DR Rate and Program Design RON-02 Phase 2 Proposal

1. January 31, 2006 DR Rate and Program DesignRON-02 Phase 2 Proposal

2. Presentation Overview Objectives and Process Approach: Phase 1 Research Findings • Develop Rate Design Alternatives • Screen 1: Technical Potential • Screen 2: Resource Value • Screen 3: Bill Impact and Free-riders • Screen 4: Customer Acceptance Phase 2 Proposal • Work Plan & Timeline • Research Team • Research Agenda

3. Objectives and Process

4. Objective of Phase 2 Research Provide DR designs ready to pilot in CA • Research Develop efficient, implementable rate and program designs for demand response • Consultation Provide a structured process to evaluate rate designs – ‘design charrette’

5. Starting Point and Objective Function Starting Point – Market Design DR Rate and Program Evaluation Process Emerging CA Mkt Structure: LTRA, Day-Ahead, Balancing Alternative Mkt Structure: Day-Ahead and/or RT Spot Price Potential DR Rate and Program Designs Revise Design Starting Point –Objective Function Screening Process “Design Charrette” • Maximize Net Benefits • Maximize Participation • Design for Emergency • Design for Operating Reserves • Design for Planning Reserves • Design for Bill Control • Design for Risk Mitigation NO YES Efficient, Implementable Rate Designs

6. Screening Process Research team is selected to provide experts at each step E3, LBNL: Stakeholder process HMG: Building science and loads E3, LBNL, NA: Avoided costs and market design E3, NA: Rate design FSC: Customer research Candidate Rate Designs Screen 1: Technical Potential Is this a significant opportunity? Screen 2:Resource Value Is it worth much? Value to system and participants? Screen 3:Bill Impact Given the value, what can customers save? Screen 4: Customer Acceptance Given the savings and design, will customers participate?

7. Screening Process • Address major stakeholder perspectives • Utilities (Procurement, Resource planning, Marketing) • CPUC, CEC (Regulatory and Policy) • Customers (Acceptance, Complexity, Bill Impact) • ISO, WECC (Operations, and Reliability) • Characteristics of the Screening Process • Transparency • Consistency • Ease of Use • Use of publicly available data and models • Consultation with stakeholders

8. E3 Research Team

9. Approach: Phase 1 Results

10. Selecting & Evaluating Candidate Designs • Efficient Capacity Rationing • Ideal Rate Designs • Rate Design Criteria • Illustrative List of Candidate Designs • Phase 1 Results • Evaluation Screens

11. Efficient Capacity Rationing Both price rationing and quantity rationing can be efficient • Price rationing • Types: dynamic (RTP, CPP), static (TOU) • References: Boiteux, 1949; Steiner, 1957; Joskow, 1976; Crew and Kleindorfer, 1976; Hogan, 1992 • mandatory RTP is the most theoretically efficient: P = SRMC in real time, but has practical limitations • Quantity rationing • Types: priority service (direct load control, interruptible, curtailable), demand subscription • References: Chao and Wilson, 1987; Spulber, 1992; Woo, 1990 • can achieve 90% of efficiency of mandatory RTP.

12. Ideal Rate Design Market Structure: ‘All-in’ Spot Market With this market structure, an ideal rate design would have the following components: • monthly customer charge - to recover costs that vary with the number of customers on the system, such as metering, billing, and customer service • distribution facilities charge per kW of design/contract demand – to recover the costs of local distribution facilities • location-specific, time varying firm energy charge – to recover the time and location differentiated marginal costs of generation, transmission, and high-voltage distribution

13. Ideal Rate Design Market Structure: Forward Capacity Market Under this market structure, an ideal rate design would have the following components: • monthly customer charge - to recover costs that vary with the number of customers on the system, such as metering, billing, and customer service • distribution facilities charge per kW of design/contract demand – to recover the costs of local distribution facilities • generation capacity charge per kW of maximum demand - to recover the forward costs of generation capacity • location-specific, time varying energy charge – to recover the residual time and location differentiated marginal costs of generation, transmission, and high-voltage distribution

14. Market Structure and Rate Design What constitutes an “ideal rate design” depends on the market structure ‘Consumer Reports’ style evaluation

