PJM and generators squared off against load-serving entities and industrial customers last week in a debate over the RTO’s proposal to change the way demand response clears in capacity auctions. The proposal could cost PJM load $1 billion a year.

The Capacity Senior Task Force last week heard three proposals regarding how offers for Limited, Extended Summer, and Annual demand response are cleared in the Base Residual Auction.

Had PJM’s proposal been in place, according to a simulation by PJM, the 2015/16 Base Residual Auction would have resulted in total costs of $28.9 million per day versus $26.6 million under the current rules, an annual increase of about $840 million (8.6%). For 2016/17, the PJM proposal would have increased total costs by $1.02 billion, a jump of almost 19%.

$1 Billion Hit

PJM’s proposal “is a $1 billion hit” for load, said Dave Mabry, representing the PJM Industrial Customer Coalition. “If generation bid cheaper than DR I don’t know that we would be here” discussing changes.

Paul Sotkiewicz, PJM’s chief economist for markets, insisted “it is not a pocketbook issue, per se. It’s a reliability issue.”

All three proposals would include a cap — or “reliability target” — on the amount of Limited DR permitted to offer into the auction.

PJM’s proposal would subtract all of the 2.5% Short-term Resource Procurement Target (STRPT) from the Limited DR cap. The proposal would have reduced the volume of Limited DR clearing by nearly two-thirds for 2015/16, according to the simulation.

An alternative submitted by James Wilson on behalf of consumer advocates in New Jersey, Maryland and Delaware would subtract only a portion of the 2.5% STRPT “holdback” from the cap on Limited DR.

Another alternative by the Southern Maryland Electric Cooperative (SMECO) does not address the holdback but does ask PJM to consider increasing the DR caps to reflect the increased operational flexibility that DR resources are being asked to provide under separate CSTF initiatives.

Once the Minimum Annual Resource Requirement is satisfied, both the Consumer Advocate and SMECO alternatives would allow Extended Summer and Annual DR to compete until the intersection with the Variable Resource Requirement curve.

1994 Rolling Blackouts Invoked

Sotkiewicz said neither of the two alternatives addressed PJM’s concerns that the increasing volumes of DR are undercutting capacity market prices and reducing incentives for new generation. Sotkiewicz invoked the memory of January 1994, when PJM was forced to order rolling blackouts because of a generation shortage as subzero temperatures reduced fuel supplies and caused increased plant breakdowns.

“What you’re doing here is exactly what we’re trying to get away from: a vertical demand curve for annual resources,” Sotkiewicz said regarding the SMECO proposal.

Sotkiewicz and generators said the two non-PJM proposals increase the risk of “boom-bust cycles.”

“I really think that under current circumstances that argument doesn’t work very well,” responded Wilson.

DR vs. Generation

The task force session was part of a broader debate over the reliability value of excess capacity and the fairness of PJM’s treatment of demand response versus generation.

One generator representative said demand response has an unfair advantage in competing against generation in the capacity market. “I have a must-offer requirement for every megawatt I have and I have to offer at a capped rate. We’ve had a lot of new [generation] entry but we’ve had a lot more retirements” because the capacity market is not sending the right price signals, he said.

Ken Jennings, of Duke Energy, said that although demand response offers into the capacity market at lower prices than generation those savings could be offset by DR’s impact on the energy market. He noted that DR set prices at $1,800/MWh in some zones during the heat waves in July and September. DR’s effective maximum price is scheduled to rise to $2,700/MWh by 2015.

In contrast with DR role in reducing consumption, Jennings added, “It is the generators that tend to spur economic development.”