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Has Demand Response Peaked in the Northeast United States?

Brett Feldman — November 19, 2013

The theory of Peak Oil was proposed by M. King Hubbert back in the 1960s.  He tried to predict the point in time when the maximum rate of petroleum extraction would be reached, after which the rate of production would be expected to decline.  Hubbert’s forecasts have proven inaccurate, as world oil supplies are expanding with new discoveries and extraction methods, but the concept of defining a peak point for any resource is intriguing.

Demand response (DR) has enjoyed rapid growth in wholesale electricity markets around the United States in the last 10 years, since the first formal programs opened following the Enron crisis in California in 2001 and the Northeast Blackout in 2003.  In the past few years, as DR has matured in the market and been afforded the opportunity to bid directly against generation, it has also fallen under greater scrutiny from federal and state regulators, system operators, and other market participants.  PJM, NYISO, and ISO-NE have all seen signs of decreasing DR participation in their capacity markets over the last couple of years.  Here are some of the statistics and supporting facts:

  • In the last Reliability Pricing Model (RPM) Base Residual Auction (BRA) in PJM, which is used to procure capacity for 3 years in the future, DR that cleared dropped by over 2,000 MW, to 12,408 from 14,832 the prior year, a reduction of 16%.
  • In NYISO, DR in the Installed Capacity (ICAP) market dropped from a historical high in 2009 and 2010 of about 2,150 MW to 1,100 MW this past summer, a reduction of nearly 50%.
  • ISO-NE has shown both short-term and long-term decreases in DR participation in the Forward Capacity Market (FCM).  Active DR (which excludes energy efficiency and distributed generation) dropped from about 1,800 MW in 2011 to about 1,200 MW this past summer, a reduction of 33%.  In the latest Forward Capacity Auction (FCA) for the 2017-2018 delivery year, retirement requests for over 600 MW of DR were submitted to the ISO.

What are some of the more specific reasons for these trends?

  • There have been more DR events called recently, so customers are feeling more of an effect on their operations.
  • System operators want to make sure that DR resources are accurately portrayed to ensure reliable operations and efficient markets.
  • Generators are seeing DR eat into their profits, so they want more comparable treatment to ensure a level playing field.
  • Energy market regulators are keeping a keener eye on DR to catch any market manipulation, like they have been doing for generators and traders for years.
  • Environmental regulators are showing concern about the air quality effects of behind-the-meter generation used for DR.
  • DR may be hitting a natural saturation point as it approaches 10% of capacity resources in some areas and all the low-hanging fruit of large commercial and industrial (C&I) customers has been harvested.
  • Low natural gas prices and a historical glut of capacity have led to low capacity prices in some regions.

These factors have put more risk and pressures on DR providers and end-use customers, which is making the decision to participate in the markets harder than it used to be.  However, I do not see all doom and gloom.

With recent and upcoming coal and nuclear plant retirements, it is possible that capacity prices could rise to levels that would make participation worth the risk.  The concepts of resiliency and microgrids, meanwhile, have taken strong root along the Atlantic Coast following Hurricane Sandy, and DR will be an integral part of those developments.  And other types of demand resources, like energy efficiency and distributed generation such as combined heat and power (CHP) and solar PV, continue to grow since they have non-market drivers pushing them.

So the overall mix and impetus for DR may change, but there will still be drivers for demand-side resources in the future.

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