Various electric grid independent system operators (ISOs) and Regional Transmission Organizations (RTOs), along with FERC have been promoting policies to increase demand response capabilities in the deregulated energy markets in recent years. Commercial & Industrial (C&I) customers are one of the key targets for achieving significant demand response in the deregulated electricity markets, due to their size, and the potential for a small number of users representing a large percentage impact on demand reduction on the grid. Various ISOs such as NYISO, PJM, ISO NE have developed demand response programs that offer financial incentives to end users under the umbrella of Emergency and / or Economic Demand response programs.

1. Energy Efficiency & Demand Response in Competitive Electricity markets:
Opportunities & Challenges for Energy Managers
Rahul Walawalkar, Ph.D., CEM, CDSM, CSDP : Customized Energy Solutions Ltd.
Bruce Colburn, Ph.D., CEM, CDSM, GBE : EPS Capital Corp.
Rick Gilkey, CEM, CDSM, CEP : Customized Energy Solutions Ltd.
Abstract: streams to the industrial plant than tend to
Various electric grid independent system be currently available.
operators (ISOs) and Regional Transmission
Organizations (RTOs), along with FERC The revenue streams available from grid
have been promoting policies to increase Demand Response programs tend to be
demand response capabilities in the variable in length, and amounts of money,
deregulated energy markets in recent years. as the incentive programs depend on the
Commercial & Industrial (C&I) customers wholesale energy market dynamics. This
are one of the key targets for achieving uncertainty of revenue has strongly
significant demand response in the discouraged meaningful capital investment
deregulated electricity markets, due to their in this area, instead relying more on manual
size, and the potential for a small number of load dropouts upon notification, a very
users representing a large percentage inefficient and unreliable scheme. These
impact on demand reduction on the grid. ISO programs (Emergency and Economic
Various ISOs such as NYISO, PJM, ISO NE Demand Response Programs) are
have developed demand response independent of the programs from the local
programs that offer financial incentives to utility and therefore may require action of the
end users under the umbrella of Emergency plant at times when the local grid is not
and / or Economic Demand response peaking, but the regional grid is. Therefore,
programs. integrating new ECMs with the more stable
and predictable energy efficiency measures,
However, thus far participation by the C&I as a combined program, can provide a more
sector in these programs has fallen far short stable financial base from which to put in
of their true potential. As a result, industry is place methods, equipment, and procedures
losing out on a useful cash flow stream, which together can reap financial rewards
while simultaneously the entire grid suffers from pure energy savings as well as
with higher than needed energy costs. This demand side management, whether that
is a case where Industry ignoring these DSM is from the local utility or from the ISO
programs does not just keep the playing grid.
field level, it actually causes increases in the
electric charges, not only for that industry, This paper will explore some currently
but everyone, and therefore some of these available ISO Demand Response Programs,
demand side response programs offer the differentiating them from local power
industrial sector not only the opportunity to company programs, and then analyze their
be paid for controlling demand, but in fact as impact on commercial & industrial
a result further reduce what otherwise would customers. The potential impact on the
be higher electric KWH charges. utility charges to that same industrial
customer will be covered, along with the
To cost-effectively change part of this impact of a direct participation, since “base
paradigm of thinking, an integration of case” conditions actually lead to higher cost
demand response technologies with more – doing nothing” costs more than being a
traditional energy efficiency projects is in direct participant.
order. To effect this, an integration of the
energy efficiency side with the demand
response side in concert with the new
energy conservation measures (ECMs)
which result from careful evaluation of joint
opportunities can lead to better benefit

2. 9/28/2009
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Energy Efficiency & Demand Response in
Competitive Electricity Markets:
p y
Opportunities & Challenges for ESCOs
Presented by
Rahul Walawalkar Ph.D., CEM, CDSM, CSDP
Bruce Colburn Ph.D., P.E., CEM, DGCP, CSDP, GBE, CEA
Presented on 6th November 2009 at
1
Analyze.
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Outline
Overview of Competitive Electricity Markets
Need for Demand Response in Competitive Markets
Overview of current Demand Response Programs and
opportunities for Energy Efficiency Projects
Value of DR with Energy Efficiency Projects for ESCO Projects
Win‐Win‐Win
Financial Benefits to ESCO, Host, and CSPs
ESCO Example, and Summary Data
1

