September 26, 2013

1. September 26, 2013 Henry Yoshimura Director, Demand Resource Strategy Demand Response Resources Providing Reserves Beginning June 1, 2017

2. background

3. Background • ISO New England (“the ISO”) is committed to enabling Demand Response Resources (“DRRs”) to participate in the Forward and Real-Time Reserves Markets beginning June 1, 2017, coincident with the full integration of DRRs into the energy markets. • In January 2013, demand response providers requested information on how DRRs will participate in the reserves markets to assist them in evaluating the ISO’s FCM Performance Incentive proposal. • The accompanying whitepaper was prepared in response to that request. • The whitepaper describes how DRRs will be able to provide Real-Time Reserves and participate in the Forward Reserve Market; the whitepaper does not address market rule changes or how this approach will be implemented.

4. Structure of the Whitepaper The whitepaper describes: • The reserve products that the ISO must procure per the requirements of North American Electric Reliability Corporation (“NERC”) and Northeast Power Coordinating Council (“NPCC”); • The general structure of the New England Real-Time Reserves and Forward Reserve Markets; • The proposed approach by which DRR will provide Real-Time Reserves and participate in the Forward Reserve Market under full integration; and • Demand response-specific design challenges with regard to eligibility requirements, measurement, and auditing that must be addressed to enable DRRs to provide reserves, and a proposal to address each challenge.

5. Reserves in the new England wholesale electricity system

6. Reserve Requirements • To protect against unexpected loss of supply (or unexpected increases in load), resources that have the capability to help balance supply and demand on the system quickly (i.e., within 10 or 30 minutes) are needed. • To provide reserves, resources must be able to quickly: • Increase generation output to increase the supply of energy, or • Reduce energy consumption to decrease the demand on the system. • The ISO must meet the reserve requirements established by the NERC and the NPCC. • The size of contingencies determine reserve requirements. • About 1,800 MW of resources are needed to meet the largest system contingency. • About 700 MW of resources are needed to meet 50% of the second largest system contingency. • The ISO designates resources to meet reserve requirements in real time, and also procures reserve capability in advance through a forward-market auction.

7. Real-Time Reserves • Based on energy market offers and resource availability, resources are designated in real-time to provide: • 10-minute spinning reserves (“TMSR”), • 10-minute non-spinning reserves (“TMNSR”), and • 30-minute operating reserve (“TMOR”). • Real-Time Reserve Clearing Prices (“RTRCP”) are determined for each reserve product as part of a co-optimized market-clearing system. Real-Time Energy/Reserve co-optimization jointly clears energy and reserves in a least-cost fashion. • RTRCPs equal to zero unless system re-dispatch is required to create additional reserve to meet the reserve requirements. • Participants are paid the RTRCP for resources that provide Real-Time Reserves.

8. Forward Reserves • The Forward Reserve Market (“FRM”) procures TMNSR and TMOR products in advance for delivery in real time. • Participants enter offers into a Forward Reserve Auction on a portfolio basis. • There is one auction for each season (Summer/Winter). • The lowest-cost offers that fulfill reserve requirements clear the auction, with the lowest cost offer that was not accepted in the auction setting the clearing price. • Before the Operating Day, participants that acquire FRM obligations will assign specific resources to provide reserves.

9. Forward Reserves (cont.) • Participants are paid the Forward Reserve Payment Rate (“FRPR”) for delivering reserves in real time to meet FRM Obligations. • The FRPR is the difference between the Forward Reserve Clearing Price and the prorated Capacity Clearing Price for the relevant Capacity Commitment Period. • A resource paid in the FRM foregoes Real-Time Reserve compensation. • Penalties are assessed if: • The participant fails to assign enough resources to meet its FRM Obligations, or • Any assigned resource fails to deliver energy when dispatched.

10. Resource Eligibility Requirements • To be eligible to provide reserves, a resource must: • Be capable of providing energy within 10 or 30 minutes. • Online (already producing energy) resource capability is based on the resource’s ramp rate and available MWs. • Offline resource capability is based on an audit. • Participate in the energy market. • Have an energy market offer that indicates: • The minimum and maximum levels of output or consumption of the resource to determine a dispatchable range for the resource. • The quantity of MWs the resource is willing and able to provide within 10 or 30 minutes. • Have electronic dispatch capability and follow Dispatch Instructions. • Provide real-time telemetry and revenue quality meter data. • Be able to provide up-to-date information on its real-time physical capabilities.

