PJM’s Capacity Performance Model: Ignoring Reliability and Cost Benefits of Summer DR?
July 8, 2016
A recent FERC order raises a fundamental question regarding the proper valuation of seasonal demand response resources (“SDR”): If an SDR is unable to reduce demand during winter peaking, should it be disqualified as a capacity resource? In other words, if an SDR (such as an air conditioner program to reduce peak loads during the summer) is unable to reduce loads during January and February (when air conditioners do not operate), should such an SDR be given no value as a Capacity Performance resource?
On May 10, 2016, FERC issued an order on rehearing authorizing PJM Interconnection, L.L.C. (“PJM”) to implement its Capacity Performance resource adequacy protocols beginning in 2018. (See, PJM, 155 FERC ¶ 61,157 (“CP Order”). The Commission concluded, in part, that PJM’s tariff enhancements would “provide greater assurance of delivery of energy and reserves during emergency conditions.” Order at 3. The 139-page CP Order addressed a wide range of rehearing issues, and included an unusually detailed 11-page dissenting opinion from Chairman Bay.
One of the key elements of the CP Order was denying rehearing of the protests raised by the Pennsylvania/Delaware Commissions and Steel Producers. These parties argued unsuccessfully that FERC should allow Limited and Extended Summer Demand Resources (e.g., air conditioner programs) to continue to participate in PJM’s capacity market on a stand-alone basis because they provide quantifiable reliability benefits. This is an important issue because the Advanced Energy Management Alliance (“AEMA”) estimated in 2015 that as much as 50% of demand resource summer capability will be regulated out of existence by PJM’s Capacity Performance proposal.
FERC rejected these challenges to the CP Program, as follows:
PJM is treating all resources identically in this respect. The rehearing requesters are in effect asking for special treatment for certain resources, permitting them to provide a lesser quality of service for the same price. We cannot find unreasonable PJM’s conclusion that non-year-round resources do not provide equivalent service as year-round resources. Permitting non-year-round resources to continue participating could result in a loss of reliability during the fall, winter and spring when PJM will not have as many resources to respond to emergencies, such as a polar vortex. CP Order at 59. (emphasis added).
It is undeniable the SDR has different operating characteristics than conventional fossil-fueled resources, such as a coal or natural gas-fired electricity generation resource. In theory, a natural gas or coal plant can provide as much electricity during a potential summer peak in August, as it can produce during the January 2014 “polar vortex”. In reality, however, “[e]quipment issues associated with both coal and natural gas units caused the greatest proportion of forced outages”, according to PJM’s analysis of that historic winter event. (See, https://www.pjm.com/~/media/documents/reports/20140509-analysis-of-operational-events-and-market-impacts-during-the-jan-2014-cold-weather-events.ashx. at page 4). In marked contrast, PJM also determined that “the availability and response of voluntary demand response” actually “exceeded PJM’s expectations in real-time”. Id. at 20.
Moreover, PJM’s resource adequacy should not only be concerned with reliability, but it should also consider the costs of achieving a reliable grid. Many industry studies have concluded that SDR is an effective and cost-effective way of achieving resource adequacy. (See, e.g., A Framework for Evaluating the Cost-Effectiveness of Demand Response which stated that “Avoided capacity costs from demand response – based on the ability to defer or delay the need for new generation capacity – are typically the most significant benefit associated with demand response programs.” https://emp.lbl.gov/sites/all/files/napdr-cost-effectiveness_0.pdf. at page vii.)
Thus, it is ironic that the CP Order accepted PJM’s argument that “non-year-round resources do not provide equivalent service as year-round resources”, despite the fact that PJM concluded that demand response “exceeded PJM’s expectations” for reliability during the actual polar vortex; while traditional fossil-fueled generation resources “caused the greatest proportion of forced outages” during the winter freeze. Moreover, the CP Order did not address the fact the cost/benefit ratio of demand response favorably achieves resource adequacy when it is needed the most (i.e., during PJM’s summer peak period which has always greatly exceeded PJM’s winter peak). That may be one reason that Chairman Bay’s dissent argued, in essence, that the CP Order incorrectly approved a multi-billion dollar solution to what may be a million-dollar problem.
An RTO cannot ensure reliability at a reasonable cost if its protocols will exclude a demonstrably valuable capacity resource, such as SDR. Although it is reasonable for PJM to adopt a tariff that focuses on reliability during both summer and winter peaks, it is illogical to adopt protocols that will significantly discourage SDR from contributing to system reliability.
This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Dan Clearfield at (717) 237-7173 – dclearfield@eckertseamans.com.