New Incentives for Pursuing Demand Response

Scott Strauss and Sean FlynnSpiegel & McDiarmid

APPA Legal SeminarSan Francisco – November 2004

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Overview

Demand Response: What is it?The Problem: “The Hockey Stick”Benefits of demand response Implementation in SW Connecticut

– Opening Bidding Markets– Incentives to curtail

Conclusion

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Conclusions

DR largely relegated to emergency/price response– Limited participation– Limited benefits

FERC moving toward economic DR programsNeed market design changes that allow revenue

stream and financing of technology

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Demand Response

“programs that encourage customers to adjust their usage in response to changes in prices or market conditions affecting reliability.” – GAO 2004

Reliability (emergency) Price responseMarket-based bidding

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Price Spikes

1998/’99 NY Ancillary Services: $10,000 /mwh

1998 Midwest: $7,500 /mwh2000 New England: $6,000 /mwh2000 Pacific NW: $1,000 /mwhCA Average prices /mwh

– 1998: $33– 1999: $317

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Benefits of Demand Response

Cut price spikesControl market powerReliabilityReduce/supplement transmission and

generation investmentsReduce use of peaking plants (air quality

benefits)

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Emerging Consensus

DOE, National Energy Policy, 2001CBO, Lessons of the CA Crisis, 2001FTC, Focus on Retail Competition, 2001FERC SMD, 2002DOE Report to Congress, 2003DOE “Grid 2030”, 2003H.R. 6, Energy Policy Act 2003

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Actual and Potential Cost Savings

Summer 2001 New York ISO: $13 million FERC 2002 RTO “economic assessment”:

$7.5 billion /year by 2010 McKinsey & Co. $10-15 billion /year +

250 peaking plantsDOE: $80 billion savings over 20 years

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Southwest Connecticut

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Problems

Reliability– “loss of a single major transmission line or

power plant in Southwest Connecticut could lead to the disruption of electricity supply” in the region.

New England ISO April 2004Price

– LMP

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Goals

Incentives for customers to curtail– Time-based pricing options

• Time of use• Critical Peak Pricing• Real Time

– Advanced metering & load controlLink to wholesale markets

– Bidding– Curtailment service providers

• Provide technology; Aggregate load

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Incentives to Curtail Public Act No. 03-135; CPUC Doc. 03-07-16

Alternative Transitional Standard Offer ServicesMandated offerings (green and DR)Customer Education

– Bill inserts– Check off to apply

Technology financing– On the bill financing/Pay as you go– Conservation funding

But: no real time pricing yet

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Link to Wholesale MarketsNE ISO SMD (2002)

Day Ahead/Real Time Reliability– ISO Call– Pay LMP price or $500 min.

Real Time Price Response – ISO call– $100 floor– $500 ceiling

No bidding as resource/ cannot set market clearing price

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New England Demand Response Initiative

Day ahead price-driven demand biddingEqualize bid ceilingsRemove 1MW minimumLICAP credits for DR

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Link to Wholesale Markets Cont’dFERC 9/20 & 12/20 2002

Support and expand demand bidding– Price-based Day Ahead

(But: 10/04 filing: “Sequential Clearing”)– May allocate costs to all load– Equalize Bid Ceilings (But: $50/$100 bid

floors)

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More FERC

Opportunities for Curtailment Service Providers– “any party that can curtail its own use or

provide curtailment services is eligible”“Commission will insist on similar

measures in all regional markets.”

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National demonstration projectDOE “Gridwise”, Nxegen, DPUC (Energy Conservation Mgt Board)

1000 customers goal: Commercial, retail, municipal

Advanced metering, load control, monitoring, efficiency technology

Split savings + Conservation fundingLoad aggregation and centralized

monitoring– Could participate in day ahead market

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Progress to date

New Haven– 95 schools and municipal buildings– Savings: $42,000 /month; $15 m /5 yrs; $51 m 2010

Norwalk– 14 Schools, $85,000 savings /year

Stratford– 15 schools by 2005

ISO NE– 136 MW enrolled in price driven real time– 260 MW enrolled reliability programs

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Conclusions

Goal: Create incentives for customers to curtail; link to wholesale markets.

Means: Advanced technology, real time pricing + demand bidding.

It takes a village– FERC, PUC, Curtailment service providers

NE not perfect– No day ahead price bidding– Bid floors– “Sequential clearing”