(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
RTOs and the Public Interest
Defining the mission when the consumer plays second-fiddle to the needs of the market.
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