3. 9/28/2009
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Organized Electricity Markets
Source: FERC: http://www.ferc.gov/industries/electric/indus‐act/rto/rto‐map.asp
Analyze.
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NYISO Net Load ‐ 2006
NYISO Net Load ‐
35000
Summer Months
30000
25000
20000
MW
15000
10000
5000
0
1-Jan
-Jan
Jan
eb
eb
6-Fe
1-Mar
25-J
18-Fe
13-
13-Mar
25-Mar
6-Apr
18-Apr
30-Apr
12-May
24-May
5-Jun
17-Jun
29-Jun
11-Jul
23-Jul
4-Aug
16-Aug
28-Aug
9-Sep
21-Sep
Days in Year S21
3-Oct
S17
15-Oct
S13
27-Oct
S9
8-Nov
S5 Hrs in
20-Nov
S1
2-Dec
Day
14-Dec
26-Dec
2

4. 9/28/2009
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Short Run Marginal Cost Curve & Price Duration Curve
* This price duration curve shows only the wholesale energy prices corresponding to the generation component of customer’s
electricity bill. T&D costs are added onto these wholesale energy costs.
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Types of DR Programs
Energy Efficiency
3

5. 9/28/2009
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DR Options Available From ESCOs
Building Automation Lighting Controls
Thermal Ice Storage
Emergency Generators
Energy Efficient Motors
Variable Speed Drives Air Compressor System
Analyze.
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Implement.
Opportunities for DR Program Participation
Equipment / DR Programs
Customer Ancillary
Building Control Strategy Emergency Economic
Type Regulation
Component (Capacity) (Energy)
& Reserve
Air Conditioners Cycling/Forced Demand Shedding
Water Heaters Cycling
Residential
Pool Pumps Cycling
Demand limiting during on peak
Chillers
period
Commercial
Chillers Pre-cool bldg over night- storage
HVAC DX Forced Demand Scheduling
Refrigerator/ Prioritized Demand Shedding
Scheduled dimming of selected
g g
Lighting
circuits
i it
Chillers Demand Limiting on time Schedule
Demand Limiting through Heat
Industrial Electric Furnace
Stages
Electric Furnace Curtail (during peak period)
VSDs Limit Output on Scheduled basis
Production Eqpt Prioritized demand on selected units
4

6. 9/28/2009
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Why Demand Response With Energy Efficiency ??
• For Customer:
• DR can result in an appreciable reduction in system marginal costs of production
during peak time, which result in long term cost reduction for consumers.
during peak time which result in long term cost reduction for consumers
• DR also presents a way to earn added revenues for implementing EE measures
and having flexible controls incorporated in operations;
• Simultaneously helps to improve grid reliability
• In spite of such financial benefits, DR participation in PJM programs
was only 0.2% during the all time system peak in 2006.
• There has been a recent growth in DR participation in Emergency DR
There has been a recent growth in DR participation in Emergency DR
programs that provide capacity payment for peak load reduction
• Significant opportunities still exist in integrating energy efficiency and
flexible control capabilities for maximizing economic & ancillary
service DR participation
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Benefits of DR For ESCOs and EE Projects:
Benefits of DR For ESCOs and EE Projects:
Additional revenue for energy efficiency with little incremental
capital costs to enhance DR capabilities
CSPs can aggregate/automatically handle dispatching, planning,
and market settlements
Additional incremental revenue stream at relatively low risk
Added revenue can either allow more infrastructure hardware, or
greater profits
Provides more options for customer in terms of control,
Provides more options for customer in terms of control
generation, curtailment as Owner wishes
CSP adds a level of risk protection for ESCO who is more focused on
energy efficiency, and not DR or electricity markets
5

