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RTOs and the Public Interest

Defining the mission when the consumer plays second-fiddle to the needs of the market.

Fortnightly Magazine - September 2009

a similar manner to the way capacity markets work in PJM (the RPM market) and the New York ISO (ICAP market); and
• Set the market price equal to payments made to providers offering demand resources under an emergency DR program.

Though it says it won’t have a concrete tariff proposal ready to put in place until June 2010, PJM told FERC that it supports the demand-curve method. Potomac Economics Ltd., the independent market monitoring unit for ISO New England, also favors the demand-curve method, in part because “prices are rarely set at the offer cap during shortage conditions.” Potomac explained its view in a report on shortage pricing submitted to FERC at the same time ISO-NE filed its order 719 compliance tariff:

“The demand curve would establish an economic value for reserves that will be reflected in energy prices … the reserve market is effectively the marginal source of supply.” (See, Report on Shortage Pricing of Potomac Economics, FERC Docket RM07-19, filed April 28, 2009.)

It also was noted, however, that an administrative demand curve, working alone, wouldn’t entirely suffice. Rather, Potomac Economics argues that the demand-curve method must be supplemented by some form of FERC’s Solution #4, whereby scarcity prices reflect prices paid to emergency DR resources:

“One example [is] a load curtailment event that occurred in Maine on December 1 and 2, 2007, for a total of 15 hours. During these hours … the hourly average real-time clearing price for the Maine load zone ranged from $89 to $230 per MWh, averaging $131/MWh over the period. …

[But] real-time clearing prices in Maine did not reflect the cost of activating the demand response resources, most of which were paid $500 per MWh to curtail.”

In other words, if markets are clearing only because load is backing off somewhere under a real-time emergency directive from the RTO, outside of the market-clearing algorithm, then any real scarcity pricing solution must be fashioned to accurately reflect and integrate all such out-of-market actions going on behind the scenes.

In their most recent report on the price-responsive demand in New England electricity markets, ISO-NE and NEPOOL note that stakeholder discussions have been focusing on two alternative approaches to deal with power pricing during periods of shortage:

• Supply-side Approach: End users would submit DR bids to reduce load, in a manner similar to supply offers by traditional generation resources.

• Demand-Side Approach: Consumers get the “opportunity” to change consumption levels in response to different energy prices, giving consumers the same option to DR bids as is done by LSEs (load-serving entities). (See, Report of ISO-NE and NEPOOL, FERC Docket ER08-830, July 31, 2009.)

In the New England stakeholder discussions, a fierce debate has emerged over how much the market should pay for load reductions from DR providers.

EnerNOC, a leading DR services company, proposed to integrate load reduction offers into the supply side of the energy market, with a price paid to DR providers equal to “LMP – G” (the locational marginal price minus the generation portion of the retail rate charge to the