PHILADELPHIA — More than 100 generators, consultants, RTO officials and utility executives attended Infocast’s PJM Market Summit 2016. Here’s some of what we heard:

Don’t understand what the big deal with the capacity market is? Jeff Plewes of Charles River Associates offered a metaphor most people are likely to understand: buffet restaurants.

Plewes likened the energy market to the main buffet and the capacity market as the salad bar. High natural gas prices allowed for “steak night every night” early on, Plewes said. But when tour buses of new diners in the form of new renewable generators showed up to “feast” on the main buffet, it sent existing customers to the salad bar for most of their meal.

That’s led to new house rules in the form of Capacity Performance — and many additional questions. Among them, Plewes said:

• • • How locational deliverability area prices will be influenced by the relative shares of base and CP capacity;
    • How seasonal and intermittent resources will be accommodated and the role of aggregation; and
    • Whether the capacity market will be split into separate classes for subsidized and competitive units.

Storage requires significant coordination to get interconnected into PJM’s grid and what to do with it when it gets there isn’t quite clear. “Arbitrage is actually a really bad economic model for storage,” said RES Americas’ John Fernandes.

PJM’s Frank Koza said his group is developing some new documents for clarity on Order 1000 processes, but bristled at the idea of being so transparent that developers are “standing next to us” while rules are being crafted. “Quite frankly, we’ve got to be able to strike a balance,” he said.

He also acknowledged that PJM hasn’t always been fully committed to the sponsorship model — in which the RTO defines the problem and invites developers to engineer and “sponsor” solutions. “We have done some soul searching about the model itself,” he said. “We’ve thought about it and decided to stay with the sponsorship model.”

While there was some support for PJM’s work, most saw room for improvement. Tom Dagenais of American Transmission Co. likened the process to “making love in a bathtub” — it seems like a great idea, but implementing it is a real challenge.

The Future of Demand Response

Even though the U.S. Supreme Court upheld FERC’s Order 745 earlier this year, demand response as a capacity resource in PJM is “mostly dead barring changes in CP,” said Jed Trott of Customized Energy Solutions. Annual changes to DR rules have made customers more “cynical” that power markets are designed to take advantage of them, he said. Customers thought they were performing a public service by installing DR, but they will start making decisions based on what’s best for them, rather than what appears best for the grid.

“It’s kind of like slapping them in the face,” said Judy McElroy of Fractal Business Analytics. “It’s like, ‘whatever you did didn’t count.’”

As customers add in-house DR technologies that markets aren’t aware of, it will become increasingly harder to accurately predict demand, “which probably means the RTO will be over-procuring because they won’t have that much insight into the curtailment by those customers,” said Allen Freifeld of Viridity Energy.

But the markets will have to adjust to that new reality, said Frank Lacey of Electric Advisors Consulting. “One of the major benefits — the major benefit — to a company is it can avoid its capacity charges by participating in demand response. … Demand response companies [are] going to have to change their business models, but demand response is alive and well,” he said. “Maybe not in PJM, maybe not in any of the other markets, but from a customer perspective, from a supplier perspective, the market’s not going away. You’ve given customers a taste for something, and they like it. They’re not going to give it up. ”

Others on the financial side at the summit weren’t as concerned about DR’s future. “DR, frankly, is a crappy tool,” said Barry Trayers of Citigroup Energy. “You can see why PJM isn’t very happy to price it in the supply curve.”

The issue with aggregating seasonal DR resources is that there are far fewer winter options, explained Robert Weishaar Jr. of McNees Wallace & Nurick, which represents the PJM Industrial Customer Coalition. So while summer options provide the majority of the value and potential risk for nonperformance, winter products are necessary to create a year-round capacity offer, he said.

“There is a lot of money at stake,” he said.

So far, there have been no commercially aggregated offers in any CP Base Residual Auction, he said. Asked how seasonal resources will likely be married, he said he expects “forced weddings.”

The Future of Solar

Solar installations are “booming,” according to Jay Carlis of Community Energy, because the module price per watt has fallen to less than $1 and “trackers” allow panels to pivot along with the sun to produce more energy during late peak hours when it is more valuable. In addition, companies are finding value in financing development projects through long-term, offsite power purchase agreements.

That said, Carlis sees no opportunity for further wind development in PJM without PPAs. The last round of major wind development in the market happened around 2008, he said, and “those owners are not happy” with the returns they’re receiving.

Getting More from Hydro

Dana Hall of the Low Impact Hydropower Institute highlighted the potential growth of both run-of-river hydro and pumped storage — and the Department of Energy’s keen focus on utilizing it.

Hall quoted from the department’s Hydropower Vision Report 2016, which said more than 48 GW of new hydropower capacity could be online by 2050 through advances in technology, financing and environmental considerations. Pumped storage has the biggest upside, with growth potential of 62%.

“We have plenty of dams in this country,” she said. She showed a map of the country’s unpowered dams with a potential capacity of more than 1 MW; spots dotted the U.S. Most were in the midcontinent near the Mississippi River, but every PJM state except Delaware showed opportunity.

Hall’s institute provides certifications that allow projects to qualify as, for example, Tier 1 resources in Pennsylvania. By 2021, Pennsylvania utilities must obtain 8% of their power from Tier 1 renewables.

“I think every project has the potential to pass,” Hall said, “but they might have to invest heavily.”

Simple-Cycle Offers Opportunities in Volatility

Matti Rautkivi, of generator manufacturer Wärtsilä, sees volatility as an opportunity to make money. For example, volatility in the Australian market means that prices hit the market’s $13,000 price cap several times a month, he explained.

While price caps are lower in PJM’s markets, there’s certainly plenty of volatility to exploit. Rautkivi showed a map of volatility in the U.S., and the vast majority — including the highest prices — was in PJM’s footprint.

His solution to capturing that value utilized natural gas as the fuel — no surprise there — but relied on simple cycle plants rather than larger combined cycle ones. Why? Speed, of course. The “reality today” of Wärtsilä’s 225-MW “standard plant” design is highly sensitive response, needing 30 seconds to synch, two minutes to ramp up to full capacity, one minute to ramp down and five minutes of downtime before it can do it all again.

That responsiveness was the basis of a plan that allowed Denton, Texas, to achieve its goal of receiving 70% of its supply from renewable sources. Modeling showed that using the plant to make a profit off of price spikes in the market while also avoiding paying high costs for electricity would save the town $975 million compared to securing its desired supply mix exclusively from the market.

─Rory D. Sweeney