PJM Re-files Burdensome Rules for Demand Response in Capacity Market, Move to Command & Control Continues

PJM has re-filed at FERC, in the form of tariff revisions, new rules proposed to be applicable to demand response capacity offers made in the Reliability Pricing Model capacity auction.

FERC previously rejected the rule changes because they were filed in business practice manuals, and not the tariff.

PJM says that the rules are needed to assure reliability and treat demand response resources equally with generation resources.

However, the greater impetus for the changes is dissatisfaction with one of the hallmarks of a true "market" - the ability to arbitrage. Specifically, there is dissatisfaction among asset owners with the apparent arbitrage opportunities in the PJM capacity market which result in lower prices in the Base Residual Auction, which procures the vast majority of capacity required under the mandatory capacity obligation.

There is speculation that entities (specifically demand response entities) offer excessive quantities of capacity in the Base Residual Auction, and then rely on the following Incremental Auctions (or bilateral capacity purchases) to fill such capacity obligations. Pricing in the Incremental Auctions, because they fill a much smaller load obligation and are closer to the delivery year, tends to be lower, hence, the opportunity for arbitrage.

Normally, this would be seen as efficient market behavior, and one that provides price relief to customers.

But since the point of PJM's capacity market isn't to meet the mandated reserve margin at the lowest price (which has undisputedly happened despite fear-mongering about some looming crisis from reliance on demand response or other arbitraging resources), but rather enrich incumbent physical asset owners, this behavior is seen as a problem.

PJM's proposal specifically requires sellers intending to offer a demand resource into an RPM auction (whether with an offer price or as self-supply) to submit a "Demand Resource Sell Offer Plan" demonstrating "to PJM's satisfaction" that the resource will have the capability to provide a reduction in demand, or otherwise control load, by the start of the Delivery Year for which the resource will be committed.

"The revisions make clear that DR Sell Offer Plan must include all Existing Demand Resources and all Planned Demand Resources that the DR Provider intends to offer in the auction," PJM said.

Notably, the Demand Resource Sell Offer Plan may be required to list specific end-users on which the resource intends to rely.

The revised tariff requires that demand resource information shall be provided to PJM on an end-use customer site basis if two screens, "designed to detect a possible mismatch between offered demand reduction capability and demonstrated demand reduction capability," are both failed, PJM said.

The first screen assesses whether a specific transmission zone has aggregate cleared offers from the last Base Residual Auction that exceed actual or "reasonably expected" demand response in that zone. The second screen measures whether a demand response provider located in that zone is offering demand reductions that exceed that provider's highest previous levels of registered or cleared demand response.

The specific customer information required if both screens are failed include the end-use customer's name, its premises address and its electric distribution company account number (if known), the customer's end-use segment, and zone (or sub-zone).

The demand response sell offer plan also requires, "an approximate timeline for procuring end-use customer sites as needed to physically deliver" the offered demand reduction capability.

"Because the DR Sell Offer Plan is designed to support Demand Resource offers into RPM forward auctions as much as three years before the relevant Delivery Year, the revised Tariff instructs the Demand Resource Provider to specify 'the cumulative number of customers and the cumulative Nominated DR Value' by customer segment and Zone/sub-Zone that the provider 'expects (at the time of plan submission) to have under contract as of June 1 each year [i.e., as of the first day of each intervening Delivery Year] between the time of the auction and the subject Delivery Year,'" PJM said.