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Prime Time for Efficiency

New England shows the benefits of demand resources in forward capacity markets.
Fortnightly Magazine - June 2008

this first auction, more than 5 percent of the region’s peak load will be met with demand resources. Over a seven- to ten-year period, this could grow to 10 percent or even 15 percent of the region’s reliability requirement.

Additionally, all owners of new resources that intend to participate in the second auction have submitted the required show of interest forms to the ISO, representing more than 800 MW of new demand resources. This amount is above and beyond those resources that were bid into the first auction. Now that ISO-NE has offered the opportunity to participate in the capacity auction, demand-resource providers are responding in great numbers (see sidebar, “DR in New England’s 2nd Forward Capacity Auction) .6

This early experience suggests the New England FCM is a successful model. FERC Commissioner Jon Wellinghoff said the FCM’s provisions for integrating demand resources were “as advanced as any market in the country.” 7

After the third FCM auction in mid-2009, the floor and ceiling prices set by the original settlement will disappear. The clearing price from the first auction suggests prices might stabilize at a level that is more competitive for inexpensive demand resources than fossil-fuel-fired generation. Additionally, consistent with FERC’s recent NOPR on Wholesale Competition in Regions with Organized Markets (Docket Nos. RM07-19-000 and AD07-7-000) , the New England markets have an opportunity to incorporate demand resources into ancillary services markets like those for forward reserves and the energy markets. Much work will be needed to figure out how to accomplish this integration.

Repeating Success

Ultimately, the greatest value of this work in New England is in the creation of a replicable precedent that can be applied across the nation. An obvious place this replication can play out is in California, which has the same architecture of well-developed demand-side management, demand-response and energy-efficiency programs—creating a reservoir of demand resources that could be purchased in capacity, ancillary services and energy markets. The California ISO has the ability, working with stakeholders and the state government, to use the same legal and regulatory tools the New England ISO has employed to create a new market, a new revenue stream and incentive for demand resources.

The FCM provides an effective gateway for demand resources to participate in other markets as well. For example, PJM is in the process of working out the details of how energy efficiency will participate in its capacity construct, the reliability pricing model (RPM), to comply with a FERC order issued on December 22, 2006. 8 Since its first auction in April 2007, RPM has included demand-response resources, which have long been participating in PJM’s existing capacity, energy and ancillary services markets. In fact, 127.6 MW of demand response cleared in that first auction. But these market designs have not yet included other demand resources such as energy efficiency. PJM plans to include energy-efficiency resources in both its incremental and base residual auctions starting in January 2009.

Additionally, in the Midwest Independent Transmission System Operator (MISO) region, demand resources are considered in the transmission-expansion planning process, and MISO says the