Cost Allocation Considerations

Herb Healy

October 5, 2009

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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

Scenario: Customer X has 1 MW of price-responsive load reductionLSE 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

Allocation of LMP-G Cost to Host LSE

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ISO

Customer XLSE

A

$20(=LMP-G)

$20(=LMP-G)

($60)(=Lost revenue to LSEA

from Customer X)

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

Host LSE held harmless by DR Participation

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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)

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”

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