PJM Interconnection announced the results of its most recent Base Residual Auction last week, revealing a mixed bag for a wide range of stakeholders.

The big winners were gas generators, which made up most of the new resource participation, and customers who will see lower prices. The losers tended to be non-carbon emitting resources, including renewable energy, demand response and nuclear energy.

Demand response participation tumbled, as did solar, while nuclear units struggled due to their high fixed costs. Exelon's Three Island Mile nuke failed to clear the auction, and the company subsequently announced plans to shutter the Pennsylvania plant in 2019. Exelon will continue to operate the Quad Cities facility, though it also failed to clear, but indicated it would consider shutting down that plant as well if it does not receive subsidies from Illinois ratepayers.

Capacity prices across most of the PJM market fell for the 2020-2021 delivery year, coming in under expectations and  clearing 165,109 MW of unforced capacity in total. Resources cleared at $76.53/MW-day across most of the grid, with higher prices in more populated or congested service territories. In last year's auction, most of the grid cleared at around $100/MW-day.

The decline in price comes alongside more stringent capacity rules that had been expected to raise prices. This was the first year PJM utilized new Capacity Performance standards, which require resources to be capable of sustained operation on an annual basis. While the new standards have been problematic for seasonal resources, in particular demand response providers, the change was made to ensure reliability after a particularly cold winter—the polar vortex of 2014—when many generators were unable to remain online.

More stringent requirements could have led to higher prices, but a glut of new gas capacity and stagnant demand instead resulted in a significant drop.

PSE&G President, Chairman and CEO Ralph Izzo said there were "a variety of factors in play" that helped to keep prices low, including movement in the spark spread, changes to how power flows from PJM to the New York ISO, and changes to demand response.

"Somehow when you put all those ingredients into the stew, you wind up with the pricing we saw," said Izzo. "If there's one takeaway, it's that prices can move a lot from one year to the next."

PSEG Power, PSE&G's unregulated generation subsidiary, cleared approximately 7,800 MW at a weighted average clearing price of $174MW-day. "We didn't change our bidding behavior," Izzo said of the results in light of the new standards.

Critics of PJM's auction mechanism say the new Capacity Performance standards are shutting out cleaner resources. In particular, residential demand response, which is an overwhelmingly a summer-based product, took a hit. But some observers say the outcry is overdone, particularly in the wake of doom-and-gloom predictions.

"What PJM procured contrasts with what customers and states want," said Jennifer Chen, an attorney working for the Natural Resources Defense Counsel. She pointed out that less than 10% of procured capacity came from wind, solar, or demand-side resources. "There's a lot of missed opportunity there."

Navigant Senior Analyst Brett Feldman, on the other hand, had a rosier take on the results. He noted that some analysts had expected a 50% reduction in demand response participation in the face of more stringent annual requirements. Ultimately, the grid operator procured 7,820 MW of demand response—down from 10,348 MW in the previous auction, and about a 24% reduction.

"Nothing to sneeze at, but far from a total market abandonment," Feldman wrote in a blog post. "All in all, I’d consider this a positive outcome for DR compared to some of the draconian forecasts."

Demand response decline was predictable, even after the Order 745 decision

Demand response capacity clearing PJM's annual auction peaked in 2012, a year after the Federal Energy Regulatory Commission issued Order 745. That decision (appeared to) cement demand response's place in wholesale markets—the order stipulated that demand response providers must be compensated for reducing electricity load at the same rates as if they met that demand with generated electricity.

For delivery year 2015/2016, the PJM auction cleared almost 15 GW of demand response resources. But Order 745 was challenged, and ultimately wound up being upheld by the U.S. Supreme Court. In the meantime, however, demand response participation in PJM lagged; between the 2012 auction and 2017 auction, cleared volumes declined by about 50%.

The debate over whether FERC had authority over demand response stretched for years, but ultimately the Court determined last year the agency was authorized to set compensation levels. 

That decision was a boon to the demand response industry, and was expected to help the resource grow in organized markets. PJM, historically the largest market for demand response, is closely watched. But while market attrition from the Order 745 uncertainty has had time to recover, the operator's response to the polar vortex of 2014 threw in another wrench. The new capacity requirements aim to provide greater resiliency, but the grid operator acknowledges there may be growing pains.

"This higher requirement likely will affect the ultimate mix of resources for demand response with less residential customer participation and more commercial/industrial participation," PJM spokesman Ray Dotter said in an email.

