Cleantech Market Intelligence
A Dark Day for Demand Response
Two announcements came out late on Friday, May 23 that will have a big impact on the future of demand response (DR). First, the U.S. Court of Appeals published its decision to overturn the controversial Federal Energy Regulatory Commission (FERC) Order 745 on Demand Response Compensation. Second, PJM Interconnection, which operates the largest DR market in the world, released results for its 2017-2018 capacity auction. It reported a drop of more than 10% from last year’s auction and 25% from its peak in the auction 2 years ago. Depending on your interpretation, these two events could be seen as mild setbacks for DR or major impediments to future growth.
FERC Order 745, which came out 3 years ago, said that DR payments should be the same as those to generators in the wholesale energy markets. A number of generator and utility groups appealed the ruling and have been waiting for a year to hear from the court. In a 2-1 decision, the court didn’t necessarily disagree with the order, but determined that DR in the energy markets is a retail product rather than a wholesale one. This means that the FERC had overstepped its jurisdiction. On the simplest level, the decision could also mean that independent system operators (ISOs) and regional transmission operators (RTOs) will have to revisit the way they pay DR aggregators for the energy conserved by DR customers.
The bigger question is whether the court’s ruling will be interpreted to mean that all wholesale DR market participation is outlawed, including capacity and ancillary markets. If so, that would be the death blow to DR in ISO/RTO markets. It would also destroy the main business model of DR aggregators like EnerNOC and Constellation Energy, the largest wholesale DR players. Individual states and utilities would have to step in to fill the void to create programs and payment mechanisms for DR to continue at a reasonable level, which would be tenuous and time-consuming. Other regions of the world that are looking to emulate or learn from the U.S. DR model will take note and may reevaluate their plans.
The recent PJM auction results add to a continuing decline in DR capacity in the northeastern ISO/RTO capacity markets. Despite the fact that capacity prices in the eastern PJM territory stayed relatively flat from the prior year and the price in the western PJM area doubled, DR declined in both zones. The bulk of the reduction, however, came from the East. Some specific utility territories in the West did see increases, like Commonwealth Edison in Chicago and Allegheny Power Systems in Pennsylvania and West Virginia, but the American Transmission Systems, Inc. territory in Ohio was nearly cut in half, outweighing those gains.
EnerNOC publicly released its auction results, stating that received capacity payments for 2017-2018 total $185 million for approximately 4,000 MW, compared to $140 million and 4,400 MW in the prior auction. So while capacity dropped, value increased due to the higher prices in the West. The overall 2,000 MW reduction in DR in the last auction was written off by some in the DR community as an anomaly due to depressed prices from a glut of imports from Midcontinent Independent System Operator (MISO). Now that these results are in, it is clear that DR is in a structural decline. With further rule changes in the works making DR participation more restrictive, there are headwinds to turning that pattern around.
May 23, 2014 may be etched in the history books for DR depending on the ultimate outcomes. In any case, it made for interesting fodder at Memorial Day barbecues for those in the industry.