? Should existing or additional LAARs or other load response be procured by ERCOT in a different manner than daily? Possibility of more market demand response –Effect of termination of MCSM and higher offer caps