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Smart Grid: Wholesale Market Realities

Granular customer data will revolutionize megawatt markets.

Fortnightly Magazine - September 2009

reliability across the country. Many have seen the results of recent ISO-NE and PJM capacity markets auction as evidence of this. For example, the results of PJM’s May 2009 capacity market auction showed a dramatic reduction in capacity prices—from $110/MW-day to $16.46/MW-day in just one year, and without significant new generation capacity being added to the system. However, most of the change is a result of the change in the ILR provision by FERC, which has resulted in more DR resources being bid into the auction.

Nevertheless, such results have reinforced the growing view among the Obama administration and regulators across many states that DR resources are cheaper and more environmentally friendly. Furthermore, they appear more politically palatable, as it seems reserve margins can be improved without new generation construction and associated rate increases. The problem is that if this is correct, why have we not seen a penetration of DR resources higher than 6 percent in the United States?

The answer is simple: The theoretical energy cost doesn’t fully account for the opportunity cost that a power customer needs to be paid to not consume power. For example, if an industrial customer, like an aluminum smelter, enrolls in a DR program, the true cost of this demand resource would be the opportunity cost to refrain from using electricity to produce aluminum. The diversity of energy consumers ( e.g., office buildings, HVAC units, aluminum smelters, steel mills, assembly factories, universities, etc.) makes it extremely difficult to make generic calculations for this opportunity cost. However, by looking at the bidding of these resources in PJM, we can assert that DR resources have very high energy prices. More specifically, the average energy cost for DR resources in PJM in 2008 was between 6 and 10 times higher than the price of running a peaker with a 12,000 MMBtu/kWh heat rate.

In other words, customers ask for a very high price to incent them to not consume power. This makes the economics of DR much more similar to the old super-peaking concept from the late 1990s (see Figures 3 and 4).

The fact is that, while having low capacity values due to low construction costs, DR resources have extremely high energy costs. Adding to this fact, a large amount of DR deceptively can inflate reserve margins, thereby giving a false sense of oversupply and depressing capacity prices. The result of this can be a more volatile market with lower reliability and higher costs that ultimately will be borne by ratepayers.

While the implementation of smart technologies likely will lower capacity cost, it also likely will increase the overall price of energy due to the simple increase of DR resources in the system. For the players in the wholesale space, the biggest challenge will be to properly assess, evaluate and price the DR resources, while incorporating them into their asset portfolio, much like in EE.

Super-Crunching Skills

As the forces shaping electric consumption are changing, developing accurate demand forecasts will become ever more difficult and will require granular data gathering and analysis processes to