Transforming the Electricity Market

Promoting Sustainable Energy Efficiency Programs

Institute for Regulatory Policy Studies

10 May 2007Springfield, Illinois

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Vision: To be the first-choice provider for customers seeking energy solutions in the complex and changing marketplace

Who is Constellation Energy?

FORTUNE 200 competitive energy company headquartered in Baltimore, Maryland

North America’s No. 1 supplier of energy to wholesale and to retail commercial and industrial customers in competitive markets

A major generator of electricity with a diversified fleet of power plants located throughout the United States

A regulated distributor of electricity and natural gas in Central Maryland

We serve customers across the energy value chain

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Vertically Integrated Utility

Contradictions???

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Average Retail Rate Trends Compared to Other Retail Products

After run-up of prices during energy crisis, electricity rate increases have been significantly below inflation rates until late 1990s

Even recent rate increases have been modest compared to sharp increases in prices for other consumer energy products

Courtesy of The Brattle Group

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Change in Electricity Rates Compared to Other Consumer Products: 1985-2005

Despite recent increases, compared to other consumer prices, electricity rates have decreased in real terms (increased less than CPI) over the last 20 years

Rate increase is less than one quarter of price increases for other consumer energy products

Courtesy of The Brattle Group

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Average Rates in Restructured and Non-Restructured States

Significant rate increases prior to initiation of restructuring efforts

In 1997, rates in restructured states were approximately 35% above rates in non-restructured states

Very similar rate trends since restructuring commenced in 1997

Courtesy of The Brattle Group

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Relative Rate Trends in Restructured and Non-Restructured States Since 1997

Since restructuring discussions were initiated in the early-to-mid 1990s, rates in restructured and non-restructured states have trended similarly

Less-noticed increases in non-restructured states due to “routine” rate adjustments

Courtesy of The Brattle Group

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Energy Policy Act of 2005 Promotes energy efficiency and

renewable power, clean coal, nuclear, alternative fuels, hybrid vehicles and hydrogen.

Incentives for Bio-based industry: grants for research and demonstrations, tax incentives, market assurance or standards, loan guarantees.

Offers federal financial assistance for clean energy technologies (Title XVII) and tax incentives for renewable energy, clean coal, industrial gasification, nuclear, energy efficiency, alternative fuels and vehicles (Title XIII).

Addresses Climate Challenge through sound voluntary actions and acceleration of technology.

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Energy Policy Act of 2005: Incentives to Propel Policy

THE LOGICTHE LOGIC

Address the “Energy Investment Challenge”

Enhance energy security

Address Climate Challenge

THE CARROTTHE CARROT

Incentives for Bio-based industry: grants for research and demonstrations, tax incentives, market assurance or standards, loan guarantees.

Offers federal financial assistance for clean energy technologies (Title XVII) and tax incentives for renewable energy, clean coal, industrial gasification, nuclear, energy efficiency, alternative fuels and vehicles (Title XIII).

THE STICKTHE STICK

The EPAct 2005 mainly focuses on the carrot.

RPS and GHG Initiatives and mandates largely left to the states.

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Oil & Natural Gas Price Volatility Creates Opportunities

Crude OilAscent of crude oil prices in 2004–2005 threatens economic growth, and provides a painful reminder of U.S. commercial vulnerability due to import of more than 60% of our crude oil, the primary fuel for all transport modes.

Natural GasNatural gas volatility, varying more than 80% within a 12 month period, has aggravated industries dependent on gas as a primary feedstock or heating fuel, such as chemicals, fertilizers, metalworking and cement. LNG terminals are facing stakeholder resistance.

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Exploring Technology Deployment Initiatives

Energy Security, Economic and Environmental gains arise from commercial use of advanced energy technologies.

But, Market Failures Hinder Deployment

Advanced energy technology systems face skepticism. Owners of early units face “first mover” penalties (higher cost and technology

risk, market and regulatory uncertainties, than later movers). Customers of early units also face “first mover” penalties from higher cost

and lower reliability. Classic externalities (e.g., renters don’t make energy decisions) hinder action

by prospective users. Regulatory bias in rates (de facto) impacts technology choice — PUCs allow

generators to pass through marginal fuel cost price spikes, but restrict cost recovery of capital.

