16. Program Transition to Function Under the New CAISO Markets
16.1. Background
MRTU is the CAISO's new design for wholesale electricity markets, which commenced on March 31, 2009. Through these markets, the CAISO ensures that there is sufficient energy to meet electricity demand in California at any given time to maintain the stability of the electrical system. Initially, the CAISO will recognize two types of demand response in the CAISO's new markets: Non-Participating Load and Participating Load. These demand response resources each have different levels of functionality and interaction in the CAISO markets.
One year after the CAISO's new market is implemented, the CAISO will introduce additional functions to the CAISO's market in an update called Markets and Performance. One of the enhancements that will be added at that time is Scarcity Pricing, a mechanism that raises certain prices to high, predetermined levels when electricity reserve margins (ancillary services) for a particular time fall below certain limits (in other words, when there is an increased probability of a shortage of electricity).
After the Markets and Performance update, the ISO will introduce Proxy Demand Resource. Proxy Demand Resource is currently under development through a CAISO stakeholder process. Proxy Demand Resource is intended to be a compromise between Non-Participating Load and Participating Load. Proxy Demand Resources would not have to schedule the underlying demand like Participating Load is required to do, but would be permitted to bid into the Day-Ahead Ancillary Service Markets and Real-Time Energy Markets unlike Non-Participating Load. Additionally, as currently proposed by the CAISO, Proxy Demand Resources would bid into the CAISO Markets at Custom Load Aggregation Points, while Participating Load bids at a nodal level and Non-Participating Load bids at a Default Load Aggregation Point.
Non-participating load has very limited functionality and will only be permitted to participate in the Day-Ahead energy market. Demand Response resources acting as Non-Participating Load can only mitigate scarcity prices indirectly by lowering load, which would then lower the amount of reserves required.148 On the other hand, Participating Load can participate in the Day Ahead market and Real Time market, as well as the markets for ancillary services, and so will be able to address scarcity pricing directly. To qualify as Participating Load, a demand response provider must have a signed Participating Load Agreement with the CAISO for a particular activity or program, and must abide by stringent telemetry and metering requirements in order to provide Ancillary Services. Though not yet complete, because it is anticipated that Proxy Demand Resources will participate in the Day-Ahead and Real-Time energy market, as well as the market for ancillary services, Proxy Demand Resources will be able to address scarcity pricing directly.
Currently, the utilities' demand response programs provide load drops based on triggers that either are internal to the utility and not necessarily tied to market prices, or are connected to emergency conditions as declared by CAISO. Additionally, the notification times required by the retail programs are not well synchronized with CAISO market operations. In other words, existing utility retail programs do not incorporate market signals under the CAISO's new market, and so are not fully integrated with the anticipated wholesale markets: they can only qualify for CAISO purposes as Non-Participating Load. This lack of integration lessens the ability of demand response to reduce electricity prices in the market because demand response cannot necessarily be called upon to reduce load at times of high prices or low reserve margins that do not result in an actual CAISO electricity emergency.
Recognizing this disconnect and the important role demand response can play in the CAISO's new market, the Guidance Ruling directed the utilities to submit plans in this proceeding outlining their strategies on how and when they will integrate their demand response retail programs with the CAISO's new market. In particular, the ruling emphasized the importance of positioning demand response resources as a tool to mitigate scarcity prices.149
In D.08-12-038, the Bridge Funding Decision in this proceeding, the Commission authorized four utility Participating Load Pilots, which are intended to enable the utilities to take existing retail demand response resources and dispatch these resources in the electric wholesale market and test ancillary services feasibility in summer 2009. The Commission expects much will be learned through these pilots to further shape the utilities' plans to integrate their programs with the CAISO's new market. This decision includes discussion of other participating-load related pilots, as well as the utility plans for transition existing programs away from non-participating load to either Proxy Demand Resource or Participating Load.