7. 9/28/2009
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DR Programs for Energy Efficiency Work
DR Programs for Energy Efficiency Work
ESCO can participate in multiple programs by partnering with CSPs
Receive Capacity payments for Emergency Program
Guaranteed Load Drop during up to 10 events called by PJM
G dL dD d i 10 ll d b PJM
Direct measurement of Load Drop through emergency generation
Energy Efficiency: permanent load reductions
PJM follows 3 year advance registration for capacity resources as part of
Reliability Pricing Mechanism (RPM) required before revenues begin
Receive Energy Payments for Emergency and / or Economic and / or
Ancillary Service Program
Ancillary Service Program
Requires typical M&V procedures for developing customer baselines
Customer could bid to ISO, but can have aggregators / CSPs to bid DR on behalf
of customers, control process, renewals and facilitate payments
Ancillary Service program participation may require real time communication
and control capabilities
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It’s A Team Effort: Win‐Win‐Win
It’s A Team Effort: Win‐Win‐
Customer / Energy Manager
Main beneficiary and determines the operating parameters
Facilitates execution for both EE and DR projects
p j
Can communicate new opportunities with management to determine ways to
maximize participation
ESCO / Performance Contracting Company
Provides technical, engineering and financing expertise
Can use additional DR revenue to expand scope
Evaluate investments based on incremental costs, that can add significant
capabilities for DR participation
Provide a technical bridge between customer goals and market opportunities
Pro ide a technical bridge bet een c stomer goals and market opport nities
identified by CSPs
Curtailment Service Provider
Provides functional & market expertise as well as interface to wholesale
electricity markets
6

8. 9/28/2009
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Benefits of Using CSPs in ISO DR Process by ESCOs
CSPs are registered market participants in the ISOs
Involves paying ISO registration fees,
Employing and training staff to know ISO rules and regulations
Fulfilling credit requirements for market participation
Verify that projects meet the ISO program criteria to ensure payment
ISO based programs have evolved over past decade and still
undergoing changes
important to be an active market participant to maximize value
CSPs can provide in depth market knowledge and domain expertise
to maximize the revenue potential from DR participation
Certain CSPs can also provide 24*7 operational support and control
i S l id 2 * i l d l
capabilities that could be vital in optimizing revenues from economic
and ancillary service programs
It is important to choose the right partner to compliment the skills
available within ESCOs and ensure that the goals of all partners are
aligned to maximize benefits for all
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ESCO Project & DR Program Participation
Benefit of ISO programs is they tend to not interfere with the energy efficiency
and cost savings plans of normal ESCO project plan
Offers payments from ISOs for the system benefits of EE projects, thus
Offers payments from ISOs for the system benefits of EE projects, thus
Augment the energy cost savings on utility bills with
Capacity payments for permanent load reductions and energy payments for flexible controls
Some ISO programs can begin to pay for energy reductions and ancillary
services from day one, even though Capacity payments are delayed for 3 years
after registration approval
Risk of loss of capacity payment for failure to perform, but this is ESCO
expertise & CSPs can help compliance with ISO requirements.
expertise & CSPs can help compliance with ISO requirements
CSP can assist ESCO in securing funding, and maximizing on going cash flows
CSPS can also help ESCOs monitor changing market scenarios to prepare for any
fluctuations in potential market revenues by keeping track of supply / demand
variations, fuel prices and transmission upgrades or market rule changes
7

9. 9/28/2009
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Hospital ESCO Example
Variety of Energy Efficiency and Cost Reduction Measures,
integrated on a bundled basis
Includes non revenue, “Infrastructure Enhancement” measures
deemed important by the Hospital
Allows integration of standard energy efficiency + other ECMs, as
well as specific ISO DR program measures. They can co‐exist.
Utility costs highly dependent on the location of the Host Site with
respect to grid regions.
Location affects both utility rates, as well as the prices paid by ISO
for Host implementing DR programs
Neither Host nor the ESCO have interfaced with electricity markets
in past
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Hospital ESCO Measures: Example
Example Hospital Project
BEFORE: Utility Rates
Peak Summer KW for Med Complex 33,640
Annual MWH for Med Complex 132,608,880
Discount Factor, for NPV Calculations 5.0% Incremental KWH $0.042
Debt Pymt Period, years 10 ISO EE Payment, $/KW/Month $3.450
Construction Period 12 Months ISO DR Payment, $/KWH $0.200
Interest Rate on Debt 7.0% ISO Payment, $/KWH $0.120
CSP Fees 33.3% DR Funds Earned Nat Gas, $/MMBTU $9.120
DSM Run Hrs/Yr- Generator 60 Dmd, $/KW/Mo $12.100
DSM Run Hrs/Yr- Controls 600
Regulated Medical Waste is cost reduction, at .37/lb
Generator expense reworked due to need of DR plus, upgrade for Hospital
ESCO Ann'l Elec EE Pk Shve Curtail Ann'l Fuel Incrntl
Sale Price Svngs Dmd Svg Pk Shvng KWH/Yr KW Svngs Maint
Revenue Producing Items
g KWH KW/Month KW/Mo (Controls) MMBTU Svngs/Yr
( ) g
Complete Lighting Retrofit $3,224,600 11,222,650 2,940 0 $7,500
New RMW System $1,510,400 -97,222 -24 -7,968 $0
Exhaust system heat recovery $312,200 1,389,000 11,333 $0
Direct Contact heat exchanger $660,000 -19,500 -30 51,780 -$10,000
Controls Schedules Modifications/pts $1,630,000 3,341,675 150 = fixed 104,700 1,745 41,430 -$8,000
Add VSD to AHUs (7) $132,000 2,906,700 21,433 -$10,000
Generators/controls for ISO Credit $39,600 0 6000 360,000 -5,040 -$5,400
Infrastructure Items
Emergency Generator System Upgrade $1,480,000 0 0
8

