PJM capacity prices would increase sharply but reliability would not be threatened if a recent federal court ruling eliminated demand response from wholesale markets, according to a new report by the Independent Market Monitor.
Market Monitor Joe Bowring said the sensitivity analysis released last week is intended to help stakeholders evaluate the impact of the May 23 ruling by the D.C. Circuit Court of Appeals that sharply restricts the Federal Energy Regulatory Commission’s jurisdiction over demand response compensation. (See DR’s Future Unclear Following Court Ruling.)
Revenue in the May base residual auction would have more than doubled to $16.86 billion from $7.5 billion if no DR or energy efficiency cleared, the analysis found. Cleared resources would have dropped by 3,290 MW, reducing reserves to 2% above the Installed Reserve Margin (IRM) from 4.4%. Bowring said the analysis included energy efficiency as “another form of DR,” which could be vulnerable under the court ruling.
Disruptive Ruling
On July 7, PJM joined FERC in asking the Court of Appeals to reconsider its ruling. “Extricating demand response from markets in which it has had years to integrate will be inherently disruptive and will inevitably raise countless unforeseen complications,” PJM said. While Order No. 745 was limited to economic demand response in daily energy markets, its implications are “potentially boundless.”
PJM’s petition overstates the impact of DR on reliability and understates the ability of PJM markets to respond, Bowring said in an interview Friday.
“If there’s a decision to eliminate [DR and EE] the market will adapt,” Bowring said. “Once you allow for other offers to respond to all this we would expect the prices to equilibrate — balance out — to the cost of new entry.”
Capacity prices doubled for much of the RTO in May’s base residual auction following rule changes that reduced the volume of limited DR and external generation that could clear.
Annual resources cleared at $215/MW-day for the PSEG zone, while the rest of the RTO cleared at $120/MW-day, about one-third of the $351 net cost of new entry (net CONE).
2.5% Holdback
The IMM’s study also looked at the potential impact of Bowring’s recommendation to eliminate a rule that reduces the volume of capacity resources procured in the BRA by 2.5%. Stakeholders last year rejected calls to eliminate the 2.5% holdback, which is intended to be filled by short lead-time resources procured in incremental auctions closer to the delivery year.
Had the holdback been eliminated along with DR and EE for the May BRA, capacity revenues would have more than tripled to $23.87 billion, or $396/MW-day, 13% above net CONE. The quantity of resources acquired would fall but remain sufficient to meet the IRM, the Monitor’s analysis found.
With the removal of DR and EE and the elimination of 2.5% offset “prices would have risen to greater than net CONE but less than the maximum price [1.5 times net CONE] and PJM’s reliability target would have been maintained,” the Monitor said.
The analysis assumed that all other variables are held constant, meaning that the real impact would likely be less because additional generation resources would have cleared the auction. “In the absence of demand side resources, some generating resources that retired in prior years might not have retired, and some new generation resources that did not clear in prior years would have cleared and both would have affected prices in subsequent auctions.”
The Monitor made no predictions on where prices would settle.
Concerns over Court Ruling
The D.C. Circuit ruled 2-1 that FERC’s Order 745, which requires PJM and other RTOs to pay DR full locational marginal prices (LMP), violates state ratemaking authority.
In its petition seeking a rehearing, PJM cited “the considerable uncertainty this decision has engendered” for PJM, which has used DR since 2000. Although PJM opposes Order 745’s equal-compensation mandate, General Counsel Vince Duane said the RTO sought rehearing because of concerns over the loss of DR.
PJM said the ruling appears to “forbid any compensation (regardless of the level) to economic demand response from the wholesale daily energy markets, not just the compensation change addressed by Order No. 745.”
“PJM does not have good options for replacing demand response capacity commitments on very short notice for the current summer, and replacing demand response capacity commitments for the next three summers (to the extent they even can be fully replaced) would likely be very costly,” PJM said.
The filing cited DR’s role in maintaining reliability during last September’s unexpected heat wave, when PJM was forced to shed load in some areas and during the arctic cold in January, when it “received more megawatts as load reductions than it could obtain as generation from all but the very largest generating stations.”
The RTO called for load reductions on 13 days in 2013. DR providers are committed to provide more than 8,000 MW of load reduction this summer and more than 10,000 MW for the summers of 2015-2017.
PJM said the loss of the wholesale markets might result in the elimination of many DR resources because the retail market cannot compensate DR for providing regulation, spinning reserves and day-ahead scheduled reserves, as PJM does.
In addition, it is unclear how DR procured through state-run retail processes could compete on price with generation procure in wholesale markets, PJM said. “There should be no mistake that pulling voluntary demand resource offers out of the grid operators’ single-clearing price markets will significantly reduce competition in those markets.”
This would contradict Congress’ direction in the 2005 Energy Policy Act to encourage demand response and eliminate “unnecessary barriers to demand response participation in energy, capacity, and ancillary service markets,” PJM said.
