About four months ago, at a conference at Stanford University’s Center for International Development, the economist and utility industry expert Frank Wolak turned heads with a not-so-new but very...
Yes, We Have No Negawatts
When you sell demand response back to the grid, how much capacity are you now not buying?
The first hint of trouble came in December 2009, when PJM revealed in a load management performance report that customers who bid demand response (DR) resources into the RPM capacity market for the 2009/2010 delivery year had actually over-performed—they had backed off 18 percent more capacity (1,299 MW) than promised.
Trouble, that is, because when PJM’s independent market monitor began to parse the data, that surplus started looking more like a shortage.
Led by its president, Joseph Bowring, the IMM Monitoring Analytics LLC had found that by taking advantage of a loophole in PJM rules, certain aggregators of retail customers (known in PJM as curtailment service providers, or CSPs) had figured out clever ways to assemble portfolios of demand-side resources so as to earn twice the credit for capacity relief that PJM ordinarily accorded to DR offers.
So in February of this year, PJM and the market monitor issued a joint statement declaring that any CSP choosing to exploit market rules by “double counting” the capacity credit earned by DR resources would seen as engaging in market manipulation. Two months later, PJM filed tariff amendments with the Federal Energy Regulatory Commission, seeking to plug the gap. (FERC Docket ER11-3322, filed April 7, 2011.)
What the IMM found, as later documented in its 2010 State of the Market Report , released in March 2011, was that for any given emergency event, when PJM on a peak day called for demand response to ease stress on capacity and reserves, at least 47 percent of participating customers had failed to meet even half of their committed customer-specific reductions in demand, and that approximately 31 percent of customers showed little or no demand reduction at all. Yet the CSP portfolio as a whole was ahead in the game.
The reason was obvious: aggregators were arbitraging by matching over- with under-performers—and doing so with PJM’s blessing.
On one hand, PJM tariffs said that no customer could receive credit for capacity reductions any greater than its past peak load contribution (PLC)—as determined by its actual power demand recorded during the five highest daily coincident-peak hours in the year prior to the delivery year. In PJM’s eyes, that PLC metric represents the amount of capacity that the RPM market already would have procured for each customer. And so even if a customer should offer to back off all its demand, down to zero, it could never free up a measure of capacity any greater than its PLC—the baseline level of capacity presumably reserved for its benefit.
Yet at the same time, PJM rules allowed CSPs to measure and verify the magnitude of DR performance—the value of backed-off capacity—using a guaranteed load drop (GLD) method applied across the entire aggregated portfolio, with all customer PLCs added together. Thus, with the right portfolio, an aggregator could match many “under-performing” customers carrying small loads with a few large customers having abnormally low