Navigant Research Blog

Demand Response Drops at PJM Capacity Auction

Marianne Hedin — June 10, 2013

In May, PJM Interconnection announced that it had attracted a record amount of new generation at its recent annual capacity auction, which ensures that electricity supply will meet demand for the period June 1, 2016 through May 31, 2017.  The auction procured 5,463 megawatts (MW) of new generation, thus breaking last year’s record amount of 5,346 MW.  In addition, the auction obtained a record amount of imported power from the Midcontinent ISO (the new name for MISO, reflecting the grid operator’s southward expansion), more than doubling last year’s total. All in all, the auction procured 169,160 MW, resulting in a reserve margin (a cushion for unforeseen events) of 21.1%, or 5.5% above the target.

PJM holds this capacity auction – also referred to as the Reliabity Pricing Model (RPM) – every May in order to obtain sufficient electricity, plus a reserve margin to meet expected demand for power 3 years in the future in PJM’s territory. PJM provides its estimate for peak power use to the bidders who then bid their existing and new power plants as well as energy efficiency and DR resources. Their bid prices are based on the costs to have those resources available for a particular delivery year. The price bid by the final resource that meets PJM’s target establishes the price paid – the clearing price – to all resources in that zone.

Most noteworthy, this time, was PJM’s announcement that the level of demand response (DR) procured in the auction had dropped by about 2,400 MW, after years of continued growth at every auction.  The auction cleared 12,408 MW of DR.  “Limited DR,” which can only be dispatched 10 times a summer for up to 6 hours each time, represented the overwhelming majority (9,800 MW) of the demand-side resource.

Shortfalls Possible

The main reason for the DR procurement decline was considerably lower capacity prices in most of PJM’s territory this year.  For example, the MAAC region, which covers 10 utilities along the Atlantic seaboard, cleared a price of $119.13 per MW-day, a drop from $167.46 per MW-day in 2012.  FirstEnergy, in northern Ohio, and western Pennsylvania’s PennPower cleared a price of just $59.37 per MW-day, compared to $136 per MW-day last year.

According to PJM’s Senior VP of Markets, Andrew Ott, prices dropped simply because supplies were up while demand was flat.  Competition from new natural gas supplies, increased imports from other regions, and less demand for electricity due to a sluggish economy have put pressure on capacity prices.  Another factor affecting the demand for DR has been the higher procurement costs for aggregators, as they look to recruit new potential and often hard-to-reach customers to participate in their capacity programs.

Although the supply of power and reserve margins are good enough to meet the demand for electricity in PJM’s territory and most other regions of the United States this summer, a few areas in the country could be facing severe shortages that will drive the need for DR.  ERCOT in Texas, for example, is dealing with tight reserves with a margin that is 0.85% below its target.  If the state experiences another extreme heat wave like the summer of 2011, ERCOT would most likely face a challenge to meet its peak demand.  Thus, the grid operator is planning to expand its DR programs to increase the current 1,700 MW of DR.  In Texas, DR is seen as the first line of defense to beat the heat.

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