11. Demand response resources Providing reserves

12. Demand Response Resources Providing Reserves • Full-integration into energy markets allow DRRs to meet most requirements to provide reserves. On June 1, 2017, DRRs will have: • Energy market offers; • Electronic dispatch capability to follow Dispatch Instructions; and • Real-time telemetry and revenue quality meter data. • Some market design changes are necessary to allow DRRs to meet the remaining requirements: • DRR energy offers must be modified to include additional parameters that: • Determine a dispatchable range (minimum and maximum levels of consumption) of the resource, and • Indicate the MWs that the DRR is able and willing to provide within 10 or 30 minutes. • DRR audits must be modified to allow it to demonstrate its ability to provide energy within 10 or 30 minutes. • DRR must be required to provide up-to-date information on its real-time physical capabilities.

13. Design Challenges • Telemetry • Resources providing reserves in New England use the same real-time telemetry for energy and reserves. • Different resource types provide real-time telemetry at different granularities. • Generators and Dispatchable Asset Related Demands (“DARDs”) provide data at 10-second intervals. • Resources providing Regulation and Frequency Response Service provide data at 4-second intervals. • The ISO proposes to use 5-minute telemetry for DRR providing reserves: • DRRs delivering energy and capacity in New England are required to provide 5-minute data. • 5-minute telemetry appears to be sufficient given that a typical DRR is an aggregation of relatively small assets that are dispersed throughout a Dispatch Zone. • 5-minute telemetry is compliant with the North American Energy Standards Board standards for Demand Response Reserve Products.

14. Design Challenges (cont.) • Zonal Issues • A Dispatch Zone is generally part of only one Reserve Zone. • However, the Western CT Dispatch Zone has nodes in both the SWCT & CT Reserve Zones. • The ISO is evaluating the issue of alignment of Dispatch Zones and Reserve Zones and plans to resolve this issue by 2017. • Use of Behind-the-Meter Generation to Provide TMSR • Per NPCC requirement 5.14 b): [L]oads cannot provide synchronized reserve if the reduction in load is dependent on starting a generator to replace energy that is supplied from the grid. • Therefore, a DRR with one or more associated assets that must start a generator will not be allowed to provide TMSR. • However, such DRRs can provide TMNSR and TMOR.

15. Design Challenges (cont.) • Estimating a DRR’s Upper Dispatch Limit • A parameter is required representing the energy consumption of the DRR when not being dispatched to reduce consumption. This parameter, the Upper Dispatch Limit (“UDL”), must be updated in real-time to reflect real-time conditions. • The current Demand Response Baseline methodology in the Tariff provides an estimate of a DRR’s normal consumption level. However, there is presently no mechanism to update the Demand Response Baseline to reflect real-time conditions so as to accurately reflect a DRR’s UDL. • The ISO is considering other methodologies that provide improved real-time estimates of normal consumption for a DRR such as modified or alternative baseline calculations, or a mechanism to update UDL automatically based on recent real-time data.

16. Appendix Determining the Dispatchable Range for a Demand Response Resource

17. Determining the Dispatchable Range For a DRR For purposes of illustration, assume an offline DRR, which has not been dispatched to provide energy and has no restriction on the minimum amount it will reduce. • The dispatchable range for this resource will be determined using two parameters: • UDL, and • Lower Dispatch Limit (“LDL”), which represents the level of consumption below which the DRR will not reduce. • In this scenario, the amount of reserve available from the DRR is equal to UDL – LDL. • In other scenarios, where the DRR is online, or has a non-zero Minimum Reduction amount, the determination of dispatchable range and available reserves will reflect those factors and may include other parameters (i.e., ramp rate for online DRR). • The chart on the following slide shows the dispatchable range for the DRR. • The dispatchable range includes LDL, UDL, and the area between these two values.

18. Example of Dispatchable Range For a DRR

19. The Dispatchable Range of a DRR Must be Updated to Reflect Real-Time Conditions • The current Demand Response Baseline methodology does not include functionality to recalculate or adjust the baseline during the Operating Day to reflect real-time conditions (e.g., higher or lower than normal temperatures). • The Demand Response Baseline for the Operating Day is calculated once for the day, early on the morning of the Operating Day. • The Demand Response Baseline may vary significantly from real-time consumption during the Operating Day. • Using a value which does not reflect real-time conditions to determine a DRR’s UDL will result in less accurate estimates of a DRR’s available reserve.

20. Example of the Calculated Demand Response Baseline Understating Available Reserve

21. Example of the Calculated Demand Response Baseline Overstating Available Reserve