10. 9/28/2009
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PROJECT CASH FLOWS – 10 YEAR BASIS
PROJECT CASH FLOWS –
Cash Flows Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Gross Revenues w/ ISO Pymts $2,651,454 $2,651,454 $2,651,454 $3,169,787 $3,169,787 $3,169,787 3,169,787 3,044,097 3,044,097 3,044,097
Debt Service $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345 $2,044,345
Debt Coverage Ratio 1.30 1.30 1.30 1.55 1.55 1.55 1.55 1.49 1.49 1.49
CSP Fees $0 $0 $0 $172,605 $172,605 $172,605 $172,605 $130,750 $130,750 $130,750
Remainder $607,109 $607,109 $607,109 $952,837 $952,837 $952,837 $952,837 $869,002 $869,002 $869,002
Net Free Cash Flow NPV-10 yrs $6,253,802
Gross Revenues w/o Any ISO Pymts $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814 $2,525,814
Debt Service Ratio 1.24 1.24 1.24 1.24 1.24 1.24 1.24 1.24 1.24 1.24
Remainder $ ,
$481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469 $481,469
$ , $ , $ , $ , $ , $ , $ , $ , $ ,
Net Free Csah Flow NPV-10 yrs $3,717,777
DSM Program NPV Benefit Increase-10 yrs $2,536,026
Analyze.
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Energy and Demand Savings due to ECMs and DR
Energy Savings Demand Savings
0%
14%
23%
9%
86% 68%
AFTER KWH
AFTER KW
KWH Reduction due to EE
KW Redctn due to EE
KWH Rediuction due to DR
KW Redctn due to DR
9

11. 9/28/2009
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Contribution of DR revenues on Project Economics
Gross Revenue Breakdown
M
10 yr revenue w/o ISO
10 yr revenue of KW ISO
10 yr revenue of KWH ISO
% increase in gross revenues with ISO payments 13.6%
% Increase in Net Revenues to ESCO/Host with ISO Payments 71.1%
Analyze.
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Implement.
Summary
Competitive Electricity markets provide new opportunities for
monetizing DR capabilities of traditional EE projects
Additional revenues can be shared between ESCO and Host
Increase per year of over $256,000 on an NPV basis.
DR program participation increased Net Cash After Cost by 71% in example
After debt service covered, about 10% increase in annual average revenues in
1st year, but substantially more over life than without DR
With help of CSP, this could be further enhanced through
monitoring day ahead energy markets and forecasting to avoid
it i d h d k t df ti t id
“Demand Hit” due to failure to perform during “Event Period”
Conclusion: By partnering with CSPs, ESCO can add meaningful
economic value for customers through DR program participation
for the system level benefits of these projects.
10

12. 9/28/2009
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Acknowledgements
We would like to thank following individuals for their
inputs & review comments
Rick Gilkey, VP, DR and Fuels, Customized Energy Solutions
Rick Mancini, Director ‐ NYISO, Customized Energy Solutions
Stephen Fernands, President, Customized Energy Solutions
Thomas K. Dreessen, President, EPS Capital Corp.
Analyze.
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QUESTIONS ???
Dr. Rahul Walawalkar Dr. Bruce Colburn
215-875-
215-875-9440 610-525-
610-525-4438
rahul@ces-
rahul@ces-ltd.com bcolburn@epscapital.com
www.ces-
www.ces-ltd.com www.epscapital.com
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11

