FERC’s new rule on compensation for demand resources tips the market balance toward negawatts. Arguably the commission’s economic analysis is flawed, and the rule represents a covert policy...
Prime Time for Efficiency
Second, the settlement provided that demand resources explicitly were included as eligible to meet capacity needs. Recognizing the different qualities and specific value of demand resources, the settlement required that a distinct method be developed to allow demand resources to be fully integrated as qualified capacity in the FCM. 3
These provisions allowed demand resources to be treated as comparable to generation. Where reliability and capacity needs responsibly could be met by reducing demand, those resources were eligible for capacity payments the same as were generation.
New England already had a successful experience with demand resources providing needed reliability. In the early years of this decade, Southwest Connecticut experienced significant capacity constraints. When ISO-NE issued a gap RFP for resources to address that constraint, significant demand resources successfully were bid, and 92 MW of energy efficiency and load reduction were used to meet the overall 250 MW of awarded contracts. The intervening years have shown that demand resources are capable of competing with generation to meet reliability needs.
Although the LICAP settlement created the opportunity for demand resources to compete in the market, the devil was still in the details. A year-long working group process shaped the rules for the demand-side aspects of the FCM. Effective rules were needed to ensure adequate resources would be available and eligible to compete in the new market. Reliable measurement and verification (M&V) was needed for all demand resources. Responsible operation of a power grid requires being able to confidently account for, and call upon, all the resources being used. For demand resources, the extensive M&V rules that had already been developed and were being used for the various DSM and efficiency programs in the region provided a firm foundation. The M&V provisions for demand resources in the FCM rules relied extensively on the experience and infrastructure created for the region’s efficiency programs. These existing M&V procedures gave ISO-NE confidence that actual demand resources would fulfill commitments made through the auction process.
The first auction for the FCM is now complete, and the market experienced a very robust response from demand resources. In rough terms, nearly half of the new resources that qualified to bid were demand resources. This is remarkable for the first auction. It shows that existing programs and efficiency are barely the tip of the iceberg.
The final auction results as reported by ISO-NE are even more remarkable (see Figure 1) .4 New demand resources outperformed new supply by a nearly 2:1 ratio. For every 1 MW of new generation, there will be 2 MW of new demand resources. The auction also shows a near doubling of the existing demand resources to meet future needs.
In terms of cost, the auction opened at $15 per kilowatt-month and systematically decreased through each round. In the eighth and final round of the auction, the price reached the predetermined floor of $4.50/kW-month with 2,000 MW of excess resources remaining. 5 These results show the potential for demand resources to be used much more widely to meet the region’s reliability and capacity needs.