The Opportunity Gap in Economic Load Response

Issue 7 and Volume 117.

Richard Fusco   By Richard Fusco, Regulatory and Research Manager, Joule Assets Inc.

Recently, PJM released an analysis, entitled ‘2012 Economic Demand Response Performance Report’, of its implementation of FERC Order 745. Order 745 directed Independent System Operators to create a mechanism for paying a demand response resource the Locational Marginal Price (LMP) at its location for curtailed load whenever the hourly price is above a “Net Benefits” threshold. In only five months after PJM implemented the order in April 2012, the volume of energy that was curtailed for this program was about equal to the volume that had been curtailed over the previous three and a half years. While this is certainly an achievement, there are still many opportunities to create increased flexibility in PJM’s demand side.

Since its post-745 rejuvenation, the report shows that Economic Load Response has had more than 42 percent of its participation come from the Dominion zone that stretches from Northern Virginia to North Carolina. The large volume of participation in the zone stems from neither high prices nor populous geography but from the fact that 97 percent of these energy market participants are larger than 5MW. As PJM notes, most participation is coming from “a small number of very large customers.” Thus, this uptick we’ve seen in Economic Load Response since last April has been from a couple large industrial customers in remote, uncongested areas of the PJM grid.

Additionally, most participation is coming from facilities that are responding less to the market and more to the convenience of curtailing, resulting in hours of resource participation with only slight correlation to peak prices. Participants are not taking advantage of the long tail at the high end of the market’s price distribution. In fact, the average of the top 1500 hours — significantly more hours than participants participated in — during the relevant time period in Dominion is still significantly higher than the average price participants made per hour there.

It is also worth noting that economic participation is only a small part of demand response in PJM. The report notes that enrollment in Economic Load Response is only 3 percent of the enrollment in Emergency Load Response, a mechanism that allows end-users to bid into the capacity market. The disadvantage to a demand response market dominated by zonal capacity pricing without a robust LMP-based energy market has begun making itself prominent. PJM recently elicited a strong response from several Curtailment Service Providers (CSPs), all of which will now essentially have to fix where their loads are located before bidding into the Base Residual Auction. PJM instituted this because, as they noted in a statement, the current demand response requirements “do not provide enough information for PJM to adequately understand the quantity and location of demand response to include in reliability planning.” PJM’s desire for more locational information about its resources is undoubtedly caused, at least partly, by the 97 percent of demand side resources that are responding to zonal capacity prices as opposed to granular energy prices.

There is currently a significant opportunity gap for Economic Load Response since participation in the program is coming primarily from a few large participants responding mostly as a result of convenience to their own operations. We should focus on enabling more diverse participation through the use of new methods and technologies. This may be utilization of advanced building management systems, facility optimization platforms, two-way communication devices or real time price feeds. It may also include practices such as auto DR and optimized market bidding strategies. Furthermore, we need a variety of end-users at specific LMPs that engage in strategies for participation in a larger quantity of more lucrative hours in order to fully capitalize on Economic Load Response.

PJM’s implementation of FERC 745 has created greater participation in Economic Load Response. With market barriers removed, we can now focus on tapping into more value on the demand side. By relieving congestion in ways that other types of participants are incapable of, demand side resources have the capability of reaping high revenues at specific times and specific LMPs, which is precisely what Economic Load Response rewards. With optimization of the participation profile, Economic Load Response has the potential to create value that no other market mechanism can.

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