Demand Side Response In An Energy Only Market

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 work1 • 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?