Estimated Benefits of Linking Wholesale and Retail Markets

1
Estimated Benefits of Linking Wholesale and
Retail Markets

• Peter Cappers
• Neenan Associates
• New England Restructuring Roundtable
• October 28, 2005

2
Analysis Framework

• Neenan Associates conducted various analyses of
  the performance of ISO-NEs demand response
  programs for a FERC-required annual evaluation
  report
• While the 2004 evaluation revealed that customer
  benefits exceeded incentives paid, the analysis
  also raised questions about the efficacy of
  encouraging price response through ISO-NE
  initiatives
• ISO-NE asked Neenan Associates to quantify and
  compare the relative benefits and costs of
  fostering price response
• That evolves from customers paying market prices
• and curtailing based on their value of
  electricity
• Through ISO programs that offer inducements
• to curtail based on their derived market
  value
• Study focuses on price, not reliability, benefits

3
Simulating the Benefits of Price Response in New
England

• Demand Characterization
• New England customers gt1,000 kW
• Segment customers by business class
• Customer usage and hourly profiles by
• ISO-NE zone derived from both private
• and public sources of information
• Supply Characterization
• Used previously developed simulation methods and
  models
• Constructed representative ISO-NE Market
  Characterizations
• Status Quo Year Used 2003/2004 ISO-NE market
  experience
• Normal and Extreme Year More extreme prices
  reflecting other likely market capacity and
  demand circumstances
• Five year benefit simulations using weighted
  outcomes

Allows use of price elasticities from NGrid/NMPC
study
Reflects LMP differences
4
Characterizing Price Response

• Degree of price response
• Un-Responsive (Elasticity 0)
• Non-Responsive (Elasticity lt 0.05)
• Responsive (Elasticity gt 0.05)
• Un-Responsive and Non-Responsive customers are
  more likely to seek hedged service from an
  alternative supplier
• Only the Responsive customers are expected to
  stay on APR (or subscribe to a similar service
  from an ESCO) and respond to prices

From NGrid/NMPC study of PR behaviors

• Analyzed robustly price responsive customers in
  NE
• All 6 NE states represented
• 1,739 CI over 1 MW
• Peak Demand of 5,001 MW
• Max Price Response of 327 MW

5
Simulating Price Response

• Autonomous Price Response (APR)
• Default RTP rate based on ISO-NE DA LMP
• Assign price elasticity to each customer segment
• Elasticity and price determines load curtailed
• Simulate daily response to RTP

• Induced Price Response (IPR)
• Assume customers on default flat-rate tariff bid
  DALRP curtailments
• Derive 4-hour bid blocks for each of four price
  points that correspond to segment elasticities
• Simulate bids scheduled only if DA LMP exceeds
  strike price over entire block
• Participation limited to only customers in
  NEMA/Boston and Connecticut

6
Benefits of Price Response

• Customer Bill Savings
• Savings from the avoidance of paying a hedge
  premium (APR Only)
• Savings from avoiding the purchase of electricity
• Electricity Market Transfer Savings
• Savings from purchasing energy in ISO-NE LMP and
  bilateral markets at lower prices
• ICAP Market Transfer Savings
• Savings from lower ICAP requirements and lower
  market prices for ICAP (APR Only)
• Social Welfare Improvements
• Resources are more efficiently used when
  customers pay actual prices, not average prices

7
Estimated Benefits of APR vs. IPR in New England
- Five Years

• APR Produces Substantially Greater Benefits
• Under APR half of the benefits are captured by
  participants
• Limited frequency and level of price response
  under IPR produces low Customer and Market
  benefits
• Customers and LSEs capture ICAP benefits under
  APR, but ISO-NE doesnt award them under IPR
• Social welfare improvements are small in
  comparison to Customer and Market benefits for
  both programs
• But What about the cost to achieve these
  benefits?

8
Net Benefits and Costs

• Total Costs to Implement
• In APR, reflect meter reading, communication and
  billing infrastructure costs
• In IPR, reflect only program payments to
  customers since infrastructure costs have already
  been sunk
• Net Welfare Improvements
• Occur naturally under APR no incentive payments
  required
• Inducement costs under IPR result in B/C below one

9
Summary and Conclusions

• Both customers and markets benefit from price
  response
• Autonomous PR is more effective and beneficial
  than Induced PR
• Substantial bill savings to participants not
  available through IPR
• APR provides greater benefits to other customers
• Promotes competition through both switching and
  demand for more diverse dynamic pricing offerings
  
• Always produces positive net social welfare
  benefits

New England States should adopt Day-Ahead RTP
default service for larger customers as soon as
practical