Christensen Associates Lessons from California The Role of

Christensen Associates Lessons from California The Role of Demand Response Energy Markets in Turmoil Institute for Regulatory Policy Studies May 17, 2001 Steven Braithwait Christensen Associates March 24, 2000 1 California PX Demand Responsiveness Workshop

Christensen Associates • Economic and engineering consulting for electric power industry • 20 years of experience in designing and evaluating pricing strategies – – TOU – Real-time pricing (Ni. Mo, Georgia Power, KCP&L) – Market-based interruptible load programs • Unbundling; pricing transmission and ancillary services May 17, 2001 2 Institute for Regulatory Policy Studies Workshop

Christensen Associates The California Energy Crisis • • • High wholesale prices Rolling blackouts Financial/debt crisis – bankruptcy State take-over of power purchases Charges of market manipulation May 17, 2001 3 Institute for Regulatory Policy Studies Workshop

Christensen Associates California Background -- Supply • No new capacity in ’ 90 s • Utilities sold ½ of generation (fossil) to Duke, Dynegy, AES, Mirant, Reliant, etc. • No long-term power contracts • California imports 20 – 25% of power requirements (NW hydro; SW fossil) • Tight capacity margin May 17, 2001 4 Institute for Regulatory Policy Studies Workshop

Christensen Associates California Background -- Demand • Modest growth in early 90 s • Rapid growth since 1995 in Calif. and in the Southwest & Northwest • Rate freeze, with 10% discount until 2002 (or when “stranded costs” recovered) • SDG&E rate freeze lifted in 1999 May 17, 2001 5 Institute for Regulatory Policy Studies Workshop

Christensen Associates Background – Wholesale Markets • All power bought and sold in spot market • PX day-ahead energy; ISO real-time energy, reserves & ancillary services • ISO price cap ($750/MWh 500 250) • 30% + of energy left unscheduled for ISO real-time market on high-price days May 17, 2001 6 Institute for Regulatory Policy Studies Workshop

Christensen Associates PX Prices and ISO Load (May – September 1999) May 17, 2001 7 Institute for Regulatory Policy Studies Workshop

Christensen Associates PX Prices and Total ISO Load (May 15 - August 31, 2000) 800 700 $/MWh 600 500 400 300 200 100 0 20000 May 17, 2001 25000 30000 8 MW 35000 40000 45000 Institute for Regulatory Policy Studies Workshop

Christensen Associates Utilities “Buy High” and “Sell Low” (May – August, 2000) 140 $126 120 100 $/MWh 80 $65 $50 60 40 20 0 Average Revenue May 17, 2001 Wholesale Costs (expected) 9 Wholesale Costs (actual) Institute for Regulatory Policy Studies Workshop

Christensen Associates Financial Impacts of California Crisis Summer 2000 • Wholesale costs – $13. 5 billion (May – Sept. ) • Expected costs under rate freeze -- $5 billion • Utility debt -- $8 billion (now $13 billion+) • Customer cost of outages (e. g. , $400 million for 4 days of rolling blackouts in early 2001) May 17, 2001 10 Institute for Regulatory Policy Studies Workshop

Christensen Associates What Went Wrong in Summer 2000? • “Perfect storm” hit an already tight market – Unexpected outages – Low imports (low hydro, high demand outside) – High natural gas prices • Market design problems – No hedging (financial effect) – Price caps (affected multiple markets) – Strategic bidding/withholding? • No demand response (except San Diego) May 17, 2001 11 Institute for Regulatory Policy Studies Workshop

Christensen Associates What Continues to go Wrong? • Financial/debt crisis continues – Utility debt from 2000 still exists – Generators not paid; some independents shutting down • Continuing high natural gas prices • Political/regulatory gridlock -- retail energy prices still below wholesale costs • Insufficient capacity for summer • No demand response (new buy-back and RTP programs planned for the summer) May 17, 2001 12 Institute for Regulatory Policy Studies Workshop

Christensen Associates Disconnected Markets – Fixed price no demand response $/MWh WP Lnormal Lhot Pspike Retail Price Pnormal GWh Qnormal May 17, 2001 13 Qspike Institute for Regulatory Policy Studies Workshop

Christensen Associates The Markets Connected Demand Response Yields Lower Wholesale Prices $/MWh WP Lnormal Lhot Pspike B E´ Phot Retail Price Pnormal E A Dhot Dnormal GWh Qnormal Qhot Qspike May 17, 2001 14 Institute for Regulatory Policy Studies Workshop

Christensen Associates Benefits of Demand Response Programs • Prices signal customers the cost of power • Customer demand response helps balance supply and demand • Reduces wholesale prices, by factor of 10+ (e. g. , load by 2. 5% WP by 25%) • Reduces market power of suppliers May 17, 2001 15 Institute for Regulatory Policy Studies Workshop

Christensen Associates Types of Demand Response Programs • Demand-side bidding • “Buy-back, ” or pay-for-performance interruptible – Suppliers buy load relative to baseline at price tied to market price • Real-time (hourly) pricing – Full-time – Whenever prices exceed specified level May 17, 2001 16 Institute for Regulatory Policy Studies Workshop

Christensen Associates Example of Demand Response – Georgia Power RTP (Demand response = 250 MW; 60% of reference load) Load on highest price day Highest HA prices May 17, 2001 17 Institute for Regulatory Policy Studies Workshop

Christensen Associates Estimated Effect of Demand Response (Braithwait-Faruqui; March 15 PUF) If RTP offered to California large C&I customers: • Load reduction in high-price hour – 2. 4% • Reduction in wholesale price – 24% • Drop in summer wholesale costs -- $700 M May 17, 2001 18 Institute for Regulatory Policy Studies Workshop

Christensen Associates For Additional Information: • Customer Response to Market Prices – How Much Can You Expect When You Need it Most? , Steven Braithwait and Michael O’Sheasy, EPRI Pricing Conference, July 2000. • Residential TOU Response in the Presence of Interactive Communication Equipment, Steven Braithwait, in Pricing in Competitive Electricity Markets, Ahmad Faruqui, Ed. • Demand Response – The Ignored Solution to California’s Energy Crisis, Steven Braithwait and Ahmad Faruqui, in Public Utilities Fortnightly, March 15, 2001. • Contact: Steve Braithwait (steve@lrca. com) Christensen Associates 608 -231 -2266 May 17, 2001 19 Institute for Regulatory Policy Studies Workshop