The actual mix of resources is unknown right now, as curtailment service providers register customers just before start of the delivery year. Dotter explained that's when the market will know what types of customers are actually making up the demand response resources. But in an effort to keep seasonal resources in the market, PJM allowed summer-only resources to partner with winter resources to develop a qualifying bid.

"The aggregated resources were limited somewhat by the amount of winter resources which offered into the market," said Dotter. "However, just the fact that this aggregation approach was available and used is a good sign."

GTM Research analyst Elta Kolo said that "it doesn't come as surprise that there was a lower volume of demand response cleared in the auction, this was expected with capacity performance specifications going into effect and certain seasonal resources not being able to transition."

The reduced cleared capacity also follows with the "declining trend in DR capacity over the past three auctions," she said. "What is noteworthy about these auction results for demand response is the percentage of total capacity that DR represents."

For the most recent auction, that portion is about 4.7%, said Kolo, while for the two previous auctions, demand response accounted for over 6% of the cleared capacity. But count the grid edge analyst among those who say PJM's auction results are not the end of the world for demand response.

"I don't think that the auction was particularly eventful nor is it signaling the demise of demand response," she said. "I think what you are seeing is a phase of transition taking place."

Seasonal resources take a hit

Transition or no, some demand response advocates were not pleased with the auction results.

“Implementing products which favor one resource over another – which is what this does, it kicks summer resources out of the market – it doesn't feel very market-based," said Erika Diamond, vice president and general manager of energy markets for EnergyHub, a demand response provider with dozens of utility partners.

Diamond said PJM's new capacity performance standards just don't make sense, given the problem they want to address.

“It's really unfortunate because the market should be open to everyone. PJM implemented this product because they believed, in the aftermath of the polar vortex, that a year-round resource was more reliable. But it doesn't add up," said Diamond. "The resources that were not reliable during the polar vortex were generators, not DR resources."

The arctic temperatures that forced up to 20% of generation offline at points during the 2013-2014 winter were largely a one-off event, she said. But the grid operator regularly faces similar issues on the hottest days.

“Peak resources are an issue in the summer. It's the most natural thing, and obviously it's disappointing that PJM doesn't see it that way,” said Diamond.

While this was the first auction where seasonal resources could aggregate to bid—and hence there may be a learning curve—NRDC's Chen says the problem is more fundamental: The PJM summer peak is about 26 GW higher than the winter.

"The market is highly seasonal, so we're always over-procuring in the off-peak," she said. "And if we rely on the aggregation method, we're still stranding a lot of the resources that can more cost-effectively provide capacity for the higher summer peak."

NRDC and other groups have proposed a seasonal resource, and have submitted a complaint to FERC. The agency, however, currently lacks a quorum. 

Ultimately, PJM reported that just 398 MW of seasonal capacity resources cleared in an aggregated manner to form a year-round commitment. The aggregated summer resource consisted of 289 MW of summer demand response, 103 MW of efficiency and 6 MW of intermittent resources. Those resources paired up with 398 MW of what was mostly winter wind capacity, the grid operator said.

As a portion of PJM's total procured capacity, that's just about 0.2%, said Chen.

"On the whole, it's a pretty insignificant mechanism for allowing seasonal resources to participate," she said. "There's a lot of missed opportunity there."

Diamond said it did make sense to impose stricter rules on capacity, but "it didn't make sense to remove summer resources from a summer-peaking market. And now demand response resources are being punished."

GTM's Kolo took a brighter look at the aggregation. "The new rules are stimulating some market participation," she said. "Granted this is not a lot but it is showing that the rules can work."

Some DR resources may have transitioned into new product

The total quantity of demand response resources offered into the auction was about 9.8 GW, a 16.7% decline from the previous year's offers.

Despite the decline in offers and cleared resources, however, Kolo said "it doesn't necessarily mean this flexibility is gone from the system." Seasonal demand response that "did not make the cut" may still find opportunities in the energy markets, she said.

And Navigant's Feldman said some utility programs may have chosen not bid into the Capacity Performance product. Exelon's utilities had issued an request for proposals seeking 700 MW of winter resources to aggregate with, but was unable to find a match, he said.

However, "price-responsive demand" resources bid into the auction for the first time, clearing about 560 MW—mostly from the Baltimore Gas and Electric and Pepco regions. "If those megawatts get added to the DR megawatts that cleared in the auction, the drop is only 19% from last year," Feldman said, referring to cleared MW of demand response.

PRD is a new product that is targeting customers with large loads who can predictably lower their usage in response to dynamic pricing. But while PJM calls it a "broader approach to demand response," the capacity product may face similar issues.

According to Diamond, PJM intends to phase out seasonality in that product as well, making it "a temporary solution."