16.2. Utility Proposals for Transition of Demand Response Activities under the New CAISO Market
In these applications, the utilities suggest that full integration of demand response programs into the CAISO's new market is not possible until more information on the market's operation becomes available and further technical changes to utility systems can be implemented. SCE states that the utilities are unable to fully identify all of the technical and operational issues that must be addressed under the CAISO's new market.150 For example, SCE states that it is limited in redesigning programs for the CAISO's new market until a comprehensive user guide for CAISO's demand response products that provides complete understanding of how demand response resources will be bid, dispatched, and settled in the CAISO's market, is made available.151 Similarly, PG&E notes that CAISO's Scarcity Pricing design is still ongoing, meaning that how demand response resources will mitigate scarcity prices is still unknown. PG&E also discusses the need for enhanced communications,152 and SCE and SDG&E express a need to complete installation of interval metering and telemetry in order to support Participating Load.153,154 SDG&E also argues that issues such as direct access load forecasting, bidding into the CAISO's new market, and methods for settlement still need resolution.155 For these reasons, all three utilities propose a gradual transition of demand response activities to greater functionality within the CAISO's new market.
PG&E asserts that Proxy Demand Resource can be implemented sooner and at a lower cost than Participating Load because the scheduling requirements for Proxy Demand Resource are much simpler. As noted above, Proxy Demand Resource only requires the submission of a load drop whereas Participating Load will require forecasting of a specific total load as well as the load drop, which will require increased planning time and forecasting effort.156 Given the relative effort involved in transitioning programs from Non-Participating Load to Proxy Demand Resource or Participating Load, all three utilities focus their transition plans for 2010-2011 on evaluating their programs for transition to Proxy Demand Resource.
In its application, PG&E notes that, other than the Participating Load pilots approved in D.08-12-038, most of its demand response programs will participate as Non-Participating Load at the start of the CAISO's new market,157 and proposes to phase some of its programs into greater alignment with the CAISO markets gradually, to allow for the development of the the CAISO's new market rules and PG&E procedures and infrastructure.158 PG&E describes a plan to transition many of its current programs, as appropriate, from Non-Participating Load to Proxy Demand Resource beginning in 2010.159 PG&E intends to transition its demand response programs to Proxy Demand Resource or Participating Load only after all changes to CAISO tariffs and procedures have been made and the necessary infrastructure is in place,160 and when "the benefits justify the costs."161 Because of this, PG&E's timeline for transition is not yet fully defined and is partially dependent on outside factors and uncertain future analysis.
Like PG&E, SCE states that its demand response programs are currently limited to Non-Participating Load, with the exception of its previously approved Participating Load pilot programs. SCE expects that the Participating Load pilots taking place in 2009 will assist in resolving technical and operational issues and developing more detailed plans for transitioning demand response to provide more benefits under the CAISO's new market.162 SCE proposes to begin bidding some of its demand response programs as Proxy Demand Resource as they conform to appropriate requirements over time. 163 SCE argues that it is not appropriate to take more immediate action until there is time to research customer needs, prepare internal systems and operations for compatibility with the CAISO's new markets, and if necessary, obtain Commission approval for its plans.164 SCE also recommends that all investments made by SCE, the other utilities, and the CAISO should consider the optimal mix of demand response products. Like PG&E's transition plan, SCE's proposal is not yet very detailed, but moves in the direction of better integrating its demand response programs into the CAISO's new market.
Similarly, SDG&E states that it will redesign proposed programs as needed to enable participation in the CAISO's new market. Additionally SDG&E states it will submit new programs for Commission approval during the 2009-2011 cycle if the opportunity to improve integration with the CAISO's new market arises.165
Each utility will run at least one pilot during the summer of 2009 to test the ability to use various demand response resources as Participating Load, and the results of these pilots are expected to provide information that can be used to transition programs to Proxy Demand Resource or Participating Load starting 2010. PG&E and SCE both suggest that the transition of programs to Proxy Demand Resource or Participating Load will require additional funding beyond the amounts requested in this proceeding.
16.3. Party Positions
Very few parties provided detailed responses to the utilities' MRTU transition proposals. TURN takes the position that the time and expense required to transition programs to function as Participating Load may not be cost effective, and proposes that the Commission minimize expenditures on compatibility with the CAISO's new markets, and focus on simpler ways of integrating demand response into them in the short run, while delaying the transition of utility programs to operate as Participating Load. 166 CAISO, on the other hand, generally supports the transition of programs to operate as Proxy Demand Resource or Participating Load, asserting that demand response that can participate in the real time market would be extremely valuable.167 CAISO also offers a few specific responses to utility assertions on the amount of information available or needed to transition certain programs, suggesting that much information about the CAISO's new market and scarcity pricing is already available to be used in planning program transitions.168
16.4. Discussion
It appears that it is not feasible at this time to install the infrastructure and processes needed for anything more complicated than Non-Participating Load for 2009. Given this, a gradual transition of some programs from Non-Participating Load to Proxy Demand Resource and a few ultimately to Participating Load, as outlined by the utilities, is reasonable. This will allow the development of additional information on the operation of Proxy Demand Resource and Participating Load, along with the implementation of technical changes and education programs that will facilitate the transition. Still, these transition plans are vague and raise several issues and barriers that should be explored while the transition is ongoing.