15. Rate Design Criteria Economic efficiency is one of several rate design criteria (Bonbright, 1961) • Efficient consumption • Equitable apportionment of cost of service • Avoidance of undue discrimination • Meets utility revenue requirements • Year to year revenue stability for utility • Rate stability for customer • Simple to implement, easy to understand • Wide public acceptance

16. Illustrative Candidate DR Rates

17. Good  Poor Summary of Phase 1 Results ‘Consumer Reports’ Style Evaluation Voluntary Demand Subscription Service with an enabling technology (PCT) was identified as best option for existing conditions

18. Good  Poor Summary of Phase 1 Results Residential Demand Subscription • Customers subscribe to a firm service level with a monthly $/kW-mo charge. Customers must not exceed this level during notice periods. • Energy rates are reduced, but can maintain tier structure to minimize free rider bill impacts. • Customers can reduce their bills by subscribing to a level below their maximum demand • Subscription level can be enforced with a limiter device, or with a very high price for excess usage. • If customers subscribe to their maximum demand, they need not alter their behavior. For those customers that subscribe to lower levels of demand, however, some education and effort will be required for them to reduce their loads.

19. Screen 1: Technical Potential

20. Technical potential screen Example: Top Ten Contributors to System Peak Phase 1 end-uses selected Data from CEC Demand Forecast Office

21. Technical potential screen Example: non-time critical customer loads • In addition to the large end-use segments, there are smaller load segments with less time critical customer loads that have potential for demand response. • Pool pumps • Electric water heat • ‘low-hanging’ fruit.

22. Technical potential screen Example: Residential PCTs Fraction of A/C on during peak is climate dependent Approximately one third A/C saturation in PG&E territory Savings per home are climate (forecast zone) dependent More Utilities and forecast zones below

23. Technical potential screen Example: PCT DOE-2 results 2 – 6 pm Period of curtailment Rebound from PCT release Average 1 kW savings Analysis Repeated for Each of the Dispatched Days

24. Total technical Sector Definition End-use, or Coincident response Technology Peak kW kW/sector Single Family Residential 2,541,319 1,945,859 A/C PCT Single Family Residential 6,895,801 2,744,013 A/C cycle off 580,000 580,000 Single Family Residential Pool Pump 551,791 551,791 A/C PCT Small Office 414,264 207,132 Lighting Small Office 1,433,955 716,978 Retail Lighting 193,614 96,807 Colleges Lighting 6,201,000 306,022 Existing Control Industrial Sector Technical potential screen Illustrative findings List is illustrative, not exhaustive

25. Screen 2: Resource Value

26. Resource Value Screen Offer to customers is driven by the value of the load reduction. Resource value screen evaluates whether the rate design provides significant value. Rate or Program Structure Value of Rate or Program Rate or Program Design Customer Bill Change.

27. Likely high value Likely zero value Uncertain Resource Value Screen Value Matrix Components of Value Vx = capacity value $/kW Kx = enrolled kW Dx = derating factor (equivalent reliability)

28. Resource Value Screen Uncertainty in customer-controlled DR • WECC has stringent standards for counting load resources towards reserve requirements • WECC Nonspinning reserve currently requires that load be interruptible within 10 minutes. WECC Minimum Operating Reliability Standards Standards BAL-STD-001-0-WECC — Real Power Balancing Control Performance • WRS2. Acceptable types of nonspinning reserve. The nonspinning reserve obligations identified in WR1, WRS1.1, and WRS1.2, if any, can be met by use of the following: • (a) load which can be interrupted within 10 minutes of notification • (b) interruptible exports • (c) on-demand rights from other entities or Control Area/Balancing • (d) spinning reserve in excess of requirements in WR1 • (e) off-line generation which qualifies as nonspinning reserve (see definition)

