RELIABILITY BENEFITS OF PRICE-RESPONSIVE DEMAND

1. RELIABILITY BENEFITS OF PRICE-RESPONSIVE DEMAND ERIC HIRST Consultant in Electric-Industry Restructuring Oak Ridge, TN Eric@EHirst.com www.EHirst.com April 2002

2. WHAT IS BULK-POWER RELIABILITY? • NERC: “Degree to which performance of … system results in power being delivered to customers within accepted standards and in the amount desired.” • Adequacy (planning): enough generation and transmission resources installed to meet projected needs plus reserves for contingencies • Security (operations): system will remain intact even after sudden disturbances (e.g., lightning or generator outage) • Adequacy and security are both substitutes and complements

3. Generators (and dispatchable load) primary resource to maintain reliability in real time TWO UNIQUE FEATURES OFBULK-POWER SYSTEMS • Near-real-time balancing of generation and load (electricity flows at speed of light) • Passive nature of transmission (few valves or booster pumps)

4. CAN WE RELY ON SPOT PRICES TO BALANCE GENERATION AND DEMAND?

5. CURRENT POLICIES LIMIT DEMAND PARTICIPATION • NERC Policy 1 limits spinning reserve to “unloaded generation that is synchronized …” • At least 50% of contingency reserves must be spinning • But NERC Disturbance Control Standard calls only for 15-minute recovery with no intermediate response • Demand exclusion affects reliability and economic efficiency • Limits amount of reliability resources • Raises cost to maintain reliability • Proposed Policy 1 changes are technology neutral

6. DEMAND EXCLUDED FROM LUCRATIVE RESERVE MARKET

7. MUNICIPAL WATER SYSTEMS COULD PROVIDE SPINNING RESERVE • Water treatment/pumping = 3 - 4% of U.S. electric use • Storage in pipelines and tanks makes spinning reserve feasible • could provide up to 50% of U.S. spin needs • Adjustable speed drives would • enable provision of spin • improve efficiency of water operations • eliminate congestion concerns • improve local voltage regulation • Other customers with storage also good candidates

8. RETAIL LOADS SHOULD BE ABLE TO PARTICIPATE IN ALL WHOLESALE MARKETS • Day-ahead energy and congestion management • Day-ahead ancillary services • Spinning reserves • Nonspinning reserves • Replacement reserves • Real-time (intrahour) energy and congestion management • Involuntary load interruptions Loads should be able to set prices, not just be price takers!

9. DAY-AHEAD MARKET SHOULD TREAT DEMAND AND SUPPLY EQUALLY

10. Loads should be able to provide these services DAY-AHEAD ANCILLARY SERVICE MARKETS SHOULD ALSO INCLUDE DEMAND • Regulation - not likely a good candidate for demand • Spinning reserve • Supplemental reserve • Replacement reserve • Intrahour energy imbalance and congestion management - not likely a good candidate for demand

11. LOADS SHOULD (AND DO) PARTICIPATE IN ICAP MARKETS • Fundamental question over usefulness of installed-capability requirement in competitive energy markets • does capacity per se have any value, unless it can be turned into energy at a known strike price? • Need to overcome problems associated with past utility interruptible contracts: discounts more than a reliability service • On the other hand, PJM Active Load Management program provides resources

12. PJM LOAD RELIEF CUT ELECTRICITY COSTS BY $10 MILLION

13. ISSUES ON DEMAND PARTICIPATION IN RELIABILITY MARKETS • Meters (frequency, who pays) • Communications (one or two way, how often) • Aggregation • Advance notice • Frequency of response • Duration of response and recovery times • Penalties • Payments for capacity and/or energy • Baseline

14. INVOLUNTARY LOAD INTERRUPTIONS UNCOMPENSATED • Last resort, interrupt loads to protect power system: • rolling blackouts, under-frequency and under-voltage relays • Generators paid for contingency reserves, so loads should be paid for bulk-power interruptions • If loads paid, say, $1000/MWh-interrupted, some customers will pay more to avoid interruptions and others will accept less to be interrupted • lead to interruption markets

15. OPTIONS TO CONSIDER • Should NERC and NPCC review reliability standards to ensure equal opportunity for retail loads? • Who should educate consumers on how bulk-power systems and markets work, and on opportunities for their participation in these markets? • Should RTOs pay retail customers for involuntary load interruptions? • Should RTOs run separate markets for demand resources or single, integrated set of markets?

16. Program and Policy Issues • How should ancillary service markets be organized to realize the potential value of demand-side resources? • Direct ISO-customer contracts, or only through LSEs? • Coordinating regional DR reliability programs with legacy interruptible contracts • Does DRR qualify as “installed capability”? • How to recognize the unique characteristics and needs of loads? • Limits on types or amounts of back-up generation?

17. Program and Policy Issues • Can the rules permit participation by, and compensation to, aggregated small loads? • What actions should STATE regulators take to enhance customer participation in reliability DRR? • How to develop Curtailment Service Providers? • Target levels? How do we know we are succeeding or failing? • Lessons from New York, PJM?