Regional differences are vast (fuel use, urban v. rural…) Solving issues requires collaborative, risk-oriented approach, nationally.

Solution: Identify key market barriers (e.g., pricing, information, finance, capital stock turnover rates, regulatory uncertainty, inefficient market structures, consumer perceptions); characterize risks; shape appropriate measures for market development.

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The Opportunities

On-Peak Demand (Efficiency, Distributed Generation)

Seasonal Peak Demand (Similar Measures)

Critical Peak Demand (Similar Measures)

Real-Time Demand (Dispatchable Measures)

Real-Time Emergency Generation

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The Challenge: Projecting the Future

The Planning Process:

Evaluate Existing & Projected Load

Industrial – What Types? Elasticities?

Commercial – Building Characteristics?

Institutional – Beyond Back-up Generation

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The Key Participants

Large Industrial Load

In-Depth Review

Commercial Buildings

Leverage customer base with new contract options

Institutions

Aggregation of Smaller Loads

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The Strategies

0 5 10 15 20 25

Global Temp. Adjustment

Duct Static Pres. Increase

SAT Increase

Fan VFD limit

CHW temp. Increase

Fan Qty. reduction

Pre-Cooling

Cooling Valve Limit

Turn Off Light

Dimmable Ballast

Bi-Level Switching

# of sites

Fully-Automated Manual or Semi-Automated

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The Benefits to Customers: Example of Buildings

Optimized building systems save 10-20% energy

Real time energy monitoring and control capabilities

Improved operation and run time conditions

Ability to positively impact load curve in three areas:

1. Load Shape

2. Demand Limiting

3. Smoother Bandwidth

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Capacity Savings – Typical Load Curve

Energy Chain MissionAffect Load Shape in 3 Ways:

1 Reduce KWH via control system installations and RetroCommissioning

3 Smooth bandwidth via optimizing control applications

2 Reduce kW via advanced demand limiting and peak shaving applications

10 to 15% Efficiency

Improve Bandwidth to 10% or Better +/-5

Peak Reduction

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Building Automation

Load Shaping

Demand Limiting

Energy Consumption

Demand Response

Control Sequences

EMS / BAS / HVAC RetroCommissioning & Building Optimization

Energy Use Strategies

Commodity Supply

Electricity

Gas

Oil

HVAC Equipment

Fans / Pumps / Motors

Central Plant Systems

Boilers / Chillers

Lighting

Air Handlers

The Constellation Retail Energy Chain

External Energy Sources

Energy Control Energy Consuming Devices Energy Generation

Generation Assets

CoGen Units

Fuel Cells

GenSets

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The Synergy of Competitive Supply

Energy Efficiency Commodity Risk Management

Load Response

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Benefits to The Grid

Ability to respond to curtailment signals in minutes

Ability to utilize new and emerging energy technologies for smooth load shaping and demand responsiveness

Commercial customer operations not negatively impacted by extreme reduction applications

Consideration of regulatory issues that facilities must deal with such as emissions, environmental impact and air quality

Consideration of load shifting strategies so that load shaping is simply not load shifting

Use ISO Demand Response Program as an ongoing tool to educate and lead customers to do the right thing

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Increasing Investment in Energy Efficiency Key Barriers: Utility rate designs do not encourage energy

efficiency; utility incentive structures where net revenue is linked to throughput; utility planning processes typically do not evaluate energy efficiency as a competitive resource; lack of information about best practices and programs that work;

PPPs (Electric and Gas Utilities; State PUCs, Energy and Environmental Agencies; Energy Consumers, Energy Service Providers) can be an effective means to address barriers and develop business solutions;

Developing National Action Plan for Utility Energy Efficiency: Promote utility resource planning and implementation programs that incorporate demand-side management and best practices; encourage use of efficient technologies and products and improve acceptance and use of energy efficiency relative to supply options;

Significant Potential Gains by decoupling utility financial health from electricity sales, fully integrating energy efficiency into state and utility planning processes and more accurately reflecting the cost of electricity through better rate designs (time-of-use, seasonal rates).

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Contact Information

Terry S. HarvillVice President, Regional Regulatory and Government AffairsConstellation NewEnergy1000 Town CenterSuite 2350Southfield, Michigan 48075248.936.9004 Direct248.936.9007 Fax312.415.6948 Cellterry.harvill@constellation.com