1. PJM©2008 1 www.pjm.com Demand Response in PJM 2009 NASUCA Mid-Year Meeting June 30, 2009 Boston, MA Panel: Price Responsive Demand – A Long-Term Bargain for Consumers? Paul M. Sotkiewicz, Ph.D. Senior Economist, Markets PJM Interconnection, LLC

2. PJM©2008 2 PJM Market Participants in Demand Response www.pjm.com Electric Distribution Company (EDC): PJM Member that owns, or leases, electric distribution facilities that are used to provide electric distribution service to electric load within the PJM Control Areas. Who Can be a CSP?: Any LSE Any EDC Any third party (PJM member) specializing in Demand Response Curtailment Service Provider (CSP): PJM Members that will act on behalf of end-use customers who wish to participate in PJM Load Response opportunities. Load Serving Entity (LSE): PJM Member, including Load aggregator or power marketer, serving end-users within the PJM Control Area, to sell electric energy to end-users with the PJM Control Areas. End Use Customer: Cannot directly participate Unless it is a PJM Member (e.g. as an LSE or CSP)

3. PJM©2008 3 What is Demand Response? From an operational perspective: It is the ability of consumers to change consumption in response to energy market prices. It is the ability of consumers to reduce consumption in response to a notice from a system operator to meet system needs such as a contingency or emergency situation to maintain reliability. www.pjm.com

4. PJM©2008 4 What is Demand Response? From a customer perspective: It is the ability of consumers to control energy expenditures through reductions in, or changing patterns of, consumption. –Reduction of consumption during high price events and possibly shifting that consumption to lower priced periods –Committing to reductions in usage during peak periods and/or “emergency of contingency events” for reliability needs www.pjm.com

5. PJM©2008 5 What is Demand Response? From a load serving entity (LSE) or electricity distribution company (EDC) perspective: It is the ability of consumers to help the LSE/EDC to avoid high cost purchases/production or avoid new capacity purchases/builds –May help reduce overall costs for remaining LSE/EDC customers www.pjm.com

6. PJM©2008 6 www.pjm.com Energy Market Capacity MarketAncillary Services Economic Load Response Program (ELRP) Reductions are voluntary Reductions measured against a consumption baseline (CBL) Emergency only…little used Emergency – Capacity Only Emergency – Full (also gets an energy payment when responding at PJM’s direction) DR (3 year ahead commitment) ILR (3 month ahead commitment…phased out for 2012-2013 delivery year) Mandatory reduction when PJM request Emergency Load Management resources during a peak event Testing now required Synchronous Reserves Regulation DA Scheduling Reserves Load bids into these markets and responds to an event exactly like a generator Mandatory response to a Synchronous Reserve event if cleared in the Synchronous Reserve market Demand Response Opportunities in PJM

7. PJM©2008 7 Responding to Wholesale Prices in the Energy Market www.pjm.com Retail Rate An End-Use-Customer reduce consumption when wholesale prices are high

8. PJM©2008 8 Revenue Opportunities in Economic Load Response 2007 Total revenue a 1 MW Demand Resource could have generated. Payment is LMP less the generation and transmission portion of the retail rate (no incentives included in 2007 figures). Strike price is the price at which reductions occur based on PJM load-weighted average LMP. Does not account for any increased consumption in off-peak periods at the retail price. www.pjm.com Revenue Opportunities in 2007 Trigger or Strike Price LMP ($/MWh) Retail Rate ($/MWh) LMP≥75LMP≥100LMP≥125 50115,75764,09319,928 7560,40744,44316,653 100n/a24,79313,378

9. PJM©2008 9 Revenue Opportunities in Economic Load Response 2008 Total revenue a 1 MW Demand Resource could have generated. Payment is LMP less the generation and transmission portion of the retail rate (no incentives included in 2007 figures). Strike price is the price at which reductions occur based on PJM load-weighted average LMP. Does not account for any increased consumption in off-peak periods at the retail rate. www.pjm.com Revenue Opportunities in 2008 Trigger or Strike Price LMP ($/MWh) Retail Rate ($/MWh) LMP≥75LMP≥100LMP≥125 50166,412122,77048,657 75100,16286,82039,507 100n/a50,87030,357

10. PJM©2008 10 Revenue Opportunities as Capacity Capacity Clearing Prices ($/MW-day) RTOEMAACSWMAAC 2007/200840.80197.67188.54 2008/2009111.92148.80210.11 2009/2010102.04191.32237.33 2010/2011174.29 2011/2012110.00 2012/201316.46139.73133.37 www.pjm.com Prices are those paid to DR committing 3 years forward.

11. PJM©2008 11 Revenue Opportunities as Capacity www.pjm.com Resulting Annual Revenue ($/MW-year) RTOEMAACSWMAAC 2007/200814,89272,15068,817 2008/200940,85154,31276,690 2009/201037,24569,83286,625 2010/201163,616 2011/201240,260 2012/20136,00851,00148,680 Revenues are for DR committed 3 years forward

12. PJM©2008 12 Revenue Opportunities in Ancillary Services For a 1 MW resource clearing Synchronous Reserve in all hours –In 2007: RFC $192, Mid-Atlantic $63,522, Dominion $232 –In 2008: RFC $1,033, Mid-Atlantic $45,971, Dominion $0 For a 1 MW resources clearing in Regulation when the price (inclusive of opportunity cost) exceeds $100/MW –In 2007: $47,306 for 305 hours –In 2008: $85,477 for 503 hours –To date there has been no Demand Resource that has bid into Regulation For Day-ahead Scheduling Reserve (operating since June 1, 2008 through August 31, 2008) $1,236 www.pjm.com

13. PJM©2008 13 Long-Term Vision for Demand Response “Price Responsive Demand (PRD)” is the long-term vision for demand response. What is PRD? –Deployment of advanced metering to end-use customers so they can see wholesale market prices in real-time; AND –End-use customers responding to wholesale market prices through the use of dynamic retail rates. PRD allows end-use customers to respond to wholesale prices in real-time. –Changing consumption patterns to reduce energy expenditures –By reducing during peak days can avoid costs of capacity www.pjm.com

14. PJM©2008 14 PJM Preparations for PRD PJM must enhance load forecast methods Day-ahead forecasts and real-time updates for the energy market. –Account for demand, by location, that will respond to prices to ensure resources are not over-committed Forecasting for capacity adequacy and transmission planning –Account for quantity and location of demand that will have responded to price and not be on the system during the forecast peak PJM to develop communication capabilities to provide price information to customers www.pjm.com

15. PJM©2008 15 PJM Working in Concert with States Provide assistance if requested to coordinate integration of dynamic retail rates PJM is willing and able to support various retail rate structures that fit each State’s needs Work with States to aid in understanding what information PJM can provide to facilitate PRD –Day-ahead and real-time LMP, for example Assist, to the extent possible, in analyzing potential impacts of PRD Shifts the locus of demand response to the retail level while accounting fully for it at the wholesale level www.pjm.com

16. PJM©2008 16 PRD vs. Current PJM Demand Response PRD – Long Term Vision –Benefits from responding to price embodied in dynamic retail rate linked to PJM prices. No measurement against a CBL or PJM settlement is necessary. –For capacity benefits, reduction in consumption at peak accounted for in reduced demand for capacity reflected in forecast. No need to offer reductions into capacity market. Current PJM DR –Benefits from reductions in response to price as measured against CBL are submitted for settlement at PJM. –For capacity benefits, offer reductions in a manner similar to a supply side resource into capacity market. Reductions not included in forecast demand for capacity. www.pjm.com