A recent proposed change to the PJM demand response program could reduce the value of “limited demand response” to end users.
The Filing - made by PJM in November of last year and originally scheduled to go in to effect February 1, 2013, would potentially place additional restrictions on the value of the limited demand response product and adversely impact its value in the PJM capacity market known as the Reliability Pricing Model, or RPM.
As might be expected, and as the results have borne out, the fewer limits there are on a demand response resource, the greater its value. Conversely, the more limits placed on a demand response product, such as limited demand response, the lower its value. Of course, from the perspective of the end user, the lower the likelihood that a demand resource will be called upon or the fewer number of hours the end user will be required to reduce demand, the higher the value to the end user because there is less operational risk.
Its Impact - For industrial energy consumers wishing to offer the “limited demand response product”, the latest filing represents a potential new limitation on the role that demand response plays in competitive energy markets and in particular in capacity markets. The latest “dust-up” will likely reduce the value of the limited demand response product even more and has potential implications beyond PJM as all other competitive power markets, with the exception of the Electric Reliability Council of Texas (ERCOT), employ some form of capacity market.
PJM employs a forward-looking capacity market to ensure that there is adequate generation and demand response in future years to insure that power needs can be met. While RPM initially had a role for demand response, the penetration of curtailment service providers and a desire to encourage demand response participation has strengthened and shaped the role of demand response, allowing end-users to offer to curtail their energy consumption in one of three potential demand response programs.
These programs are:
1) Annual Demand Response in which load can be curtailed as many times per year as necessary for up to 10 hours at a time.
2) Extended Summer Demand Response in which load agrees to be curtailed from May through October as many times as necessary for up to 10 hours per call.
3) Limited Demand Response, which only requires an end-user to curtail for up to 6 hours for a maximum of 10 interruptions during June through September.
The Test - PJM’s request for a change to its tariff is an additional test to determine whether there is a 90% probability that PJM will have to call on limited demand response for a “seventh hour”, which is longer than the amount of time that a resource is required to respond. This additional test, which would supplement two existing tests which currently restrict the value of Limited Demand Response, would determine whether there was a greater than 90% chance that limited demand response providers would be required to perform for longer than the 6 hours which are required under the tariff.
In determining the value of demand response for capacity payments in the RPM auction, the most restrictive of these three tests will be used so it is not surprising that demand response providers are opposed to this additional potential limit on their ability to make money by offering demand response products as part of the capacity procured under the RPM auction. In response to the initial filing by PJM, demand response providers argued that industrial users, who receive a 2 hour notice of a curtailment event, already ramp down their usage in front of the curtailment event and come back on at a gradual pace, meaning that the potential “seventh hour” will already be met through ramp up and ramp down procedures already employed by industrial users.
However, as PJM pointed out in its response to these assertions, while the data may support the fact that PJM is already getting the benefit of this “seventh hour”, the tariff only requires that those companies providing Limited Demand Response perform for six hours, so it cannot, for reliability planning purposes, rely on these resources for a period beyond those six hours.
In other words, the additional test proposed by PJM could threaten industrial consumers who are looking for the greatest return and the least risk from offering to curtail their demand and serving as “virtual” capacity and receiving payments under the RPM auction structure.
The Ruling - On January 29th, the Federal Energy Regulatory Commission informed PJM that its filing was insufficient and requested additional information. This means that the proposed tariff change will not be effective by the February 1, 2013, date requested by PJM in its initial filing.
All filings related to this docket can be found by going to the following web address and searching for Docket ER13-486: http://elibrary.ferc.gov/idmws/docket_search.asp
For more information, please contact Alberto Rios, Director of Risk Management 832 294-2506 or firstname.lastname@example.org