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Up in Smoke

PJM auction jettisons 6.9 GW of coal-fired generation

year. Indeed, PJM has reported that demand response mitigated unconstrained region-clearing price increases by 10 to 20 percent, and contributed 30 percent to the price reductions in the constrained region. These percentage savings translated to about $1.2 billion in direct payments to capacity providers.

Demand response is an outgrowth of market innovation and smart grid technology. Operating under market constructs that introduce variable demand into energy markets, demand response providers search for the most economic megawatts available for curtailment and build networks of sites utilizing intelligent energy management to generate “negawatts,” which represent the ability of end users to reduce or eliminate energy consumption in response to signals. By making negawatts available at costs that are generally below those required to build and maintain generation plants, demand response lowers capacity costs in energy markets and offsets new build capacity.

Demand-Side Potential

According to FERC, there are currently about 37,000 MW of demand response capacity available in the United States.

Demand response providers will pay back more than $300 million to end-use customers in the PJM region in 2014/2015.

FERC further estimates that given the right market constructs, this capacity could grow to between 80,000 MW and 108,000 MW by 2030, permanently eliminating the need to build power plants to serve that demand. PJM, with demand response registrations of 9,200 MW in 2010/11 and cleared demand response of 14,100 MW by 2014/15, is the largest demand response market.

In addition to providing overall costs that are lower than traditional fossil fueled generation, such as coal plants in the auction, demand response will provide additional benefits to electricity consumers in the PJM region. Demand response provides payments directly to end consumers who agree to curtail their energy use. While varying widely depending on technical and market factors, these payments or “customer splits” average 50 percent or more of the gross revenues provided by the PJM capacity market. This means demand response providers will pay back more than $300 million to end-use customers in the PJM region in 2014/15, on top of the $1.2 billion already saved by consumers.

The prices at which coal-fired plants bid were higher than where the market cleared -- as a result of environmental capital expenditure requirements.

Customers receiving these payments often use them as leverage for capital expenditures on energy management and other energy efficiency projects, which helps generate “green collar” jobs. As these customers eliminate or reduce consumption when called upon for grid events, their action has a concomitant effect on real-time wholesale electricity prices in the energy markets, further lowering costs and reducing peak-time pollution.

The success of consumer-side participation in the PJM capacity markets clears a path for succeeding in the long sought trifecta of winning policy as it relates to the environment, energy and economics.

About the Author:

Ade Dosunmu is managing director at Capacity Markets Partners. Previously he held executive positions at Utility Risk Management Corp., Comverge, and Booz & Co. He co-founded GreenPrimate Inc., a provider of automated building energy efficiency software and services. He holds an MBA from Stanford Graduate School of