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One if by Wholesale, Two if by Retail

Which path leads to the smart grid?

Fortnightly Magazine - October 2010

procurement decision on a stand-alone basis, but because of the purported ‘benefits’ of suppressing prices in the energy markets.”

Hogan described a DRIPE-based net-benefits test as nothing less than using regulatory authority “to enforce a buyer’s cartel.”

Many others at the conference agreed. They warned that if FERC justifies paying full price to DR as a way for driving down wholesale prices, it risks rebuke by appellate court judges, under precedents set by FERC in the 2007 Amaranth and Energy Transfer Partners cases. (120 FERC ¶61,085; 120 FERC ¶61,086.)

“There,” noted Newton, “the commission was deeply troubled by traders allegedly trading against their economic interest in one market to benefit positions in other markets. So too here.”

Moreover, a DRIPE-based test would pose severe practical difficulties for the software-driven algorithms that RTOs use to clear markets. If DR providers bid into markets on the promise of receiving full LMP, and if those bids clear only upon a net-benefits determination that a DR offer will drive LMPs down, then markets will confront a breakdown in logic: To calculate price, you must know the price.

To figure the real-time LMP, which governs whether a generator or DR bid will clear, the RTO under this model must predict and calculate a hypothetical future price—what LMP would be with DR in the mix. And DR, unlike a power plant, doesn’t generally carry a specific geographic nodal (bus) location on the grid. When asked how RTOs might work this out, PJM’s Ott simply nodded that yes, the calculation would prove extremely demanding—assuming it could be done at all.

As an alternative, Dr. Robert Ethier, ISO New England’s v.p. for market development, suggests a net-benefits test related to some objective measure of energy efficiency more friendly to computer modeling. One possibility might be the system-wide marginal operating costs, or perhaps capacity factor or heat rate. Yet this notion also poses problems.

When RTOs decide whether a coal-fired plant or gas-turbine peaker should clear the market, they look at the bids—not the internal operating costs, or some internal, plant-specific measure of efficiency. Should they change their tune?

“That’s not how markets work,” said Audrey Zibelman, president and CEO of Viridity Energy. “Market price is the price, regardless of who the players are, and what their costs are, whether baseload or peaking.”

To Zibelman, that reasoning should apply as well to rebut any notion that FERC must subtract the retail rate (LMP - G) from the compensation paid to DR. “You should not be looking at individual profitability,” she explained. “If you look at the customer’s retail rate, you are looking at the customer’s cost of goods sold.”

Yet others at the conference insisted that the desire for a net-benefits test served only to prove that paying full LMP for DR is a mistake. If you back out the retail rate, they argued, then there’s no need for a net-benefits test in the first place.

Consultant Roy Shanker, retained by PJM Power Providers Group, but avowedly “speaking for himself,” took the lead on this point. “The whole topic of this