NOVEMBER 21 2014 BOSTON MASSACHUSETTS The Future of

NOVEMBER 21, 2014 | BOSTON, MASSACHUSETTS The Future of Demand Response in New England Electricity Restructuring Roundtable Henry Yoshimura DIRECTOR, DEMAND RESOURCE STRATEGY

Demand Resources Have a Strong History But Uncertain Future in the New England Wholesale Market Today Future • Demand resources include: • – Demand response – Energy efficiency (EE) – Distributed generation (DG) • Demand resources (DR) participate in the Forward Capacity Market (FCM) – Markets provide opportunities for demand response providers to sell demand reductions at wholesale energy prices Unless otherwise directed by FERC, the ISO intends to fully integrate demand response into other wholesale markets, including: – Energy – Reserve • FERC jurisdiction over DR is uncertain • Grid modernization (including timevarying rates) opens up new approaches to DR and coordination between wholesale-retail planning, operations, and pricing 2

Forward Capacity Market Has Helped Stimulate DR in the Region Enrollment in ISO programs before the start of FCM Resources Cleared in the FCM � 4, 000 3, 500 1486 1644 1292 2, 500 983 1064 1, 500 1195 1170 1363 1382 1384 600 600 600 271 /1 7 262 16 6 /1 20 15 5 20 /1 14 4 20 /1 13 3 20 /1 12 2 1 /1 20 10 10 20 20 09 M ay 20 08 20 07 20 06 20 05 20 04 20 03 20 -S M D 0 810 Real-Time Emergency Generation 8 600 855 /1 500 Active Real. Time DR 17 975 1, 000 1961 1631 703 Passive DR (energy efficiency) 20 2, 000 Pr e MW 3, 000 Notes: Total real-time emergency generation (RTEG) capped at 600 MW Cap reached for FCAs #1 – #6 (2010/11– 2015/16); RTEG cleared below cap over last two auctions Source: ISO-NE FCA Auction Results Filings 3

Energy Efficiency is a Priority for New England State policies and regional capacity market have produced robust EE investment 2014 • Ranking of state EE efforts by the American Council for an Energy-Efficient Economy : – – – Massachusetts 1 Vermont 3 Rhode Island 3 Connecticut 6 Maine 16 New Hampshire 22 • In New England, billions spent over the past few years; more on the horizon − 2009 to 2012 = $2. 3 B − 2017 to 2023 states are projected to spend $6. 3 B • EE flattens annual energy usage in New England for the foreseeable future 4

Demand Response Has Shed FCM Obligations 2000 Aggregate Capacity Supply Obligations (CSO) of Demand Response Resources (MW) 1500 1000 500 0 2010/11 2011/12 2012/13 2013/14 2014/15 Capacity Commitment Period CSO Cleared Primary Auction CSO on August 1 of Commitment Period 5

Primary and Reconfiguration Auction Price Differences Encouraged Shedding of Capacity Supply Obligations 4. 5 4 3. 5 3 2. 5 2 1. 5 1 ARA = 0. 5 Annual Reconfiguration 0 Auction • • $4. 25 Capacity Clearing Prices in $/k. W-month $3. 12 $2. 54 $1. 50 $1. 43 2010 Series 1 ARA 2 $2. 52 $2. 86 $1. 75 $1. 93 $1. 00 $0. 93 $0. 90 $0. 55 $0. 59 $0. 50 2011 2012 2013 Primary Auction (pro-rated price) 2014 A participant could make money by selling a CSO acquired in a primary auction Price differences shrink as the FCA floor price disappears and as surplus capacity diminishes 6

ISO is Moving to Fully Integrate Demand Response in Wholesale Markets If Order 745 is ultimately vacated, everything below will be impacted In response to Order 745, ISO proposed to fully integrate demand response into the energy markets by June 1, 2017 August 2011 ISO issued a paper describing how demand response could provide reserves and participate in the forward reserve market by June 1, 2017 September 2013 April 2012 ISO proposed to modify capacity market rules to make capacity obligations of generators and demand response resources comparable by June 1, 2017 October 2014 ISO proposed market rules allowing demand response to provide reserves and participate in the FRM; Legal issues currently underway make status of DR uncertain 7

PJM Whitepaper Recently Released An approach to DR to mitigate lengthy litigation risk and uncertainty • Demand response would no longer participate as a supply resource • Load-serving entities (LSEs) could submit load curtailment bids into the capacity market • LSEs with a cleared load curtailment bid receive no capacity or energy payments – rather, the LSE’s capacity obligation and energy bill is reduced • Loads providing ancillary services (i. e. , regulation and operating reserve) could receive payment for providing those services • Transition rules are needed to allow for the conversion of demand resource obligations to load curtailment obligations • Will LSEs have the incentive to submit load curtailment bids? 8

Grid Modernization Can Be the Platform that Preserves Demand Response in New England • New England states are considering advanced metering infrastructure and associated tools to facilitate customer response to price and improve the integration of distributed generation – Current default service in New England is based on a uniform rate • Customers cannot benefit from changing their consumption levels in response to changing real-time wholesale energy prices • Smart grid technology is not fully utilized under uniform retail rates – Current lack of retail customer data limits the ability of: • Load serving entities to offer other retail products • Customers to evaluate other retail products such as dynamic retail offers, distributed resources, and/or other smart grid opportunities • On November 5, 2014, the Massachusetts DPU ordered utilities to implement default time-varying retail rates (see D. P. U. 14 -04 -C) following deployment of advanced metering functionality to facilitate demand response 9

The Growth of Distributed Generation Will Impact Both Wholesale and Retail Markets • If customers both produce and consume power, net demand becomes less predictable and operations more complex – Nameplate PV generation expected to more than triple (1, 800 MW by 2023) • The ISO does not have direct access to distribution system data, or control over distributed generation – A distribution system operator (DSO) that operates and administers localized systems and retail markets may be needed – DSOs and ISOs would need to share system and market information to optimally balance supply (including potential surplus energy from distribution systems) and demand in real time Many complexities: • Role of DSO, utilities, LSE? • Operations, trade and pricing? • Settlement? • Communication standards? • DG interconnection standards? • Long-term planning? 10

Legal Action Creates Uncertainty for DR in the Wholesale Markets • The ISO’s existing tariff provisions are still in effect and the ISO is moving ahead in preparations for the next Forward Capacity Auction • Unless otherwise directed by FERC, the ISO plans to integrate DR into energy and reserve markets • Will FERC maintain jurisdiction over DR? How will FERC respond to the court order vacating Order 745? 11