The Federal Energy Regulatory Commission approved PJM’s request to cap the quantity of Limited and Extended Summer demand response that clears in the annual base capacity auction, rejecting protests of opponents, who said it will increase costs and stunt the growth of DR.
The commission’s 4-0 ruling late Thursday (ER14-504) allows the changes to take effect in May’s Base Residual Auction for delivery year 2017-18.
The new rules cap the amount of Limited and Extended Summer DR at 10% of PJM’s reliability requirement, with Limited DR providing no more than 4%.
The changes — which the PJM Board filed with FERC despite a lack of stakeholder consensus — could boost capacity prices by $1.8 billion over two years, according to PJM simulations. (See PJM Goes it Alone in Bid to Limit DR in Capacity Auction.) PJM said those increases will be more than offset by a $3.4 billion reduction in energy prices over the same period.
“While we cannot confirm the simulation’s relative estimates,” the commission wrote, “we agree with PJM that additional generation resources clearing the capacity auction under PJM’s proposal would, unlike demand response that does not participate in the energy market until an emergency event occurs, contribute more energy in the energy market, which in turn would tend to place downward pressure on energy price.”
PJM told FERC the volume of limited DR clearing in the capacity market had to be reduced because current rules result in a vertical demand curve that threatens reliability. The RTO said it had erred in 2011 when it won FERC approval for rules incorporating limited and extended summer demand response into the capacity market.
PJM CEO Terry Boston issued a statement this morning praising the FERC ruling. “FERC’s action expands the usefulness of demand response and will allow demand resources to make a bigger contribution during tight power supply situations outside of the summer peak season, as we have been experiencing this January,” Boston said.
UBS Investment Research called the ruling “a coup” for PJM generation owners such as Exelon, FirstEnergy, PSEG, Calpine and NRG Energy, saying it could boost capacity prices by $25/MW-day in the RTO and $10/MW-day in MAAC.
USB termed it “a clear setback” for DR providers, although it said sector leader EnerNOC might benefit because its “relative technological advantage” will allow it to provide more Annual DR.
FERC rejected the arguments of consumer advocates, industrial load, cooperatives and state regulators opposed to the changes. However Commissioner John Norris did acknowledge some of their concerns in a concurring statement, expressing “caution that we not lose sight of the extraordinary benefits demand response has brought to consumers.”
“We must continue to provide demand response opportunities to participate in the PJM market on a level playing field with other types of resources,” Norris wrote.
“…It is my hope that this Commission will strike the right balance that maintains a reliable system while ensuring competition among resources that result in the most efficient costs to consumers.”
FERC is one commissioner short since the departure of former Chairman Jon Wellinghoff, who had championed DR. President Obama last week nominated FERC Enforcement Director Norman Bay as Wellinghoff’s replacement.
The PJM proposal won only 45% support from the Members Committee and 37% from the Markets and Reliability Committee in votes in November. A simulation by PJM found that the changes would have increased total capacity costs by nearly $2 billion over the last two Base Residual Auctions. (See Demand Response Changes Could Cost $1B Annually.)
FERC took note of the stakeholders’ misgivings but ruled that it was “reasonable for PJM to distinguish between each class of resources when designing its capacity market rules.
“On balance, we find that PJM’s proposal retains an adequate opportunity for limited-availability demand response to participate in PJM’s capacity markets,” the commission wrote.
It added: “While there may be other ways to address the problem identified by PJM, as suggested by intervenors, that does not mean that the solution proposed by PJM is unjust and unreasonable.”
