Floyd Trefny Director of Product Development

1. Future of Demand Response In ERCOT A Presentation to the Workshop – September 15, 2006 Project Number 32853 Evaluation of Demand-Response Programs in the Competitive Electric Market Floyd TrefnyDirector of Product Development

2. Topics • Market Load Response to Support the Resource Adequacy Rule • Market Load Response and Reliability Load Response • Amount of Price Responsiveness that is needed • Where could it come from?

3. Market Load Response to Support the Resource Adequacy Rule • Necessary Conditions for a Successful Energy-Only Market Design • Adequacy must be able to be treated as a private good • Each individual customer must carry the burden for assuring Resource Adequacy • Consumers must be willing to pay the energy price for scarcity or interrupt voluntarily so that ERCOT is not forced to de-energize other customers on an involuntary basis • Consumers must be charged proportionally with the cost to provide energy • Adequate Market Load Response must exist to respond to high prices • Free ridership can be overcome if there is sufficient voluntary demand response • Market participants must believe regulators can withstand pressure not to mitigate high prices due to scarcity

4. Market Load Response Private Good, individual providers get a benefit only if interrupted Provided only by Load Responds to high Market Prices Amounts needed are determined by a balance of market dynamics of supply and demand Deployed by individual consumers or by REPs in response to scarcity pricing that is so severe no other alternative is available to maintain supply Reliability Load Response Public Good, capacity costs are charged to all retail loads Generators also may provide and price mitigation rules for generators cap prices paid by retail customers Amount is specified by ERCOT and procured from qualified suppliers by bid award Amounts needed are determined by engineering analysis of the reliability consequences of not having supply reserves Deployed as a matter of routine control of the power grid, e.g. Regulation, Non-Spin, Responsive Characteristics of Market Load Response and Reliability Load Response The same Load can not be used for Reliability Load Response at the same time as it is being used for Market Load Response

5. Required Amount of Price Responsiveness 70,000 - - 116.7% Market Reserve – 2,500 Mw or 4.2% 67,500 - - 112.5% Reserve for Forced Outages & LF Error – 3,400 Mw or 5.7% 64,100 - - 106.8% Ancillary Services – 4,100 Mw or 6.8% 60,000 - - 100.0% Reserves for Forced Outages & Load Forecast Error Only 5.7% - 3400 Mw of Capacity Operating Range 30,000 - - 50.0% 3400 Mw of Response is needed for 100 - 150 hours a year 0 - - 0 Peak ERCOT Load

6. Load Response OpportunitiesPrepared by DSWG – September 2006 AC Frequency Switch Hot Water Heaters Similar to Residential AC Frequency Switch Target loads < 1 MW Back up Diesel Pumping Loads AC Frequency Switch Back up Diesel LaaR (RRS, NSRS) RGS and RPRS Balancing Energy Tiered FR RRS from CLRS On site generation Boiler management Pumping Loads Smart Meters Critical Peak Pricing Day Ahead Market Air Conditioners Household Devices Similar to Residential IDR Meters Day Ahead Market IDR Meters BUL Back up Diesel Day Ahead Market Grid Lighting Day Ahead Market Grid Lighting Chillers and Coolers Real Time Response Back Up Diesel Direct Load Control Day Ahead Market Irrigation Day Ahead Market Waste Water Pumps Personnel Hours Grid lighting Thermal Storage Cost of Meter Sub Metering Issues Incentives (Landlord) Inconvenience Loss of production Air Permits Time Response Notification Mechanism Lack of Firm Price Signals ISO System Cost to Implement Cost of Meter Forward Pricing REP or No REP? Cost of Meter Read Customer Acquisition Fractured Value Chain Lack of Firm Price Signals ISO System Cost of Meter Cost of Meter Read Many tenants lease Customer Acceptance Lack of Firm Price Signals ISO System Upgrades Time Response Notification Mechanism Lack of Firm Price Signals ISO System TCEQ Permits Metering ERCOT EMS Lack of Firm Price Signals ISO System Non Specific Profiles Lack of coordination Lack of incentive Focus on efficiency ISO System Reliability = Capacity Payments and Firm Obligation to perform Price Responsive = Energy Payments and Voluntary Performance Requirements

7. Questions????