It is true that the CAISO's final design of Scarcity Pricing is incomplete. However, it is well known that the triggers Scarcity Prices will be based on the CAISO's ancillary service reserve margin. Additionally, there is consensus amongst participants in the CAISO's Scarcity Pricing stakeholder process regarding the products that will be subject to Scarcity Pricing, including Non-spinning Reserves, Spinning Reserves, and Regulation (both upward and downward). The requirements of these products are established by the Western Electricity Coordinating Council (WECC), are well defined, and are not likely to change. As noted above, Demand Response acting as an ancillary service resource will mitigate Scarcity Pricing much more effectively than Demand Response acting as an energy resource. However, none of the utilities propose a plan that will put demand response in a position to reasonably mitigate scarcity prices because none of the programs allow utilities' Demand Response to participate in CAISO markets as ancillary services.
The other barriers and uncertainties raised by the utilities in support of their proposals for a gradual transition to Proxy Demand Resource and Participating Load include CAISO's completion of comprehensive User's Guides for Proxy Demand Resource and Participating Load and the need for more information on demand response aggregators' role in the CAISO's new market. We agree that it is difficult for the IOUs to create the necessary infrastructure and communications networks without knowing the final market designs. These concerns all support the need to continue information gathering and analyses on the expected place of demand response programs within the CAISO's new market. For example, the Participating Load Pilots approved for 2009 are expected to provide a great deal of relevant information. Because the Participating Load Pilots are designed to test Participating Load, the most complex demand response product, these pilots should provide the utilities with opportunities to design and test networks that are able to integrate demand response resources into the CAISO's new market as Non-Participating Load, Proxy Demand Resource, and Participating Load.
It appears that several significant milestones will be reached over the next two years. The first milestone is the completion of the Participating Load Pilots during the summer of 2009. As noted earlier, these pilots will provide information regarding the needed infrastructure, communications, and metering technologies required for Participating Load. The second milestone is CAISO's completion of its market designs and user guides for Proxy Demand Resource and Participating Load, expected sometime in the fall of 2009. The third milestone is the participation of utility demand response programs as Proxy Demand Resource in summer 2010. As noted earlier, the CAISO is projecting that it will have a Proxy Demand Resource product in place for use during the summer of 2010, and that the utilities will transition some demand response programs to Proxy Demand Resource for 2010 participation.
We agree that it would be best to wait to make major changes to programs until the benefits of those changes are found to outweigh the costs. We believe that the determination that the benefits of a major change outweigh its costs is best made by the Commission after the demand response opportunities and their costs and benefits under the CAISO's new market can be better defined. The current gaps in our knowledge may be addressed through the results of the Participating Load Pilots, which are expected to provide a great deal of information regarding the costs of such changes. The final designs for Proxy Demand Resource and Participating Load will also affect the implementation costs for the utilities, as will the utilities' experience with Proxy Demand Resource in 2010. However, we do not consider altering at least one program to be compatible with the CAISO's non-spinning and/or spinning reserves products to constitute a major change.
We approve the utilities' existing MRTU transition plans for 2009-2011, with the following additional requirements. As noted earlier, the utilities' integration plans indicate that moving demand response programs to Participating Load will be more complex and difficult than transitioning them to Proxy Demand Resource. In order to address these difficulties and ensure that programs are transitioned in a thoughtful way when such changes are deemed to be cost effective, we require the utilities to prepare two reports over the next two years. First, the utilities shall file an evaluation of the Participating Load pilots in 2009. The evaluation will provide an assessment of what was learned through the pilots, areas that need further exploration (if any), and potential next steps for 2010 and beyond. This evaluation will be due by December 31, 2009.
