The Current Value of Demand Response: It All Depends Where You Look

by Matthew Rose, Enerdynamics Facilitator and Director at EMI Consulting

Depending on where you look, the value and business rationale for demand response (DR) varies. In certain parts of the country, there seems to be a growing focus on DR; in others, market forces are reducing the value of DR. In some areas DR is viewed as a resource competing in capacity markets whereas in others it is a resource included in utilities’ integrated resource planning.

In the Pacific Northwest, the focus has traditionally been only on energy efficiency, but the current 20-year power plan prepared by the Northwest Power and Conservation Council indicates demand response could offer billions in cost savings. In California, the state’s Investor Owned Utilities (IOUs) now participate in the state’s Demand Response Auction Mechanism (DRAM) program. DR also is unfolding in the Northeast with both utility and ISO programs.

Despite new areas of DR attention, there are signs that activity levels are tapering off in some of the more mature markets. A review of the current market for demand response points to a fragmented landscape affected by varying aggregator activities, changing market rules, and a capacity market that has notable swings in capacity requirements and value. A closer look follows:

The status of demand response by looking at PJM

The Regional Transmission Organization or RTO known as PJM Interconnect (which provides system operations in 13 Mid-Atlantic and Midwestern states) is one key place where demand response has been a viable resource. Over the past decade, PJM has successfully facilitated markets open to DR resources including its energy, capacity, and ancillary services markets. However, despite continued market activity, PJM has seen some recent reductions in DR market impacts. This is especially evident in the commitment of DR in its forward capacity market, which remains the most heavily transacted of PJM’s DR markets and accounts for more than 90% of PJM’s DR revenues.

A key metric that looks at participation of DR in the PJM Interconnect is the results of the just-completed Basic Residual Auction (BRA). The auction saw significant declines in capacity prices across most of PJM’s market for the 2020-2021 delivery year with resources clearing at $76 MW-day across most of the grid (as compared to last year’s auction where most of the grid cleared at around $100 MW-day).

 

The BRA auction directly reflects the impact of DR in PJM’s forward capacity market. Demand response as a resource continues its trend of decline over the past few years. Some experts point to changes in PJM’s auction rules that require year-round operation of resource reduction as part of its Capacity Performance construct. This was seen as particularly challenging for DR resources that traditionally focused on summer months when prices and activity levels are usually high. Auction bidders now must bid year-round offers requiring creative solutions in packaging varying types of DR to cover the entire year.

While many in the industry expressed surprise at the reduced amount of DR clearing the PJM auction, many analysts close to the DR industry stated that the 7,280 MW of DR exceeded what they had predicted in the face of rule changes and continued uncertainty in the world of DR curtailment providers. For the providers, there is no obvious answer on how to package resources for year-round bids.

Perhaps impacting PJM on a broader level are additional signs that DR growth is slowing, especially for the more conventional commercial and industrial (C&I) aggregator opportunities. There is some thought that suitable C&I customers have already been approached by curtailment providers, leaving modest avenues for adding new participants. The reduced DR growth in combination with reduced wholesale prices has likely impacted the financial attractiveness of the DR markets.

In addition to lower capacity prices, activity levels of some of the more prominent curtailment providers continues to demonstrate market uncertainty:

  •  EnerNOC has seen its energy efficiency management software strategy stumble. This has led to some company retrenchment and a recent agreement for EnerNOC to be acquired by the international power company Enel.
  • Comverge was recently sold (again), this time to Itron, which further contributes to an uncertain landscape. It appears that lower capacity prices make it more challenging for companies to make money on a predictable basis.

 

Where are we today?

A few signs of change in the DR market include:

  • The notable forward capacity markets in PJM, ISO-NE, and NYISO continue to deliver greater levels of respective grid capacity, even to the point of oversupply (above its required reserve margin). Greater availability of capacity results in a general trend of lower prices available to DR providers.
  • The MIdcontinent ISO (MISO) auction results cleared at the incredibly low value of one dollar and fifty cents ($1.50). This is a stark reduction from the regional prices that rose as high as $150 MW-day in some MISO regions the prior year.
  • The NYISO also saw auction capacity prices reduced through most of its grid with the exception of the New York City and Hudson Valley zones.

Despite these challenges, DR is not going away. There remain areas in the country where capacity is constrained or limited and DR remains a viable solution. There also are utilities and curtailment providers offering larger “packaged” benefits to their customers beyond just offering and bidding DR. These expanded offerings include efforts designed to promote customer tariff savings, create distributed energy opportunities, improve customer satisfaction, offer renewable options, and facilitate customer-strategic energy planning. There are also state initiatives looking at greater DR efforts including policies in Michigan and Pennsylvania. Some industry experts believe future DR growth may come from the residential or mass market customers as utilities advance new technology and communications software that allow for aggregating DR loads.

Opportunities also exist for targeting DR to offset transmission and distribution assets (rather than generation). The Bonneville Power Administration in the Pacific Northwest recently announced it will not construct a proposed 80-mile, 500-kV transmission line but will instead turn to non-wire alternatives including DR. The New York State utilities are advancing numerous non-wire projects as part of REV demonstration efforts, and Consumers Energy in Michigan is carefully examining distribution assets facing constraints and considering targeted DR solutions.

As with any market solution, the viability of DR will vary in accordance with location, regulation, prices, and customer needs. While today the activity levels may seem to be slowing in some places, it is not unrealistic to envision a future in which DR offers increasing reach and wider participation.


References:

Jeff St. John. EnerNOC Seeks Alternatives Amid Software Slump. Greentech Media. March 14, 2017.

Robert Walton. What’s The Future for Demand Response Under PJM’s New Capacity and Aggregation Rules? Utility Dive. May 31, 2017.

Amanda Cook. All Zones at $1.50/MW-day in 5th MISO Capacity Auction. Rtoinsider. April 2017.

Personal communications. P. Langbein. PJM. June 2017.

PJM. 2020/2021 RPM Basic Residual Auction Results. May 23, 2017.

Northwest Power and Conservation Council. 7th Northwest Power Plan. February 2016.

David Steves. BPA Cancels Controversial Line in Southwest Washington. Oregon Public Broadcasting. May 18, 2017.

Julien Dumoulin-Smith. PJM Take 3. Teasing Out the Key Learnings for the Future. UBS Global Research. May 31, 2017.

Robbie Orvis. The State of U.S. Wholesale Power Markets: Is Reliability at Risk from Low Prices? Energy Innovation. May 22, 2017.

EnerNOC Press Release: EnerNOC Enters Into an Agreement to be Acquired by the Enel Group for over $300M. June 22, 2017.