13. Author Bios:
Bruce Colburn Ph.D., CEM, CDSM, GEB
Rahul Walawalkar Ph.D., CEM, CDSM
Dr. Bruce K. Colburn is licensed both as an
Dr. Rahul Walawalkar leads the Emerging electrical and as a mechanical engineer in
Technologies practice for Customized several states. He holds a Bee, MS and
Energy Solutions with focus on energy Ph.D. in Electrical Engineering. In addition to
storage, demand response, renewables and 39 years of engineering design and analysis
smart grid technologies. He is an experience, he is certified as a Green
internationally acclaimed expert in areas Buildings Engineer, PE, CEM, DGCP,
covering energy management, electricity CSDP, and CEA and various other
markets, emerging technologies and new certifications, including NCEES national
product development. engineering registration. He has over 70
publications to his record, including
Rahul has been involved in evaluating contributions to 6 books, and was inducted
economics of emerging technologies in into the AEE International Hall of Fame in
deregulated electricity markets since 2004. 2004. He has received numerous honors
His research and consulting activities have and awards from various engineering
covered complete range of demand societies, including AEE, IEEE, ASHRAE,
response and energy storage technologies. and AIST, and is A Member of the Energy
Rahul currently serves on the Board of Committee of the Association of Iron and
Directors of Electricity Storage Association Steel Technology. He has worked on a
and is involved in providing inputs for the variety of industrial, commercial, and
demand response and energy storage policy institutional projects in 28 countries,
to FERC & various state agencies. He also including design, retrofit troubleshooting,
serves as a Lead Analyst for "Global Energy commissioning, forensic engineering work,
Assessment" initiative of the International energy engineering, and related aspects.
Institute for Applied Systems Analysis
(IIASA) as part of an international team of Dr. Colburn has also been a lecturer at a
experts. number of energy training programs
sponsored by various state energy
Rahul holds a Ph.D. in Engineering and agencies, the US Department of Energy,
Public Policy from Carnegie Mellon Portuguese government, ASHRAE and
University. Rahul conducted research on AEE. Prior to entering the consulting field,
“economics of emerging energy storage and Dr. Colburn was Associate Professor of
demand response technologies in Electrical Engineering at Texas A&M
deregulated electricity markets” under the University. He is a Charter Member of AEE,
guidance of Dr. Jay Apt, Dr. Lester Lave, Dr. member of IEEE, ASHRAE and AIST and is
Granger Morgan and Dr. Rahul Tongia at associate editor, reviewer, awards
the Carnegie Mellon Electricity Industry committee member, director and advisor for
Center. He also holds Masters in Energy numerous technical journals and
Management from New York Institute of engineering organizations, and on the Board
Technology and undergraduate degree in of the Distributed Generation Institute of
Electrical Engineering from Walchand AEE. Past industry awards include the AEE
College of Engineering. Energy Professional Development Award,
Sigma Xi Research Award, IEEE Prize
He is recipient of numerous awards Paper Award and Houston Chapter AEE
including Computer Society of India’s Young Achievement Award. He is a Chartered
IT Professional Award, Demonstration of Legend in Energy of AEE.
Energy Efficiency Developments scholarship
from American Public Power Association
and is also recognized as one of the
Legends in Energy by Association of Energy
Engineers.

14. Rick Gilkey CEM, CDSM, CEP
Richard (Rick) Gilkey is the VP Fuels and
Demand Response for Customized Energy
Solutions. He is responsible for assisting
clients in developing and selecting cost-
reducing energy supply strategies in
wholesale and retail markets for electricity
and natural gas. As well as, supporting
clients in RFP processes including data
analysis document preparation, coordination
of wholesale and/or retail suppliers, bid
evaluations, RTO coordination of supply,
and contract negotiations
Rick oversees the Demand Side Response
programs for end use customers as well as
our partner clients who contract with us for
back office DSR support services, including
energy, capacity and ancillary service
market operations and coordination
functions for clients with behind-the-meter
generation and demand resources. Rick
also assists clients in developing and
selecting cost-reducing energy supply
strategies in wholesale and retail markets for
electricity and natural gas as well as RFP
processes including data analysis document
preparation, coordination of wholesale
and/or retail suppliers, bid evaluations, RTO
coordination of supply, and contract
negotiations.
Rick received his MBA from Widener
University. He also completed a BS in
Chemical Engineering at Rensselaer
Polytechnic Institute in addition to a BS in
Chemistry from Dickinson College. He is an
active member of The Association of Energy
Engineers. Rick is also recognized as a
Certified Energy Manager, Certified Demand
Side Manager and Certified Energy
Purchaser in conjunction with The
Association of Energy Engineers.