Navigant Research Blog

PJM’s Latest Capacity Auction Shows Drop in Demand Response, but Not Catastrophic

— May 25, 2017

The holding of breath for PJM’s annual capacity auction results ended on May 23, with the results indicating mixed feelings. The price for most of the market was down from $100/MW/day for the 2019-2020 auction last year to $76.53/MW/day for 2020-2021. However, certain subzones cleared at nearly twice that price or more, so bidders in Chicago, Philadelphia, New Jersey, and Cincinnati came out smiling.

For demand response (DR), there was a lot of speculation going into the auction about the effect that the first 100% Capacity Performance procurement would have. Some analysts predicted 50% or greater reductions in DR participation, assuming most DR providers and customers would not want to take on annual performance risk. In my Market Data: Demand Response report for Navigant Research last year, I estimated a 25%-30% reduction, feeling that large commercial and industrial (C&I) customers would continue to participate; DR providers would continue to aggregate midsize C&I customers with more conservative megawatt values; and residential DR would take the biggest hit since it is almost all summer based.

Pricing, Aggregation Rules Influence Auction

The actual reduction was 24% from the last auction, dropping from 10,348 MW to 7,820 MW. Nothing to sneeze at, but far from a total market abandonment. Last year, only 614 MW of DR cleared as an annual product, so there was a large portion that was willing to convert. Pricing may have influenced DR quantities as well. While all zones decreased year-over-year, the zones with the lowest prices showed the biggest drops and those with higher than expected prices shed fewer megawatts.

This was also the first auction in which PJM instituted new aggregation rules, where summer and winter resources could match up with each other to meet the annual obligation. While 2,000 MW of summer resources (mostly DR, energy efficiency, and solar PV) submitted aggregation bids, only 485 MW of winter resources bid (mostly wind), limiting the effects of the new mechanism.

Silver Linings

Historically, EnerNOC has happily proclaimed its percent procurement of PJM DR in the auctions, but has been quiet the last couple of years. However, this year EnerNOC tweeted: “@EnerNOC captures 34% of the DR market in #PJM BRA.”

On the residential DR side, it appears that the Exelon utilities—which have been the biggest bidders in that sector—largely pulled out of the auction from the supply side. The utilities had put out an RFP in March looking for 700 MW of winter resources with which to aggregate, but apparently did not find enough partners. However, this does not mean that they exited the capacity market entirely. PJM reported that, for the first time, price-responsive demand resources cleared in the auction to the tune of 558 MW, mostly in the Baltimore Gas and Electric and Pepco regions—likely from those host utilities. If those megawatts get added to the DR megawatts that cleared in the auction, the drop is only 19% from last year.

All in all, I’d consider this a positive outcome for DR compared to some of the draconian forecasts. Now we’ll have to see how well the market performs once the annual requirement kicks in.

 

PJM Capacity Auction Livens Up the Dog Days of Summer

— August 24, 2015

A lot of people normally take vacations and start to think about the back-to-school rush in August, but nothing productive gets done. The same cannot be said for 2015, as PJM’s capacity auction, normally held in May, was moved to August this year due to regulatory proceedings. This change has kept people checking their messages from the beach to make sure they don’t miss any important news while working on the perfect tan.

PJM’s 2018-19 Base Residual Auction (BRA) for its Reliability Pricing Model (RPM) capacity market was held last week and it released results late last Friday. This was the first auction to include the new Capacity Performance (CP) requirements, which increase risk to suppliers but also potentially increase revenue. The auction prices for CP fell within expected ranges, elevated over the last auction. Importantly, PJM only procured 80% of its supply need with CP, with the other 20% coming from Base Capacity (BC) resources, which have lower performance requirements and lower risk. The main analyst sentiment going into the auction was that BC would clear at a much lower price than CP due to the risk premium. This did not turn out to be the case, however, as CP only cleared 7%–9% higher in most zones.

What does all this mean for demand response (DR), which was seen as a wild card in the auction outcome? All signs point to a positive prognosis—well above most expectations—with 11,000 MW clearing, about 100 MW more than the year prior. This increase is probably due to the higher prices rather than any DR industry trends. Over 90% of DR cleared in the BC product. Had the BC price ended up much lower, as was widely expected, it would have been interesting to see how much DR would have stayed in the market.

One big question was how much DR would clear in the CP product given the higher risk of penalties. The answer was about 1,500 MW, less than 10% of total DR. There are many ways to interpret this result. First, it rebuffs the notion that little to no DR would take the CP plunge. So some level of DR is here to stay once PJM starts procuring 100% CP in a couple of years. On the other hand, a very small percentage of DR cleared in CP, so it does not look like a mass-market opportunity. However, a third perspective is that because the CP premium over BC was so small, most DR suppliers chose BC for the lower risk; had the premium been much larger, perhaps more DR would have jumped to CP. A lot of those details are hidden in the bidding strategies of the suppliers and are not made public unless willingly volunteered. EnerNOC normally releases a statement soon after the auction announcing its results, but probably not that level of detail.

PJM has stolen the headlines once again, but I’m sure there will be time to discuss other energy developments once I put my surfboard away and school commences. In the meantime, you can read about EnerNOC and other DR providers in Navigant’s recently published Demand Response Leaderboard Report.

 

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