In addition, the utilities will prepare and submit detailed reports on the transition of demand response programs into the CAISO's new market by January 31, 2011. These plans shall include lessons learned from the utilities' 2009 pilots and their 2010 Proxy Demand Resource experience, including performance assessments as well as an evaluation of expected costs and benefits of integrating all programs into Proxy Demand Resource (if such programs have not already been integrated) and Participating Load (for all programs). As part of each transition plan, the utility should also include a description of its analysis in determining the appropriate level of integration into the CAISO's new market (Non-Participating Load, Proxy Demand Resource, or Participating Load) for each of their demand response programs, and the rationale for their recommendations. These reports should also include an assessment of the probable effect of each program on Scarcity Pricing. The plans should also provide information on any barriers that still exist for integration to Proxy Demand Resource and Participating Load, and suggest next steps as to how to address those barriers.
In order to ensure steady progress towards integration with the CAISO's new markets, the Commission directs the utilities to propose modifications to one or more existing demand response programs that will make at least 10 percent of the megawatts enrolled in the demand response programs authorized in this decision comply with the CAISO's Proxy Demand Resource requirements. These required program modifications should be requested within 30 days of the filing of CAISO's Proxy Demand Resource tariff with the Federal Energy Regulatory Commission. We expect the transition to Proxy Demand Resource to involve modifying one or more of the following programs: the Capacity Bidding Program, the Demand Bidding Program, PG&E's PeakChoice, SCE's Energy Options program, or a utility's contract with an aggregator. Because these changes are unlikely to affect the utilities' overall demand response budgets adopted in this proceeding, we expect these changes to be requested via Tier 2 advice letters, consistent with the rules for program and budget changes adopted in this decision.169
In addition, within 30 days of the approval of CAISO's Proxy Demand Resource tariff by the Federal Energy Regulatory Commission, each utility shall file a proposal with the Commission to make at least one program comply with the 10-minute dispatch notification time requirements for participation in the CAISO's ancillary services market as either Proxy Demand Resource or Participating Load. Utilities may choose to create a new program, a new option within in existing program, or modify an existing program such as its Capacity Bidding Program, the Demand Bidding Program, PG&E's PeakChoice, SCE's Energy Options program, or a utility's contract with an aggregator. These requests shall also comply with the rules for program and budget changes adopted in this decision; changes that require additional funding beyond the total approved in this decision, or creation of an entirely new program, may require an application or petition for modification, as discussed in Section 25, below. All other metering and telemetry requirements for demand response participation in the CAISO's ancillary service markets are subject to CAISO review and approval.
All demand response activities that are not transitioned to Proxy Demand Resource or Participating Load shall continue to be scheduled in the CAISO day-ahead market as Non-participating Load. Utilities will comply with existing CAISO requirements for Non-participating Load. These requirements include the elimination of the manual work-arounds used to account for demand response by reducing the level of Residual Unit Commitment procured by the CAISO, and submission of a price-curve on desired load purchases, allowing the utility to forego the purchase of energy at a price at which a demand response program will be triggered.
148 The Reserve Requirement percentage would remain the same but the underlying MW amount needed to satisfy the percentage requirement would decrease.
149 Guidance Ruling, pp. 16-17.
150 SCE Exhibit 2, p. 19.
151 SCE Exhibit 2, p. 37.
152 PG&E Exhibit 201, Chapter 3, p. 32.
153 SCE Exhibit 2, p. 7.
154 SDG&E Exhibit 101, p. 10.
155 SDG&E Exhibit 101, p. 8.
156 PG&E Exhibit 201, Chapter 3, p. 19.
157 PG&E Exhibit 201, Chapter 3, pp. 35-52.
158 PG&E Exhibit 201, Chapter 3, pp. 1-2.
159 PG&E Exhibit 201, Chapter 3, pp. 35-52.
160 PG&E Exhibit 201, Chapter 3, p. 10.
161 PG&E Exhibit 201, Chapter 3, p. 5.
162 SCE Exhibit 2, p. 13.
163 SCE Volume II, p. 10.
164 SCE Volume II, p. 13.
165 SDG&E Prepared Testimony of Mark Gaines, Volume I of VI, p. 6.
166 TURN Exhibit 420, pp. 5-6.
167 CAISO comments on amended application, September 29, 2008, p. 14.
168 CAISO comments on amended application, September 29, 2008, p. 10.
169 As discussed in Section 25 below, changes to aggregator contracts will require new applications or petitions for modification of the decisions adopting those contracts.
