The biggest threat to demand response? It may not be the Order 745 ruling

The overturning of Federal Energy Regulatory Commission Order 745 has injected speculation into the wholesale demand response conversation, and not just for its impacts on energy markets.

In the wake of the U.S. Court of Appeals for the D.C. Circuit's decision to vacate the orderFirstEnergy Corp. filed a complaint asking FERC to order demand response barred from capacity markets under PJM's tariff. Some observers say a victory there could have wider implications, so Utility Dive spoke with EnerNOC senior vice president of marketing and sales Gregg Dixon. EnerNOC is a leading provider of demand response software solutions, and has been vocal in its opposition to FirstEnergy's complaint. We asked Dixon to give us a demand response provider's take on the impact of recent events, beginning with the court's decision.

"[The decision] vacated demand response's ability to participate in wholesale energy markets. And on the face of it, it's kind of meaningless to the demand response industry—from the practical perspective of generating revenue," Dixon said. "I say that because FERC Order 745—though from a policy perspective was an important win for the demand response industry, and really for consumers of energy at large—it didn't really have any impact on the demand response industry itself when it comes to revenue or profit because the demand response industry predominately generates its revenue from the capacity markets."

Dixon explained that with gas prices so low in recent years, and the economy on the road to recovery, wholesale prices were low and demand response providers participating in energy markets generated little revenue. But FirstEnergy's complaint to FERC could change everything, because demand response competes significantly in capacity markets.

'Massive amount of megawatts' at risk

"At that point people really began to get nervous," Dixon said. "If you can eliminate demand response from competing in wholesale capacity markets you would see a massive amount of megawatts in the PJM market vaporize overnight. And that's where it really gets interesting, and that's where the fight is right now."

"FirstEnergy has a very, very clear incentive," he continued. "Demand response has been a very successful new entrant into capacity markets, and over the past  five to seven years has reduced capacity prices that clear most wholesale energy markets by 50 percent because demand response megawatts are competing with traditional generating megawatts in the wholesale market."

FERC will need to rule on FirstEnergy's complaint, but the commission's support for demand response in capacity markets is established. The generator could then go to the courts, and if it were successful in pulling demand response from capacity markets Dixon said the impacts are much less clear.

"It's really anyone's guess. A number of things could happen," Dixon said. "First, [there would be] a debate over at what point this actually takes effect in the market, because PJM is a three-year forward capacity market. 

"If the markets were to change," he explained, "conceivably it would impact only those capacity markets that took place after whatever the outcome of this appeal is. And if it was against what we believe is the right thing, it could impact the May 2015 base residual auction for resources in the 2017/2018 power year. One could argue that if it was appealed there could be a retroactive ratemaking, but that's very rare and highly unlikely and FirstEnergy itself actually has not requested that."

'The single largest power plant in all of PJM'

Results of PJM's most recent capacity auction in May yielded 10,975 MW of demand response resources and PJM noted that there was a shift to  types of resources that have more flexibility and a greater contribution to reliability. All of that resource would disappear, Dixon said, if demand response disappeared from capacity markets.

"After that, what would happen? You've got all these megawatts in the market for demand response. It's the single largest power plant in all of PJM, if you think of it like a single virtual power plant. If it can no longer participate in the market construct that exists today, where would they participate?"

"They could participate at a retail level, on a state program-by-program basis, and state's place a lot of value on demand response," Dixon said. "That program-by-program model would take a tremendous amount of work. It can take years to design. Effectively what can happen is those [10,975 MW] are gone from the market for a year or two years, and then all of the sudden PJM capacity market prices go through the roof and ratepayers are stuck with a much bigger bill until some form of megawatts fill the void."

"Of course," he added, "FirstEnergy would want them to be generation megawatts. It would give them a much bigger incentive to go build more power plants."

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Filed Under: Efficiency & Demand Response
Top image credit: Flickr; Señor Codo