LONGTERM RESOURCE ADEQUACY: DEMANDRESPONSE OPTIONS

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LONG-TERM RESOURCE ADEQUACYDEMAND-RESPONSE
OPTIONS

• ERIC HIRST
• Consultant in Electric-Industry Restructuring
• Bellingham, WA
• Eric_at_EHirst.com www.EHirst.com
• March 2003

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TWO PRIMARY WAYS TO MANAGE GENERATION ADEQUACY

• Investors, through market prices, decide on
  generation retirement, repowering, and new
  construction (e.g., pre-2001 California)
• RTO or regulator uses LOLP calculations to set
  minimum planning reserve requirements RTO may
  run market for installed capacity (e.g., PJM, New
  York, New England)
• ______________
• Market prices include real-time and day-ahead
  markets plus bilateral contracts.

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CAN SPOT PRICES DO THE JOB?

• Will demand and supply respond?
• Will prices accurately reflect system conditions
  and economics?

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SCARCITY PRICING ESSENTIAL TO MOTIVATE INVESTMENTS
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TWO APPROACHES PRODUCE DIFFERENT OUTCOMES

• Mandated minimum reserve margins will yield
• higher average energy prices
• lower prices during peak-demand periods
• less price volatility
• lower customer load factors
• more peaking capacity
• than would sole reliance on markets to
• make capacity-expansion decisions

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NEW APPROACH vs TRIED AND TRUE

• MARKETS
• Lets market make both capital and operating
  decisions (Isnt this why we are restructuring?)
• Encourages demand-side participation in
  reliability
• Lowers costs to consumers
• Price volatility provides important information

• MANDATES
• Reliability in part a public good (Can we trust
  market participants to provide enough capacity?)
• Demand elasticity low and uncertain
• Major outages very costly
• Customers hate volatility

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PROBLEMS WITH FERCS SMD PROPOSAL

• Concept of long-term resource requirement is
  antithetical to competitive markets
• What other products are purchased so far ahead of
  use with such ambiguous product definition?
• For what other products does government mandate
  purchase?
• FERCs proposed long-term resource adequacy
  (LTRA) requirements vague and at odds with other
  parts of SMD
• FERCs opposition to northeastern ISO ICAP
  programs unclear

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UNCERTAINTY OVER RESOURCES INCREASES WITH
FORECAST TIME
Plans
??
Physical resources
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STRAIGHTFORWARD TO INCLUDE DEMAND RESPONSE

• Demand-response resources/programs developed for
  shorter term should qualify as long-term
  resources
• No need to develop new programs for LTRA
• Challenge is to treat demand resources comparably
  (not necessarily identically) to supply resources
• ISO operating and market rules accommodate supply
  idiosyncrasies, need to do same for demand
  resources
• Reliability requirements need to reflect system
  needs, not just generator characteristics

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ISSUES TO CONSIDER ...

• Forecast horizon
• Certification requirements
• Qualifying resources
• Interruptible loads and direct-load control
• Dynamic pricing
• Load participation in contingency-reserve markets
• Energy efficiency
• Seasonal v annual requirements
• RTO role in markets
• End-use infrastructure requirements
• Metering and communications

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ISSUES TO CONSIDER

• RTO resource rights
• Retail customer/LSE obligations
• Minimum resource size
• Customer baseline level
• Payments
• Capacity
• Energy
• Penalties
• Other ??

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KEY RESOURCE COULD BEDEMAND CURVE FOR RESERVES
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WHICH DEMAND RESOURCES CAN QUALIFY?

• YES
• Interruptible loads and direct-load control
  (participants in existing programs)
• Bids into contingency-reserve markets

• NO
• Dynamic pricing ? Probably not
• Energy efficiency, passive nature prohibits
  system operator dispatch of resource
• These resources show up in load forecast

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DEMAND RESPONSE MORE VALUABLE AS LOAD REDUCTION

• Consider LSE with 100 MW peak demand, 15 reserve
  requirement, and 10 MW of contracted load
  reduction
• If the 10 MW qualify as LTRs, then LSE needs
  another 105 MW of qualifying resources
• If the 10 MW reduce peak demand, then LSE needs
  only 103.5 MW of qualifying resources

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METERING AND COMMUNICATIONS DEPENDS ON TYPE OF
RESOURCEWho pays for this equipment?

• Interruptible Load
• Meters hourly
• Communications Receive, confirm, and act upon
  RTO instructions (pager, telephone, email, fax)
• Does RTO need to know load response in real time?

• Contingency Reserves
• Meters 1-minute
• Communications Receive and act upon RTO dispatch
  instructions
• Does RTO need to know load response in real time?

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RTO RIGHTS

• Number of times per year (or season)
• Maximum duration of each interruption
• Minimum advance notice
• These limits generally do not apply to generators
  and reduce the value of demand resources
• Point in emergency sequence (e.g., ISO New
  England OP-4) that resource is called

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PAYMENTS AND PENALTIES

• LTRs (both supply and demand) receive
  reservation/capacity payments, /MW-month
• When dispatched, supply paid for energy at spot
  energy price and load does not pay for unconsumed
  energy at same price
• (Ruff argument, no double payment)
• Noncompliance vs. underperformance penalties
• Stiff noncompliance penalty is quid pro quo for
  capacity payments
• Underperformance penalty should be cost based

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MY BOTTOM LINE

• LTRA is a political necessity because of aversion
  to price spikes, lack of demand response, and
  deficiencies in current market designs
• LTRA not compatible with competitive wholesale
  energy markets
• Demand resources can and should qualify as LTRs
  and participate in such markets
• Build on experience with existing ISO and utility
  programs
• Ensure comparability with treatment of generation