September 5. 2012 | Holyoke, MA

1. September 5. 2012 | Holyoke, MA Catherine McDonough Principal Analyst, Demand Resource Strategy Demand Response Working Group Summary of Dynamic Net Benefits Test Compliance Filing

2. Background The Billing Unit Effect The Consumer Net Benefit’s Test Threshold Price Method & Caveats FERC Directive with regard to Dynamic Net Benefits Test Key Points from ISO-NE’s Compliance Filing Outline

3. Background • Order No. 745 requires that a demand response (‘DR’) resource be compensated at the locational marginal price (‘LMP’), when the DR is able to balance supply and demand as an alternative to a generation resource, and the dispatch of that DR resource is cost-effective as determined by the consumer net benefits test (‘CNBT’) • This CBNT recognizes that, depending on the change in LMP relative to the size of the energy market, dispatching DR may increase the cost per unit ($/MWh) to the remaining wholesale load paying the bill, a potential result that the Commission refers to as ‘the billing unit effect of dispatching DR’

4. The Billing Unit Effect (Commission’s Example) Assume load w/out dispatch of DR is 100 MW and LMP =$50 & load w/ dispatch of DR Load is 95 MW and LMP =$40 Because there is less load paying the bill w/ dispatch of DR, cost to load is not $40 $/ MWh but rather Cost to Load = $40*(95+5) / 95 = $4000 / 95 = $42.11

5. Commission’s Net Benefits Test (Single Settlement Market) • Based on the Commission’s statements in Order No. 745, the CBNT that acknowledges the existence of the billing unit effect in a single settlement market can be expressed as:

6. Threshold Price Method • To implement the CNBT, the Commission directed each RTO/ISO to: • Determine a threshold price (‘TP’) at or above which the dispatch of demand response resources is cost-effective (i.e. where the supply curve becomes inelastic) • Update the TP monthly as historic data and relevant supply conditions (fuel prices, generator availability) change • ISO-NE is currently implementing TP approach

7. Threshold Price Method : Caveats • Because the TP method ignores complicating factors considered in the ISO’s dispatch system software engines, Commission believes that the TP Method “may result in instances when DR is not paid the LMP but would be cost effective and when DR is paid the LMP but is not cost effective” • The Commission “accept[ed] this result given the apparent computational difficulty of adopting a dynamic approach that incorporates the billing unit effect in the dispatch algorithms at this time” • Commission indicated that integrating a determination of the cost-effectiveness of DR resources into the dispatch may be more precise than the monthly price threshold and, therefore, provide the greatest opportunity for load to benefit from participation of DR in the organized wholesale energy markets.

8. FERC Directive • Commission required each RTO and ISO “to undertake a study either individually or collectively, examining the requirements for, costs of, and impacts of implementing a dynamic net benefit approach to the dispatch of demand resources that takes into account the billing unit effect in the economic dispatch in both the day-ahead and real-time energy markets and to file the study by Sept 21,2012

9. ISO-NE’s Compliance Filing: Summary of Key Points • Developing a detailed dynamic consumer net benefits test (CBNT) will not help to achieve the Commission’s objective better than the TP method • The CBNT discussed in the Order No. 745 does not consider impact of day-ahead energy market purchases which can markedly alter the impact of dispatching DR on Load • The CBNT cannot be incorporated into the Day Ahead Energy Market (“DAEM”) clearing process using any conceivable method • ISO-NE has identified a conceptual method to incorporate the CBNT into a simplified real time dispatch scheme but this approach ignores DAEM purchases and may not be feasible to implement in the ISO-NE’s actual RTEM

10. Key Point # 1 • Developing a detailed dynamic CBNT will not to help to better achieve the Commission’s objective than the TP method • CBNT cannot be incorporated into the Day Ahead Energy Market (“DAEM”) clearing process using any method. • Being able to implement the CNBT in the DAEM is crucial since the vast majority of resources are committed (turned on ) in the DAEM and the ISO does not generally de-commit resources • DR MWs cleared in the DAEM (w/out CBNT) establishes a de facto lower bound on the DR resources that can be dispatched in the RTEM • Even the CNBT can ultimately be integrated into the ISO’s RTEM, the results from the CNBT could be moot. • TP method can be implemented in DAEM and RTEM

11. Key Point # 2 • The CBNT discussed in the Order No. 745 ignores impact of DAEM market purchases which can markedly alter the impact of dispatching DR on Load • Consider multi-settlement variant of Commission’s example. • Assume 100 MWs clears in the DAEM at DALMP =$50, and 5MW of DR is dispatched in RTEM at RTLMP =$40 • LSEs will need to sell the unused 5MW in RTEM for a loss of ($50-$40)*5 = $50 • Dispatch of DR would increase customers net payments by $50+$200 = $250 versus the $750 reduction in customer payments in the single settlement case.  

12. Key Point # 3 • CBNT cannot be incorporated into the DAEM clearing process using any conceivable method • DAEM is a financial market in which the clearing solution is based on demand bids and supply offers alone, not on actual real time load and delivery of supply as in the RTEM • Market participants may or may not take accurately take into account the impact of DR resources (which will ultimately effect load served by LSEs) and it is not possible to observe what those offers would have been without the potential dispatch of DR • Because CBNT is based on the difference between market clearing solutions with and w/out DR offers, CBNT cannot be evaluated in the DAEM since we cannot observe what demand or supply bids would have been w/out potential dispatch of DR or the associated DA LMP

13. Key Point # 3 (continued)

14. Key Point # 3 (continued)

15. Key Point # 4 • ISO-NE has identified a conceptual method to incorporate the CBNT into a simplified real time dispatch scheme if we ignore the impact of DAEM purchases • The method uses an iterative approach to identify the combination of DR resources that minimize total production costs subject to the constraint that CBNT (single settlement version) is positive • This method would require much more development and testing to see if it can be applied to the ISO’s actual RTEM clearing process which co-optimizes reserves and consider multi-intervals. The prognosis is not promising from a technical standpoint