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Cost Allocation Considerations

Cost Allocation Considerations. Herb Healy. October 5, 2009. Cost Allocation Considerations. In ISO and EnerNOC supply-side proposal, energy payment levels differ ISO Pays LMP-G, where G is the cost of generation in the customer’s retail rate EnerNOC

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Cost Allocation Considerations

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  1. Cost Allocation Considerations Herb Healy October 5, 2009

  2. Cost Allocation Considerations In ISO and EnerNOC supply-side proposal, energy payment levels differ • ISO • Pays LMP-G, where G is the cost of generation in the customer’s retail rate • EnerNOC • Pays LMP at or above a threshold price • Both ISO and EnerNOC require allocation of energy payments EnerNOC advocates • LMP – G allocated to the host LSE • LSE is held harmless by this payment structure (see following) • “G” portion of LMP payment is an uplift to Real Time Load Obligation (RTLO) • Prorate across all load

  3. Allocation of LMP-G Cost to Host LSE Scenario: Customer X has 1 MW of price-responsive load reduction LSE A is Asset Load owner for Customer X in ISO energy wholesale market Assume: --RT LMP = $80/MWh --Customer X retail rate for supply (G) = $60/MWh LSEA: Pays market (LMP-G) $20 Loses customer revenue (G) $60 Total cost $80 If LSEA is long: Sells 1 MWh @ LMP $80 revenue If LSEA is short: Avoids procurement of 1 MWh @ LMP ($80) avoided expense ISO $20 (=LMP-G) $20 (=LMP-G) LSEA Customer X ($60) (=Lost revenue to LSEA from Customer X) Host LSE held harmless by DR Participation

  4. Comments on ISO’s Draft Report“Evaluation of Demand Response Payments Rates and Cost Allocation Methods” • The paper illustrates and analyzes a valid cost allocation methodology • The methodology is applicable only to the particular, narrow example that is outlined in the document • ‘G’ – An ethereal concept. Difficult to determine in its simplest manifestation, widely divergent from a contractual and risk perspective for the vast majority of C&I loads • Use of study as basis for correct payment level is faulty • Study explicitly (and fatally) ignores DR’s marginal benefit to load, which is quite significant • Study assumes that the participation of DR in independent of the compensation price  • This proves…. if you pay less (for the same benefit), you are better off than paying more (for that same benefit)

  5. EnerNOC Proposed Additional Analysis • EnerNOC is not proposing a specific threshold today • Believe current DALRP threshold using 11.37 MMBtu/ kWh is too high • Proposes additional analysis • Potential savings to system, considering various levels of participation in the market • Appropriate heat rates indexed to FRFI • Look-back correction mechanism • Consideration of impacts of bidding parameter flexibility From EnerNOC presentation to MC, September 21, 2009 “Energy Market Construct for PRD -Payment Level, Threshold, and M&V”

  6. Example Benefit to Load – Draft Results • Basis of analysis • 100 MW of DR participation • Analysis shows: • DR will lower LMPs • Hourly benefits are highest in • high priced, scarcity hours, • But • Overall savings to load are • derived for higher levels of • participation

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