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Negawatt Pricing

Economists take sides in the battle for DR’s soul.

Fortnightly Magazine - December 2009

Brattle overstated DR benefits by adding together the energy savings achievable in 2005 and the capacity savings that wouldn’t occur until past 2010, and states in any event that the gains enjoyed by non-curtailing customers due to market-wide energy price reductions always will prove short-lived, since they can exist only when generating capacity is in surplus—as in PJM in 2005—and will be given back once demand growth absorbs the surplus and new generation is needed, thus driving capacity prices back up. However, Borlick’s most telling indictment of DR incentive payments concerns the possibility of market price manipulation.

Proponents often tout DR as the best method to counterbalance supplier market power, which arises when power producers can benefit by withholding a portion of production from the market, so as to boost prices captured by remaining capacity. But as Borlick points out, PJM’s DR incentive proposal might well be tried for the same charge: “PJM is proposing to make ‘incentive payments’ to DR providers in order to drive down spot market prices, so that the loads remaining in the market derive greater value.” (See, Protest of Robert L. Borlick, FERC Docket EL09-68, Sept. 16, 2009.)

In effect, as Borlick concludes, “PJM is proposing to use its unique position … to manipulate market prices in a way that benefits one class of market participants (load-serving entities and their retail customers) at the expense of another class of market participants (suppliers).

“When this is done with the explicit intent of optimizing the net gains from changes in market prices, we are in the realm of collusive behavior.”

Subsidy, Schmubsidy

Eric Woychik, v.p of regulatory affairs for Comverge, offers perhaps the best argument for paying an incentive or subsidy to DR providers—that the sheer complexity of state-approved retail rate designs makes it much too difficult for curtailing customers to calculate the dollar amount of the avoided retail energy charge, in order to net out the true value of LMP – G , and so puts load at a disadvantage as against generation suppliers, who can log on to the Internet and get an instantaneous, minute-to-minute readout of LMP prices, to guide their decisions on how to bid their supply into the market.

Indeed, state utility commissions aren’t uniform in their choices of rate designs. Sometimes fixed costs are recovered through the energy charge, or variable costs are recovered through the demand charge. Decoupling efforts by some state PUCs further complicate the task of calculating the avoided energy charge (G) and thus put in doubt the exact dollar payoff for the would-be DR provider.

“The deck is stacked against customer and DR providers,” notes Woychik, testifying on behalf of the Demand Response Supporters. “Many customers and DR providers that would otherwise participate in the market cannot easily translate the existing and proposed PJM economic compensation policies [such as LMP – G ] into day-to-day operational rules.

“These net-pricing results are lagged and resolved with certainty only after the PJM settlement period is over.”

Imagine the difficulty faced by a large-scale industrial facility, as described in testimony given by