US FERC approves PJM plan to alter demand response in capacity auction

Washington (Platts)--31Jan2014/504 pm EST/2204 GMT


The Federal Energy Regulatory Commission approved PJM Interconnection's proposal to boost the use of demand-response resources on a year-round basis to address what PJM identified as adverse market impacts of its DR program.

While PJM's proposed tariff change drew some criticism and it may not be the most optimal choice to address the capacity market issues it was designed to fix, FERC said PJM "need only demonstrate that its proposed revisions are just and reasonable, not that its proposal is the most just and reasonable among all possible alternatives."

PJM issued a statement Friday noting that FERC's action will allow the grid operator to expand the use of DR outside of the summer peak demand season. PJM, along with other independent system operators and utilities, has been seeing winter demand records amid a bitterly cold January.

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"Given the challenges of the extreme cold weather, PJM is pleased and grateful that the commission has agreed to our proposals to strengthen demand response as a reliable capacity resource," said Terry Boston, president and CEO of PJM.

Financial analysts at UBS Securities said the decision likely will be cheered by generators in PJM, who are likely to see higher capacity prices in the upcoming auction for the 2017-18 planning year.

"Many investors and participants alike have been looking towards the approval of these reforms as central to seeing meaningful recovery in the auction [prices]," said Julien Dumoulin-Smith, executive director of equity research at UBS.

For the proposed tariff change to be in effect for the upcoming capacity auction, it needed to be approved by Friday, PJM said when it filed the request, since parameters for that auction are to be released Saturday.

The Thursday order approved PJM's Federal Power Act Section 205 change to its tariff that will alter the way resources are procured through its base residual auction. The current practice of having DR resources subject to procurement minimums suppressed auction clearing prices, PJM told FERC late last year. It sought to establish procurement caps on two of its limited-availability DR products.

The change is needed because under a 2011 tariff change, when annual resources -- which include generation capacity, energy efficiency and DR resources -- are required to be paid a price premium to meet minimum reliability requirements, the auction algorithm will clear lower-availability products, at a lower cost, as soon as a minimum for higher-availability products is met, PJM said.

PJM has limited DR resources that must be available from June through September for a certain number of hours, and extended summer DR resources that must be available from May through October for a certain number of hours. The change will cap the amount of limited DR resources at 4% of PJM's reliability requirement and cap the aggregate amount of limited and extended summer DR resources at 10% of PJM's reliability requirement.

PJM also said the change will allow limited-availability DR resources to be offered into PJM's capacity auction as annual resources.

The independent market monitor for PJM, various generators and some state regulators supported the change, while industrial customers, consumer advocates and regulators in Maryland and Delaware protested the move. State regulators from Maryland said the added capacity costs may amount to as much as $1 billion/year, using PJM's own data and auction simulations filed as part of the proposal.

FERC likened the additional costs to the procurement of more annual resources to provide an enhanced level of reliability, thus it is reasonable to expect higher costs.

--Tom Tiernan, tom.tiernan@platts.com
--Edited by Jason Lindquist, jason.lindquist@platts.com

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