Why demand response providers aren't happy with PJM's capacity market fix
The grid operator says new rules will make it easier for seasonal resources to participate, but DR boosters say they don't go far enough
It's been three years since the polar vortex gobsmacked PJM Interconnection's grid, when bitter temperatures forced about 20% of generation offline and left the operator scrambling to meet demand on some of the coldest days.
The grid for much of the Mid-Atlantic, serving 61 million people, has since been working to address the reliability issues that were uncovered during the 2013-2014 winter. A key strategy is enhanced payouts and penalties for capacity resources, designed to ensure those generators show up when needed most. But in addition to the steeper financial up- and down-side, PJM wants to go a step further to require all capacity resources must be available year-round.
For demand response providers, especially those in the residential and small commercial market, the cure may be worse than the disease.
"The proposal is an improvement overall, but for mass-market demand response providers it's not even moving in the right direction," said Comverge's Matt McCafree, senior director of regulatory strategy at the demand management company.
It's the year-round requirement that is causing trouble for companies working on the customer side of the meter. PJM wants to ensure its new Capacity Performance product brings resources to the grid for 12 months, but neither demand nor resources are flat across the full year. Summer peaks can be 15 GW higher than winter, and many of the region's demand response resources are based around summer HVAC optimization.
When you add in the demand and resource differences between summer and winter, McCafree says there is about a 30 GW delta between the seasons, in terms of resource availability.
"There is significant asymmetry between summer and winter demand," said McCafree. "Even with aggregation across deliverability areas, and expanding that, which is a good step, there is nothing that addresses that significant asymmetry between seasons."
PJM formed the Seasonal Capacity Resources Senior Task Force earlier this year, looking for a way to keep demand response resources as viable capacity. The grid operator has been phasing in the new capacity products, and during the last two auctions 80% was allocated to a new Capacity Performance product and 20% to Base Capacity. But the next forward capacity auction is slated June, meaning a solution must be worked out by then.
"This is a very time sensitive approval with respect to the next auction that has to clear full Capacity Performance, and if there is no agreement reached in time to make the necessary changes PJM will continue with the status quo," said GTM Research analyst Elta Kolo. And existing aggregation rules, she said, "have clearly proven insufficient in the previous auction."
Demand response participation in PJM has been declining. The grid operator's forward auction results over the summer revealed 10,348 MW cleared for 2019/2020 delivery – the lowest point in years. Not all of the decline is necessarily attributable to the new capacity product, as the grid operator saw an increase in DR bids, but it was below 2014/2015 delivery years and a worry for the industry.
This month, PJM asked the Federal Energy Regulatory Commission to approve changes to its auction, including easing restrictions on resource aggregation, that are designed to make room for demand response. Under the proposed changes, summer-only and winter-only resources would be able to pair together as a qualifying bid, and aggregation of resources across the grid’s footprint would be allowed.
The second is a big change for PJM, allowing resources to aggregate outside their locational deliverability area. And in order to make aggregation simpler, the auction mechanism would pair summer and winter resources rather than requiring a commercial contract between the two, though parties can still go that route.
While pairing winter and summer resources can generate a year-round capacity offering, providers say they are limited by the smaller of the seasons' resources. Summer demand response capacity unable to pair with a winter intermittent resource, primarily wind, would be unable to clear the auction.
"It’s a step in the right direction, but not nearly enough," said Natural Resources Defense Council attorney Jennifer Chen. "Effectively the cap right now is how much the winter resources could pair."
The grid operator said it solicited interest from capacity market sellers to gather information about the potential that intermittent or seasonal resources would seek to obtain winter capacity interconnection rights, and found approximately 2,300 MWs of primarily wind resources.
PJM is also proposing changes to its measurement and verification rules that could result in another 1,000 MW of demand response, but "we’re looking at several thousand (MW) left on the table," said Chen.
Overall, said Navigant senior analyst Brett Feldman, the changes to the aggregation rules "should make it easier for DR to participate, since they won’t need direct commercial agreements with counterparties and they don’t have to be in the same zones." However, he said the primary beneficiary may be utility demand response programs that were going to run anyway.
PJM officials, however, say the volume of resources is not an issue. The proposal "creates additional opportunities for summer-only demand response of any size," said Ray Dotter, a spokesman for the grid operator.
"Offer price, not the size of the offer, is the primary factor for a resource to clear the auction," Dotter said in an email. "The proposal allows the auction process to match winter-only resources with summer-only resources removing counterparty arrangement barriers."
GTM's Kolo said PJM's proposal is "an improvement to the existing rules, even though it does not bring back summer specific capacity products." And it may create opportunity for something third-party energy companies are doing increasingly-well these days: crunch numbers.
The new rule "allows for some room in innovation," Kolo said. While there are limitations, "maybe this can be a long term business opportunity for data analytics."
Matching seasonal demand to resources?
It's important to remember that demand resources are not always called on to provide load reduction, meaning capacity market payments are essential to the revenues of many providers. They can still show up as needed, but the basic tension is between generators and load reduction managers, and how to most efficiently manage reliability.
If load is not a constant, say demand response backers, why must capacity be?
"Because PJM is trying to maintain a single capacity performance product that is annual-only, it’s not taking into account that demand is seasonal," said NRDC's Chen. "There may be buyers that want to meet seasonal peaks."
Ultimately, Chen said a 365-day capacity product is "kind of arbitrary." Allowing both summer and winter capacity would enable resources with different commitment periods. "As long as you cover the entire year ... it would better serve customer demands."
Comverge's McCafree said that solution was given short shrift during stakeholder meetings.
"There hasn’t been a whole lot of runway to address the potential solutions," he said. "Even through the stakeholder process ... it seems PJM leadership didn’t like the results of that stakeholder process and decided to move forward with this proposal without fully seeing that process through."
"We think it’s warranted to extend the base capacity transition for one more year," said McCafree.
It remains to be seen what will happen at FERC, but PJM says its filing addresses the issue effectively.
"The proposal increases aggregation opportunities for summer-only resources by including a process by which resources that want to provide additional capacity in the winter would be studied for deliverability and then such resources with higher winter capacity values to offer this increased capability into the auction," Dotter said.
Ultimately, providers of seasonal resources would prefer to see separate products as opposed to year-round only.
"Instead of defining capacity products that only come in 12 month commitments, why not break it up into two six-month commitment periods," said Chen. "If we go to 100% Capacity Performance, we have a lot of stranded resources."
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