What’s the future for demand response under PJM’s new capacity and aggregation rules?
PJJM Interconnection announced the results of its most recent Base Residual Auction last week, revealing a mixed bag for a wide range of stakeholders.
The big winners were gas generators, which made up most of the new resource participation, and customers who will see lower prices. The losers tended to be non-carbon emitting resources, including renewable energy, demand response and nuclear energy.
Demand response participation tumbled, as did solar, while nuclear units struggled due to their high fixed costs. Exelon’s Three Island Mile nuke failed to clear the auction, and the company subsequently announced plans to shutter the Pennsylvania plant in 2019. Exelon will continue to operate the Quad Cities facility, though it also failed to clear, but indicated it would consider shutting down that plant as well if it does not receive subsidies from Illinois ratepayers.
Capacity prices across most of the PJM market fell for the 2020-2021 delivery year, coming in under expectations and clearing 165,109 MW of unforced capacity in total. Resources cleared at $76.53/MW-day across most of the grid, with higher prices in more populated or congested service territories. In last year’s auction, most of the grid cleared at around $100/MW-day.
The decline in price comes alongside more stringent capacity rules that had been expected to raise prices. This was the first year PJM utilized new Capacity Performance standards, which require resources to be capable of sustained operation on an annual basis. While the new standards have been problematic for seasonal resources, in particular demand response providers, the change was made to ensure reliability after a particularly cold winter—the polar vortex of 2014—when many generators were unable to remain online.
More stringent requirements could have led to higher prices, but a glut of new gas capacity and stagnant demand instead resulted in a significant drop.
PSE&G President, Chairman and CEO Ralph Izzo said there were “a variety of factors in play” that helped to keep prices low, including movement in the spark spread, changes to how power flows from PJM to the New York ISO, and changes to demand response.
“Somehow when you put all those ingredients into the stew, you wind up with the pricing we saw,” said Izzo. “If there’s one takeaway, it’s that prices can move a lot from one year to the next.”
PSEG Power, PSE&G’s unregulated generation subsidiary, cleared approximately 7,800 MW at a weighted average clearing price of $174MW-day. “We didn’t change our bidding behavior,” Izzo said of the results in light of the new standards.
Critics of PJM’s auction mechanism say the new Capacity Performance standards are shutting out cleaner resources. In particular, residential demand response, which is an overwhelmingly a summer-based product, took a hit. But some observers say the outcry is overdone, particularly in the wake of doom-and-gloom predictions.
“What PJM procured contrasts with what customers and states want,” said Jennifer Chen, an attorney working for the Natural Resources Defense Counsel. She pointed out that less than 10% of procured capacity came from wind, solar, or demand-side resources. “There’s a lot of missed opportunity there.”
Navigant Senior Analyst Brett Feldman, on the other hand, had a rosier take on the results. He noted that some analysts had expected a 50% reduction in demand response participation in the face of more stringent annual requirements. Ultimately, the grid operator procured 7,820 MW of demand response—down from 10,348 MW in the previous auction, and about a 24% reduction.
“Nothing to sneeze at, but far from a total market abandonment,” Feldman wrote in a blog post. “All in all, I’d consider this a positive outcome for DR compared to some of the draconian forecasts.”
Demand response decline was predictable, even after the Order 745 decision
Demand response capacity clearing PJM’s annual auction peaked in 2012, a year after the Federal Energy Regulatory Commission issued Order 745. That decision (appeared to) cement demand response’s place in wholesale markets—the order stipulated that demand response providers must be compensated for reducing electricity load at the same rates as if they met that demand with generated electricity.
For delivery year 2015/2016, the PJM auction cleared almost 15 GW of demand response resources. But Order 745 was challenged, and ultimately wound up being upheld by the U.S. Supreme Court. In the meantime, however, demand response participation in PJM lagged; between the 2012 auction and 2017 auction, cleared volumes declined by about 50%.
The debate over whether FERC had authority over demand response stretched for years, but ultimately the Court determined last year the agency was authorized to set compensation levels.
That decision was a boon to the demand response industry, and was expected to help the resource grow in organized markets. PJM, historically the largest market for demand response, is closely watched. But while market attrition from the Order 745 uncertainty has had time to recover, the operator’s response to the polar vortex of 2014 threw in another wrench. The new capacity requirements aim to provide greater resiliency, but the grid operator acknowledges there may be growing pains.
“This higher requirement likely will affect the ultimate mix of resources for demand response with less residential customer participation and more commercial/industrial participation,” PJM spokesman Ray Dotter said in an email.
The actual mix of resources is unknown right now, as curtailment service providers register customers just before start of the delivery year. Dotter explained that’s when the market will know what types of customers are actually making up the demand response resources. But in an effort to keep seasonal resources in the market, PJM allowed summer-only resources to partner with winter resources to develop a qualifying bid.
“The aggregated resources were limited somewhat by the amount of winter resources which offered into the market,” said Dotter. “However, just the fact that this aggregation approach was available and used is a good sign.”