PLMA Report: DR Is More Essential and More in Flux Than Ever

Friday, December 5, 2014

[From Powerit Solutions' Blog at www.poweritsolutions.com/blog/?detail=yes&id=1032

The resounding message of the Peak Load Management Alliance fall conference in Philadelphia earlier this month was that demand response (DR) is a more valuable resource than ever—and the market structure may change significantly, making opportunities for industrial users a moving target.

There was general frustration at the conference with the court ruling that invalidated Federal Energy Regulatory Commission (FERC) Order 745, issued in 2011 to put DR on the same playing field as generation resources. But the consensus was that DR is not going away. Instead, the action is likely to shift to programs defined at the state level and run through utilities.

PJM responds to FERC Order 745 ruling

PJM Interconnection, the regional transmission organization serving all or parts of 13 states and the District of Columbia, faces the greatest upheaval if the order stands (FERC has until Dec. 16 to decide if it will appeal the ruling to the U.S. Supreme Court). FERC Order 745 allowed bidding of DR resources into day-ahead and real-time energy markets, and valued those DR resources at the same locational marginal prices as those paid for generation resources. In a case brought by the Electric Power Supply Association and others, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the order violates state rate-making authority in the retail power market.

That means PJM and other system operators can no longer directly compensate DR as a supply-side resource. Now only entities that have a retail relationship with customers participating in DR—such as utilities—can supply DR resources to the wholesale markets. That cuts out curtailment service providers (CSPs), or aggregators, which have driven innovation in PJM territory.

Stu Bresler, vice president of market operations at PJM, said it’s unclear what the effect of the ruling will be. PJM’s 2015 capacity transactions have already cleared, and it hopes to keep its 2015 DR contracts. PJM has submitted a capacity proposal to FERC that puts retail service providers (also known as load-serving entities, or LSEs) in charge of managing DR for the capacity market. LSEs would submit their capacity to PJM in the form of a demand bid. PJM would not pay the service providers; they would benefit from savings achieved by using DR programs rather than paying for generation resources. CSPs could continue to provide ancillary services DR, used to maintain reliable power transmission, under PJM’s proposal.

Navigant Research analyst Brett Feldman said ancillary services are the best argument for keeping DR on the supply side of the equation: they are non-emergency and operate close enough to real time to mimic generation, so providers can price them similarly to generation.

Another aspect of DR that could shift under PJM’s proposal is the way DR is measured. Currently, it’s a relative measure: whatever power participants are using, they must drop a certain amount during a DR event. Putting LSEs in charge opens up an opportunity to shift programs to firm service, an absolute measure requiring that participants not exceed a certain level of power use. That would give PJM better market-planning capabilities.

Attention turns to the states

Assuming that the court ruling stands, authority over capacity DR programs, at least, will shift to the states. Ultimately, the California model may be the model everywhere, with utilities running their own DR programs in conjunction with CSPs.

So far this model has resulted in a lot of DR but less-innovative programs. However, Ishtiaq Chisti of Southern California Edison said recent California Public Utilities Commission proceedings will force changes in the state’s DR market. Regulators want the utilities’ DR programs to meet an array of needs beyond peak demand, including reliability, operational efficiency, and avoidance of new infrastructure investment. Changes may include having the California ISO act as a DR provider.

New York has taken the lead in reimagining its electricity markets with a plan redefining utilities as distribution services providers, or mini ISOs. The state expects utilities to manage significant amounts of DR and distributed generation.

Polar vortex shows cracks in the DR system

Regardless of who is running DR programs, last winter’s polar vortex in the Northeast showed that those programs need to be more robust. A panel on the topic agreed that DR programs didn’t perform as well as they should have during that event.

Some concluded that incentives and penalties weren’t high enough. Others thought resources weren’t flexible enough—they wanted to be able to call shorter-duration events, which program rules didn’t allow. The debacle has already sparked a move to annual DR (instead of summer-only DR programs), with winter test events to verify performance.

In general, the polar vortex was a wake-up call demonstrating the need to fine-tune the DR system and put automation in place to enable flexibility. The push to pursue these improvements while adapting to the changes wrought by the Order 745 ruling and New York’s initiative ensures that interesting times lie ahead.