March 10, 2008

1. Day-Ahead Load Response Program (DALRP) Proposal Review with Markets Committee March 10, 2008 Contact Information: Herb Healy 860-306-4503 hhealy@enernoc.com

2. Outline of Review • Overview of DALRP – Impacts on Real-Time LMP • Issue of Static Customer Baseline – Rules Flaw • Effect of Revised ISO Rules • EnerNOC’s Alternative Proposal • Examples • Summary

3. Overview of DALRP – Benefits to Load • Intent of the DALRP • participation of demand side resources in the DA market competitively with supply • ability of DR resources (facilities) to decide, based on opportunity costs, when to offer load reduction into the market • Since DALR is not integrated into the clearing of the day-ahead energy market, DALR load reductions only affect real-time prices • EnerNOC has previously shown to Markets Committee • real-time demand reductions impact marginal price at any time; cost reductions are not limited to only high-priced hours • DALR resources reducing consumption in real time prevent the need for dispatch of a higher-cost unit, effectively lowering LMP and reducing overall system cost

4. Real-time Impact of DALRP • Using 2007 ISO-NE control area day-ahead demand/price data and fuel index, calculated implied heat rate as a function of demand • Using results of regression, estimated impact of 1 MW reduction on LMP at various dispatch heat rates Real-time demand reductions can impact marginal price at any time

5. Value of DALRP to Market • Using analysis from previous slide, estimated value of reductions on net cost to serve real-time load (~10% according to Annual Market Report) • Note: Assumed that DALR resource was able to respond 24x7 Real-time demand reductions substantially reduce the cost to serve load

6. Rules Flaw – Issue of Static Customer Baseline • Market Participants can engage in strategic behavior under the current structure of the DALR program • cleared days (ie, days when participating in DALRP) are not used in Customer Baseline (CB) • CB is locked over successive clearing days • offers at minimum floor price clear on most days • market participants can earn inappropriate payments by establishing and locking in a high CB • CB can be “gamed” • EnerNOC agrees the rules flaw MUST and CAN be fixed • address the flaw; ie, CB methodology • don’t proscriptively constrain ability of market participants to participate

7. Effect of Revised ISO-NE Rule Change • On February 7 ISO-NE implemented revised minimum offer price for DALRP • Result of revised minimum offer price: • Participants not clearing on successive days • Any previously static customer baselines (CBs) have been refreshed • ISO-NE version addresses potential for strategic behavior, but precludes demand resources from clearing in the market; through March 1 • In CT, DA price > min. offer price in 20 of 187 program hours (10.7%) • In ME, DA price > min. offer price in 2 of 187 program hours (1.1%) ISO-NE version precludes demand resources from providing system benefit through downward pressure on real-time prices

8. Alternative DALRP Proposal – Possible Approaches • EnerNOC raised two approaches with the Markets Committee representing possible long-term solutions • Alter CB methodology to force inclusion of recent data, as necessary • For example, baseline incorporates at least x of y trailing days worth of data, including DALRP cleared days as necessary • Impose administrative limit on resource clearing frequency (e.g., x days per week/month) • Neither approach was discussed or voted upon by the ISO or NEPOOL • Note: EnerNOC proposed a interim solution – a lower indexed threshold price • EnerNOC believes that changes to the mechanics of the CB calculation both narrowly focus and fully address the rule flaw

9. EnerNOC’s Alternative DALRP Proposal Alter CB methodology to force inclusion of recent data • Mechanics • CB calculated over trailing 45 program-day window using existing weighted-average methodology • CB must include at least 15 program days • If 15 or more non-cleared program days exist in the 45-day window, CB calculated using all of those days (no cleared days included) • If 15 non-cleared program days do not exist in the 45-day window, CB calculation first uses all non-cleared program days then incorporates most-recent cleared program days until minimum 15 program days reached • This alternative proposal ensures dynamic CBs while allowing demand response resources to continue to actively participate in the market

10. EnerNOC Alternative DALRP Proposal – Application of Methodology • Example 1: resource clears 30 of 45 program days in trailing 45 program-day window • CB calculated using 100% non-cleared program days’ data • Example 2: resource clears 35 of 45 program days in trailing 45 program-day window • CB calculated using 10 non-cleared program days in window plus 5 most recent program days

11. Baseline Illustration – Seed Period Gaming • Strategic behavior originally presented by ISO enabled by gaming of “locked” CB and “seed period” (first five days of enrollment -> create initial CB); we modeled how such behavior would play out under each strike price/CB scenario • Graph on following slide -- key takeaways: • Existing CB with $50 strike price (orange line) reflects seed period problem – customer has measured, but not actual, load reduction • Existing CB with heat rate-indexed strike price (purple line) adjusts over time (offer does not clear 70% of days), but slowly • Proposed baseline (red line), which gives a higher weight to more recent data, adjusts to actual load profile (even with 100% cleared offers)

12. Baseline Illustration – Seed Period Gaming

13. Baseline Illustration – Permanent/Seasonal Load Reductions • Assuming same customer would participate as often as possible (as in the past), we modeled how permanent/seasonal changes in load play out under each strike price/CB scenario • Graph on following slide -- key takeaways: • Existing CB with $50 strike price (orange line) reflects problem of “locked” baseline – customer has measured, but not actual, load reduction • Existing CB with heat rate-indexed strike price (purple line) is slow to pick up permanent changes to load profile • Customer participates ~50% of time (ISO-NE hub price, backcasted threshold price) • Proposed baseline (red line) is quick to pick up permanent load profile changes, refreshing CB even during a period of frequent customer participation

14. Baseline Illustration – Permanent/Seasonal Load Reductions

15. Proposed Baseline - Summary • Proposal is designed to be as similar to existing and (ex. gaming) effective baseline methodology while directly addressing underlying program issues: • Proposed CB is as accurate as existing CBsince it is based on current CB (weighted average of historical data), small changes for accuracy (more weight given to recent data, event days included if insufficient data) • Proposed CB addresses strategic behavior discussed by ISOeven over periods of frequent participation; no more “locked” CB • Guarantees program payments are appropriate; resources reducing usage as measured against a contemporary baseline • Restores substantial market benefits that demand resources can provide that are precluded by ISO-NE’s proposal • Not discriminatory (i.e., allows demand response resources to participate like supply resources—whenever market prices justify action)