Ruminations on demand response – a view from Chicago Bob Lieberman Illinois Commerce Commission

1. Ruminations on demand response – a view from ChicagoBob LiebermanIllinois Commerce Commission Presented to Restructuring Roundtable October 28th, 2005 Boston, Mass.

2. My Lawyer told me to say… • My thoughts today are mine alone and do not necessarily reflect the positions of the Illinois Commerce Commission on any of the issues discussed today

3. A little background • I have been a regulator for nearly 8 months • Before that, for nearly 10 years, I was a practitioner. I created and managed demand and price response and energy efficiency programs for small commercial and residential customers in northeastern Illinois • And before that, I was partially – only partially – responsible for Illinois’ late and (un)lamented integrated resource planning process

4. A quick introduction to Electric Industry Restructuring in Illinois “Between the idea and the reality…falls the shadow” TS Eliot

5. Illinois Restructuring: Where we are… • 1997 Illinois electricity market restructuring law passed and signed • Rates frozen through 2004 • Rates reduced for residentials • 1999 -2002 Various market segments opened for choice of electric service suppliers • 2003 rate freeze extended through 2006 • “Markets not yet fully developed” • End of the transition is now looming • Rate freeze ends • All hell is breaking loose

6. Post 2006 conjecture • 3% of customers and 25% of load likely to be procured competitively • 97% of customers and 75% of load will remain bundled • How their electricity will be procured is as yet unclear

7. Tales from the demand response front • Late 1990’s • Restructuring had just begun • Law had been signed in fall of 1997 • Illinois utilities experiencing rapid growth in peak demand and frequent service interruptions • Hot summers • Wholesale market was immature • Center for Neighborhood Technology – a Chicago-based not-for-profit – and ComEd agreed to sponsor the Community Energy Cooperative (CEC) • Pilot project • Opportunities for small consumers in a restructured market • Lowered costs for the wires company

8. Cooperative’s first steps • Identified overloaded substations and feeders • Organized DR programs for municipal and smaller commercial and industrial customers on those feeders • Available on a feeder-by-feeder basis • Paid as capacity • Within six months, had 15 mw of load under contract on 15 or 20 feeders throughout the Chicago area • Organized window air-conditioner exchange program for residential customers in four Chicago-area communities, determined on a feeder-by-feeder basis • In the summer of 2000, exchanged nearly 8,000 air conditioners, or a nearly 30% penetration rate in the four communities • A measured savings of 0.7 kW per a/c. • Paid on a per kW reduced basis

9. Rejected… • CEC ran these programs for two years 2000 – 2001 • Everyone loved them • Participants • Politicians • Evaluators • But the external conditions had changed • 2001 was a cool summer • Peak demand growth had fallen • Glut of new peaker plants online • Enron went bankrupt • Utility desire for demand response and load reduction cooled

10. A dilemma • Invested significant time and money to build the capacity to deliver demand reductions • Delivered measured reductions – value to participants, value to the utility • Our only customer was no longer interested in our product

11. A new hope • Residential real-time pricing • Article by Hirst and Kirby early 2001 • ("Retail-Load Participation in Competitive Wholesale Electricity Markets,“) • Divided the electricity price into two components • Actual cost on an hour by hour basis • Risk premium • If the difference between the average of the real time prices and the bundled price was high, than there was a large risk premium • If you could inexpensively manage those few hours a year when the price was likely to spike, then you could use the risk premium as compensation • The market would send the right price signals, customers could use some of the risk premium to manage their load and pocket the rest • Thus was born the Energy Smart Pricing Program • http://www.energycooperative.org/energy-smart-pricing-plan.php

12. The Conventional Wisdom • Real-Time Pricing for Residential Customers Won’t Work • The market is volatile and full of risk • There is no value for residential consumers • The meters are too expensive • Residential consumers won’t respond to price signals, are unable to manage risk and volatility and need to be protected

13. The Energy-Smart Pricing PlanSM • First program of its kind in the nation • Day ahead hourly prices • New meters to record hourly energy use • Notification of high price days • Energy education • Web-based detailed energy use display and analysis • 3rd Party evaluation

14. Who is participating? • 2004 Numbers • 1500 households • 35% Chicago, 37% Kane County, 28% other suburban • 8% Spanish-speaking households • 82% single family • 18% multifamily • Air conditioning • 34% have window air conditioners • 51% central air conditioning • 3% both window and central air conditioning • 12% no air conditioning

15. Well, what happened? • August 26, 2003, with the market price above $0.10 per kWh, people in the program changed the way they used energy…. • One woman cooled only the kitchen and cooked outdoors • Another turned off her air conditioner and went to the movies • One man pre-cooled his house and turned off the air conditioner in the late afternoon

16. The Conventional Wisdom Was Wrong • Evaluators found: • Participants respond to peak period prices • Overall demand reduced by up to 20% with small changes in behavior • Participants saved money • Approximately 15% per year for first two years of program • Participants of all incomes benefited • Low-income households respond more to high prices • The meters aren’t expensive ($150-200 installed) • Increased investments in energy efficiency • Changing understanding and attitudes about energy usage

17. One Member’s Response: Changing Thermostat Set Point In Response To Price Notification

18. Central Air Conditioner Users Respond To Price Alerts

19. Well, now what? • I am becoming increasingly convinced that organizing price and demand response markets is critical for • Customers to get the lowest possible costs from either a vertically integrated or a restructured system, • Lowering the costs for the wires companies and • Producing a more efficient wholesale market • But to get there, at least four problems need to be overcome • Short term thinking • Whose job is it? • Overcoming the “DR is about system protection” mindset • Explaining to customers what we are talking about and what’s in it for them

20. Short term thinking • Investment is required • Time frame needs to be longer than next twenty minutes • Value equates to risk reduction over the longer term

21. Whose job is it? • In Illinois, it really isn’t clear whose job it is • Assume, for the moment, that the public policy goal is to make these markets work • (at present, this is a somewhat debatable premise) • And assume that part of that equation is making the demand side of the market demand and price responsive • The wires companies say its not their job • The generators say its not their job • Maybe the ISO says its their job, but not really soon and they have a 157 page dictionary of acronyms they have created so its kind of hard to figure out what they are saying anyway

22. DR is only about system protection • As long as DR is seen as primarily system protection, it will be constrained, managed, controlled and narrowly targeted • We need to frame DR more broadly • Enabling markets • Providing clean and reliable capacity • Providing a new kind of customer choice and benefits and • Constraining possible wholesale market power

23. Talking to people • 99.9 out of 100 people in Illinois have no idea what we are talking about • They have no idea what’s in it for them: • A cost savings perspective • An environmental perspective • A reliability perspective • At the beginning of the restructuring in Illinois, very half-hearted attempts were made to educate people and small business but it was ineffectual, consisted largely of brochures and was quickly dropped. • Until we have widely disseminated pilot projects, innovative rate and education strategies, and let people know that if they change their behavior, they will be fairly and transparently compensated, we probably won’t get very far.

24. The Illinois Sustainable Energy Plan • A ten year plan to reduce the rate of growth in electricity demand • Integrating demand response, price response and energy efficiency • Supported by business groups, consumer groups, environmental groups and utilities • Strong positive NPV • Designed to combine innovation, learning with actual measurable results • Watch for it coming to a metroplex near you in 2006

25. Questions, comments or rants Bob Lieberman Illinois Commerce Commission 160 N. LaSalle Chicago, Illinois rlieberm@icc.state.il.us