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Valuing Demand-Response Benefits In Eastern PJM

Fortnightly Magazine - March 2007

resulted from curtailing load of much lesser value than the price of energy on the spot market was estimated to be $85 to $234 per megawatt-hour or $9 million to $26 million per year, based on the results of the Dayzer simulations and simplifying assumptions about the economic value customers place on their curtailable load.

• The reduction in capacity needed to meet reserve adequacy requirements for a load shape that has been modified by reducing the peaks was estimated to be $73 million per year (again for curtailment of 3 percent of load in the five zones), based on an assumed capacity price of $58/kW-yr.

More rigorous analyses of these participant benefits would be needed, along with an assessment of the costs of equipment and administration of demand-response programs, to evaluate fully the net benefits to participants.

Our conclusions are summarized in Table 1. As indicated, we did not quantify several additional categories of DR benefits. These include enhanced competitiveness of energy and capacity markets, reduced price volatility, the provision of insurance against extreme events that have not been captured in the scenarios considered, reduced capacity market prices, and deferred T&D costs. In addition, because we focused on curtailments to day-ahead schedules, our estimates do not capture the additional benefits that would accrue from real-time demand response, which can mitigate the effects of unexpected increases in load, generation outages, and transmission disruptions.

It is equally important to note that our study did not quantify secondary effects that could offset the benefits to non-curtailed loads. Consumers may shift load to other hours, which could casue prices to rise in those hours. Our estimates of price effects also would be offset partially by a more muted response of customers on real-time pricing, as a consequence of the lower market prices. Moreover, reduced energy prices and reductions in the demand for capacity could accelerate the retirement of old capacity or delay the construction of new capacity, leading to an eventual increase in energy prices relative to our estimated price reductions. In addition, assuming that energy and capacity markets reach competitive equilibrium, a reduction in energy market prices and hence energy margins likely would trigger an increase in capacity prices as suppliers raise capacity bids to recover their going-forward fixed costs. Ultimately, the long-term benefits will be determined by the extent to which adding DR to the resource mix lowers total resource costs.

The study is available at: