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PJM 'Road Map' Would Rely On "Wholesale" Demand Response to Continue Demand Response Participation in Capacity Market, In Light of Court Order

October 8, 2014

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Copyright 2010-14 EnergyChoiceMatters.com
Reporting by Karen Abbott • kabbott@energychoicematters.com

PJM has issued a "road map" for how demand response could be treated in light of an appeals court holding that demand response compensation, in the energy market, is a "retail" matter and outside of FERC's purview.

Notably, the approach advanced by PJM gets around the retail question by relying on participation of "wholesale" demand response, or the demand response of LSEs, rather than specific end users.

Under this approach, demand response would participate in PJM's energy and capacity markets under the following broad terms:

1. As demand response (i.e. demand side). PJM's markets would not separately compensate demand as a supply-side resource. The economics and incentives in having demand participate would result from avoided costs and obligations. State programs, of course, could offer added incentives to both wholesale and retail market participants.

2. Through load-serving entities. PJM would base planning and procurement decisions on commitments bid into PJM's markets by wholesale market entities. These entities, by definition, have control over, or an obligation to serve, specified retail load and can commit to reduce their wholesale load based on curtailment commitments or alternate supply (behind the meter) which they arrange with their end-use retail load. We envision that in many states third-party curtailment service providers will serve a continuing and important function by partnering with load-serving entities to provide their customer management expertise.

With respect to the capacity market, PJM explained:

"Wholesale demand response would bid into the capacity auction as a commitment to curtail by wholesale market entities (load serving entities, including competitive retail providers). This alternative would enable wholesale (load-serving entity-based) load to participate on the demand side of the capacity market as 'demand response' and would be modeled as a reduction in capacity obligation. The demand would bid a curtailment commitment into the capacity auction at a price. This curtailment commitment bid would affect the demand curve, could set the capacity price and, if cleared, would avoid paying the capacity clearing price. This cleared curtailment would result in PJM procuring less capacity for that load-serving entity in the same amount as the cleared curtailment bid quantity. Under this approach, PJM would define the eligibility characteristics of a curtailment commitment and would establish measurement, verification, penalty and credit requirements as necessary to ensure performance and compliance. The curtailment commitment is essentially a commitment by the load-serving entity to reduce its wholesale demand at PJM's request during the established compliance period. If the demand response curtailment commitment is called to perform in the energy market, it may receive no additional energy market payment, but would avoid an energy payment for the demand reduced."

PJM believes a transition mechanism can be developed based on this alternate approach to minimize disruption to participation by wholesale demand response that is already committed through a capacity auction for delivery years 2015/16, 2016/17 and 2017/18. The proposed transition mechanism is as follows:

• PJM would review demand resource commitments to determine which are load-serving-entity-based and can be directly converted to demand response curtailment commitments.

• PJM would develop a mechanism to work with curtailment service providers, states and load-serving entities to explore how demand resource commitments may be transitioned to load-serving entity-based curtailment commitments through assignment arrangements and the like.

• PJM would establish procedures for demand resources that cannot be converted to release them from their capacity commitment. Such resources would receive no capacity credit for their released commitment and retain no curtailment obligation in the delivery year.

• Similar to the pending rules transitioning demand resources affected by the new 30-minute notification requirement, PJM would account for the quantity of released demand resources in the remaining incremental auctions for the three transition delivery years and, if necessary, purchase additional capacity to replace the released demand resources. Additionally, load-serving-entity-based demand response would be eligible to bid into the incremental auctions as demand-side participants.

• The terms of the curtailment commitment in the energy market for each type of demand resource (limited, extended summer and annual) would be preserved during the transition.

In contrast, with respect to the energy market, PJM said that depending on FERC's decisions for demand response compensation, demand reduction in the PJM energy markets may not receive direct compensation from the wholesale market. "The PJM Day-Ahead Energy Market permits price responsive demand bids in which load-serving entities can specify a price at which they choose not to consume energy rather than pay energy market clearing prices. The PJM Tariff also includes provisions for Price-Responsive Demand in the Real-Time Energy Market. Under these provisions, a load-serving entity can provide a forecast of aggregated price responsive demand which PJM will model in the regional dispatch to avoid dispatch of generating resources in anticipation of price responsive demand reduction," PJM said

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