29. 1.00 0.99 0.99 0.80 operator issues curtailment request curtailment manager issues command RF setback command sent to PCTs customer AC is installed and load is present 0.99 0.99 0.95 0.97 PCT commands AC to turn off at setpoint PCT resets temperature setpoint PCT receives RF setback command customer PCT is installed and operable 0.75 0.90 customer chooses not to override AC cycles as intended, reduces load load reductions aggregated at zonal level override indic-ator, smart meter installed operator receives confirmation confirmation of load reduction sent to operator Example: Derating a PCT load reduction Derating factors at each stage are in red DERATING FACTORS ARE MULTIPLIED TOGETHER OVERALL DERATING FACTOR = 0.48

30. Resource Value Screen Net Social Welfare • Rates not based on market value result in some efficiency loss • Voluntary rates allow preference discovery and preference matching • *High transaction costs (e.g. technology) can lower welfare gains of mandatory rates *

31. Screen 3: Bill Impact and Free-Riders

32. Bill Impact Screen Rate or program design affects customers bill savings. Bill impact screen evaluates whether the rate will provide the customer significant savings. Rate or Program Structure Value of Rate or Program Rate or Program Design Customer Bill Change .

33. Bill Impact Screen Example of Demand Subscription • Demand subscription charge = $10.92/kW-mo. (30% of total revenues). • Other residential tier $/kWh rates reduced by 30%. • Rate is revenue neutral based on average DS of 95% of max demand. • Large users receive a relative lower % discount because the DS charge in this example is constant ($/kW-mo), while the average rate increases with size.

34. Free Rider Screen Free Rider Potential Voluntary enrollment in customer control DR programs (pricing) is the most subject to free-riders. TOU DSS

35. Screen 4: Customer Acceptance

36. Customer Acceptance Screen Phase 1 research on customer acceptance (conducted by FSC): • Assessed factors affecting enrollment and response • Calculated projected enrollment rates for illustrative designs

37. Enabling Technology Effectiveness of Targeting Size and Volatility of Price Reliability of Response Burn-out Churn Enrollment and Response Estimation Framework RATE/PROGRAM DESIGNS Enrollment Rate Enrollment Rate Responsiveness OPT-OUT OPT-IN Attractiveness of Design Bill Savings, Volatility, Frequency of Events, Tech Package Attractiveness of Design Bill Savings, Volatility, Frequency of Events, Tech Package Participation Costs Partial Outage, Transaction, Risk, and Equipment costs Participation Costs Partial Outage, Transaction, Risk, and Equipment costs Attractiveness of Available Alternatives Attractiveness of Available Alternatives Customer Factors Awareness, Attitude, Intention, Behavior Customer Factors Awareness, Attitude, Intention, Behavior DEMAND RESPONSE IMPACT

38. Reliability of Estimation Methods Responsiveness More Reliable Estimate Experience with the Real Thing Price Elasticities Pilot/Field Testing Experience in Similar Programs Enrollment Less Reliable Estimate Enrollment More Reliable Estimate Participant Surveys Revealed Preference Models Stated Preference Models Recruitment into Pilots Responsiveness Less Reliable Estimate

39. Illustrative ‘Opt-in’ Enrollment Estimates Steady State Enrollment Rates for Sample DR Rates/Programs

40. Customer Acceptance Findings • Targeting strategies, enabling technologies, and marketing have a substantial effect on both enrollment and response rates • Momentum’s enrollment estimates are based on customer preference modeling assuming 100% awareness. • FSC’s lower estimates are based on actual program experience. These estimates are uncertain but the ranges are reasonable. Phase 2 screen will build upon participation literature and experience and will be augmented by quantitative research.

41. Phase 2 Proposal

42. Phase 2 Proposal Summary Deliverables: • suite of prototype DR rate and program designs for California • set of screening tools to evaluate any DR program design Process: • consultative stakeholder process • E3 takes lead in framing questions, conducting research, writing drafts

43. Phase 2 General Approach • Engage stakeholders throughout process • Consider wide spectrum of candidate designs • Make screens flexible to allow for future evolution of market and regulation • Make rate design consistent with DR value The success of Phase 2 should be measured by implementation of DR designs with broad stakeholder support

44. Phase 2 Proposed Tasks • Develop MOU • Finalize Research Plan • Develop Screening Tools and Designs • Initial Screening of Candidate Programs • Complete Screening Tools and Program Designs • Final Screening of Prototype Programs • Final Report

45. Phase 2 Timeline