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Negawatt Pricing

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

Fortnightly Magazine - December 2009

Viridity Energy and Wal-Mart, counter that a DR payment of LMP – G would require PJM (or any other grid system operator purchasing DR services) to interpret and calculate state retail electric charges, so that FERC must intrude upon state PUC jurisdiction when it enforces wholesale DR tariffs. ( See, Protest of Demand Response Supporters, FERC Docket EL09-68, filed Sept. 16, 2009 .) The PJM IMM defeats that argument, however, by showing that neither PJM nor FERC need interpret or calculate the state-approved retail rate, as the ultimate calculation of compensation earned by DR providers is simply a wash:

“This arithmetic [LMP – G + G] involves no attempt to evaluate the level or the appropriateness of G. Consequently, the argument raised by Demand Response Supporters that PJM’s proposal would encroach on the jurisdiction of the [state retail] jurisdiction … is a red herring.” ( Answer of IMM, FERC Docket EL09-68, Oct. 16, 2009 .)

Nevertheless, such mathematical niceties ring hollow for many DR advocates, such as the PJM-area steel producers, Nucor and Steel Dynamics. In their view, DR’s “true leverage … resides in its potential to eliminate or reduce the need for the most inefficient generators, and the associated outsized reduction in market-clearing prices.” ( See, Answer of Steel Producers, FERC Docket EL09-68, Nov. 2, 2009. )

Nucor and Steel Dynamics refer to an oft-cited 2007 report from the Brattle Group, produced on behalf of the Mid-Atlantic Distributed Resources Initiative (MADRI), that curtailing just 3 percent of the load in the BG&E, Delmarva, PECO, PEPCO, and PSE&G zones in PJM during the top 20 five-hour price blocks in 2005 would have cut wholesale energy prices by between $8 and $25 per MWh—price cuts that could save between $57 million and $182 million a year for non-curtailing retail customers within PJM.

The potential market-wide savings stem from the fact that most retail customers pay a fixed retail rate that doesn’t track day-to-day or hour-to-hour movements in wholesale spot prices, so that, as the Brattle report states, “the market demand curve is distorted into a nearly vertical, inelastic curve”( see Figure 1 .) The Brattle report adds that savings from DR also can extend beyond the LMP-based energy price, to include capacity markets: “Demand response could reduce capacity prices by reducing peak loads and therefore reducing the demand for capacity, as determined by PJM’s resource adequacy requirements.” (See, Brattle Group, “Qualifying Demand Response Benefits in PJM,” Jan. 29, 2007.)

In this light, say the steel producers, “It should be clear that the $75 fixed incentive payment proposed by PJM is likely to be more than offset by the value of the demand response itself, particularly given that the payment of an incentive is restricted to a small number of the highest-priced hours each calendar year.”

Some of Brattle’s claims are questioned by consultant Borlick, who for the last four years has been advising Midwest ISO on how best to develop DR programs; MISO recently proposed its own economic DR program at FERC ( see, Docket ER09-1049, filed Oct. 2, 2009 ). Borlick says