A U G U S T 2 7

A U G U S T 2 7

A U G U S T 2 7 , 2 0 1 4 | H O LY O K E , M A DEMAND RESOURCES WORKING GROUP Passive Demand Resources in the Two-Settlement Capacity Market The eligibility of Demand Resources consisting of Energy Efficiency measures to collect performance payments Andrew Gillespie P R I N C I PA L A N A LY S T MARKET DEVELOPMENT Topics

FERC Order on Pay-for-Performance (Referenced by the Commission as a two-settlement capacity market design) Two-Settlement Basics Fundamentals necessary to understand the new construct Passive Demand Resources Energy Efficiency in the two-settlement capacity market 2

FERC ORDER ON PAY-FOR-PERFORMANCE The ISO filing, the FERC Order, and ISOs compliance Specifics regarding Energy Efficiency 3 May 30, 2014 Order (ER14-1050) The Commissions Order on the ISOs January 17, 2014 filing directed the implementation of a two-settlement capacity market design for the ninth FCA The Order also required the following be addressed in the compliance filing:

1. Revisions reflecting higher Reserve Constraint Penalty Factors (PP 107-110). 2. Revisions to the treatment of energy efficiency resources (P 89); 3. Revisions to address intra-zonal constraints (PP 66-67). 4 Compliance Filing & Effective Dates July 14, 2014 - ISO submitted a compliance filing (ER14-2419) Regarding Tariff changes, there are two primary effective dates of note: Tariff sheets effective June 9, 2014 (the refund effective date) These changes effect the FCA for the June 2018-May 2019

commitment period Tariff sheets effective June 1, 2018 These changes go into effect for the June 2018-May 2019 commitment period 5 FERC Order Regarding Energy Efficiency From Paragraph 89 of the Order:

Energy efficiency resources represent a pre-determined level of load reduction that is constant as a percentage of that resources load Therefore, we direct ISO-NE to submit as part of the compliance filing Tariff revisions ensuring that energy efficiency resources Capacity Performance Payments are calculated only for Capacity Scarcity Conditions during hours in which demand reduction values are calculated under the Tariff for that particular type of resource. 6 TWO-SETTLEMENT BASICS

Monthly Settlement Performance Payments Scarcity Condition 7 Monthly Settlement Base payment Based on CSO amount (e.g., at applicable capacity price) May be zero, or positive Performance payment

Based on system conditions and resource performance during a scarcity condition May be negative, zero, or positive Monthly capacity payment (credit or charge) based on the sum of these two payment streams 8 Performance Payments Performance payments are calculated for each scarcity interval Charge:

Performance Payment Rate (PPR) x [Balancing Ratio (BR) x CSO] Credit: Performance Payment Rate (PPR) x Actual Capacity Provided (A) Combining the two Score = [A (BR x CSO)] x PPR Points of note: Credit does not require that the resource have a CSO Score depends on amount provided relative to balancing ratio adjusted CSO - not full CSO 9

Parameters Balancing Ratio This is a system parameter For a given interval (5-min) Balancing Ratio = (Load + reserve requirement) / Total CSO Actual Capacity Provided This is a resource parameter For a given interval (5-min) Actual Capacity Provided = Energy + reserve designation 10 Scarcity Conditions A scarcity condition occurs when system is deficient when the

sum of the energy and reserve requirement is not satisfied When this occurs, the Reserve Constraint Penalty Factor (RCPF) will be setting the real-time reserve price, and is included in nodes energy price (the nodal LMP) During a scarcity condition every resources score is calculated The calculations are linear, so score can be summed for given period (e.g., month) Possible to over perform in one interval, to offset under performance in a separate interval 11

PASSIVE DEMAND RESOURCES Energy Efficiency in the two-settlement capacity market 12 Actual Capacity Provided Under two-settlement design Demand Reduction Value is not used to determine payment The resources Capacity Supply Obligation is the value used to determine a resources base payment in all months The Actual Capacity Provided would be used to calculate a resources score during scarcity condition intervals

For passive demand resources, the Actual Capacity Provided will be the Average Hourly Load Reduction These are the same values reported today used to determine the resources Demand Reduction Value 13 Actual Capacity Provided Energy Efficiency Recall from the Order ensuring that energy efficiency resources Capacity Performance Payments are calculated only for Capacity Scarcity Conditions during hours in which demand reduction values are

calculated under the Tariff for that particular type of resource. Performance payments will apply to Energy Efficiency assets/measures during scarcity conditions occurring during peak reporting hours only (i.e., Demand Resource On-Peak Hours or Demand Resource Seasonal Peak Hours) For all other scarcity conditions occurring in off-peak hours the score from Energy Efficiency assets/measures is set to zero 14 Energy Efficiency III.13.7.2.4Capacity Performance Score.

Each resource, whether or not it has a Capacity Supply Obligation, will be assigned a Capacity Performance Score for each five-minute interval in which a Capacity Scarcity Condition exists in the Capacity Zone in which the resource is located. A resources Capacity Performance Score for the interval shall equal the resources Actual Capacity Provided during the interval minus the product of the resources Capacity Supply Obligation and the applicable Capacity Balancing Ratio; provided, however, that for an On-Peak Demand Resource or a Seasonal Peak Demand Resource, if the Capacity Scarcity Condition occurs in an interval outside of Demand Resource On-Peak Hours or Demand Resource Seasonal Peak Hours, as applicable, then the Actual Capacity Provided and Capacity Supply Obligation associated with any Energy Efficiency Demand Response Assets shall be excluded from the calculation of the resources Capacity Performance Score. The resulting Capacity Performance Score may be positive, zero, or negative.

15 Open Issue(s) A passive Demand Resource may include other measures/assets; not just energy efficiency measures/assets (e.g., Distributed Generation) A methodology is required to segregate measures/assets and the contribution of each in a resources score where energy efficiency is mixed with other measure/asset types 16

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