Energy news for the past few weeks has understandably been dominated by the U.S. Department of Energy's proposed changes to wholesale power markets. 

But for those looking for a break from NOPR comments, CPower Energy Management this month released a white paper titled "PJM capacity performance is here. Don’t believe the myths." The commercial and industrial DR provider says that despite new rules that are a challenge to the industry, actual demand response participation has remained robust and there are emerging opportunities for demand-side resources to participate outside the capacity market. 

PJM refresher

First, a quick refresher. Following the Polar Vortex winter of 2014, PJM instituted new requirements in its capacity market designed to ensure generators were online in extreme weather events. Among the changes was a requirement that resources be available year-round. That's not typically a problem for traditional generators, but in the PJM footprint demand response tends to be a summer resource, particularly on the residential side.

PJM introduced the more stringent requirements in a new product called Capacity Performance, and phased them in through a pair of transitional auctions. The transition ended this year and capacity in the latest auction had to be available year-round, prompting demand response stakeholders to closely watch the outcome.

The results were mixed, leading to concerns over where the market stands now and how more demand response resources can participate. About 9,850 MW of demand response was offered in the 2020/2021 Base Residual Auction, declining nearly 17% from last year. Out of that, 7,820 MW of resources cleared the auction — about a 25% drop compared with 10,348 MW last year.

A good showing?

Was that a good showing for the demand response industry in the first year of Capacity Performance? That's where it gets tricky. Demand response-cleared megawatts have been declining in PJM's forward capacity auction for years — but some had predicted an even steeper decline in this auction.

Demand response clearing the Base Residual Auction (BRA) peaked in 2012, a year after the Federal Energy Regulatory Commission issued Order 745. For delivery year 2015/2016, the PJM auction cleared almost 15 GW of demand response resources. Between the 2012 auction and 2017 auction, cleared volumes declined by about 50%.

In its white paper, CPower writes that "despite changes in PJM products and market conditions over the last decade DR is not in decline or at least not to the extent some will have you believe. Real DR is steady and holding strong. "

CPower argues that while cleared megawatts have declined, the volume that actually shows up has remained more constant. But what is "real DR?"

What shows up

There are several metrics by which you can judge the quantity of demand response participation, but an important thing to remember is the BRA numbers aren't really final.

According to PJM spokesman Ray Dotter, "there long has been a difference between the amount of demand response capacity that participates in and is committed in capacity auctions and the amount of demand response actually available in the resulting delivery year."

The amount of demand response clearing the reliability pricing model (RPM) BRA reflects the capacity commitments for a specific year. But Dotter says those commitments can change before the delivery year, so long as the curtailment service provider replaces their capacity with another resource — such as a generator.

That means a hypothetical curtailment service provider could potentially clear 20 MW in the BRA, discover they cannot deliver the load reduction, and replace the capacity with 20 MW of gas-fired generation. This is done through incremental auctions that occur between the RPM auction in May and the start of the corresponding delivery year. Dotter said that historical data show the auction-cleared demand response commitment is "significantly higher than the DR commitment when the delivery year starts."

And the shift is significant. According to the PJM Independent Market Monitor’s 2016 State of the Market Report, in 2016, about 4,800 MW of DR cleared in the annual auction was replaced for the actual delivery year.

Different ways to frame the figures

Other ways to judge the size of the demand response market include the commitment during the delivery year. That too can change, but Dotter said "experience to date is that it remains pretty consistent for the entire delivery year.

Finally, you can examine "registered" demand response capacity, which measures the DR capabilities of the end-use customer. That figure tends to be greater than commitments, Dotter explained, so the curtailment service provider can ensure it "has margin in its portfolio to avoid any performance penalties."

So even though demand response capacity clearing the annual auction has declined significantly in recent years, there are more than a few ways to frame the figures.

CPower's white paper notes that "although the amount of cleared DR has generally declined over time, and declined in 2020/21, the amount of actual enrolled DR participating in the market each year has stayed steady, hovering around 9,000 MW each year." That's why the firm maintains "real DR is steady and holding strong."

But there's a possible hitch in that outlook: If historical norms hold, then fewer than the 7,820 MW that cleared the RPS BRA will actually be enrolled for the 2020/21 delivery year. And that would mean a significant decline in enrolled DR.

CPower acknowledges this, adding that "additional DR could clear in the Incremental Auctions or even be enrolled beyond that amount."​

Where did those lost megawatts go?

One question analysts are considering is where the lost demand response capacity actually went. It's possible that facing more stringent requirements (and penalties), curtailment providers didn't want the risk and simply exited the market. But there are other options, and they may give an indication of how PJM's marketplace will evolve.

The grid operator's rules don't leave summer-only resources completely out in the cold. PJM has developed a process for those warm-weather megawatts to pair with winter-only capacity (typically, wind generation). But not enough winter resources were available this year, leaving some capacity unable to bid. According to Navigant Senior Analyst Brett Feldman "most of the drop was on the residential side."

There were about 2,000 MW of summer resources that submitted bids, but only 485 MW of winter resources were available to partner.

PJM is still working on mechanisms to allow more seasonal resources to participate in the market. Stakeholders have approved an issue statement initiated by the grid operator to look at other opportunities for seasonal demand response. Dotter said that process will begin over the next few months.

Dotter also said that the operator has completed its work on aggregation rules, at least for now. "There is no other activity currently under way," he said. Though he added that since there has been only one auction with the new Capacity Performance rules,"we recognize other enhancements may come up as we gain from experience."

Feldman also said it appeared some of the residential capacity unable to bid into the BRA had likely found another route by clearing as Price Responsive Demand (PRD) resources.

Feldman said there were 558 MW, mostly in the BG&E and Pepco zones, likely from those host utilities’ residential programs, which cleared as PRD. 

PJM describes PRD as "an additional option for demand to participate in PJM’s wholesale markets. But the grid operator also warned that PRD "will not be treated as a supply resource, like the demand response that participates in PJM’s Reliability Pricing Model capacity market. Instead, it will be treated as a predictable change in the amount of electricity used, not as additional generation."

According to Elta Kolo, grid edge analyst for GTM Research, that may be where PJM is headed long-term with summer-only resources: into the energy markets.

"My inclination is that the demand response that was 'lost' in the capacity market will slowly migrate to the energy markets, prompting more demand response for dynamic operation," Kolo said. "The migration of more significant volumes of demand response to energy markets means increased elasticity, and if such activity persists for the RTO this will prompt a change in forecasting and planning."

As for the current state of demand response in PJM, Kolo said it's too soon to tell. The first incremental auction for delivery year 2020/2021 will take place next year.

"The fact of the matter is, we have to wait to see the ramifications; you will not see the full implications of capacity performance in PJM until the incremental auctions clear," she said.