PJM, the entity responsible for transmission grids from the mid-Atlantic coast to the shores of Lake Michigan, just closed its first auction for grid resources under its new capacity-performance regime. The results are bad for both demand response and some nuclear power plants.
PJM announced Tuesday that its Base Residual Auction for capacity for the 2020-2021 period cleared a price of $76.53 per megawatt-day, well below the prices of $80 to $100 from last year’s auction. Capacity prices were higher in more congested or heavily populated parts of PJM’s territory. But with the exception of its Eastern Maryland region, they were lower than last year’s prices, largely due to the expectation of continued low natural-gas prices for years to come.
These clearing prices were too low for some nuclear power plants that haven’t yet received state zero-carbon incentives. Exelon announced Wednesday that its Three Mile Island and Quad Cities facilities didn’t clear the auction, in part due to a lack of federal or state incentives for their zero-carbon energy.
All told, PJM cleared 165,109 megawatts of capacity, only slightly less than last year’s 167,306 megawatts. But it managed to achieve a 23.3 percent reserve margin, compared to the 22.4 percent reserve cleared in last year’s auction.
Meanwhile, the 7.8 gigawatts of demand response cleared in Tuesday’s auction is a big drop from 10.3 gigawatts in last year’s auction. What’s more, demand response as a share of total committed capacity has fallen to 4.7 percent, down from more than 6 percent in its previous two capacity auctions, GTM Research analyst Elta Kolo noted.
This poor showing is due to a combination of challenges for demand response. Long-term, the industry is still in a slump from the 2014 U.S. Court of Appeals ruling that threatened the legal basis of the grid operator capacity markets that make up most of its revenues. The U.S. Supreme Court overturned that ruling in early 2016, removing that existential threat.
But later that year, PJM rolled out its new capacity-performance rules, giving demand response another problem in its biggest market. Unlike its long-running, summer-focused capacity market, based on historical spikes in air conditioner demand during hot summer afternoons, the capacity performance plan was seasonal, with both summer and winter periods to cover.
This was in response to the 2014 polar vortex, when record-cold temperatures spiked demand for heating energy, while 22 percent of the generators available to PJM failed to perform due to freezing pipes, motors that wouldn’t start, and other similar problems.
But PJM’s new capacity performance rules also disadvantaged demand response, wind and solar resources, according to industry groups that lobbied against the changes. (We’ve covered the details at GTM Squared.) This week’s results seem to indicate that the changes have indeed had the predicted negative effect.
At the same time, they come at a time of overall weakness for the demand response industry. GTM Research’s latest U.S. Wholesale DER Aggregation report finds that the total estimated demand response availability in ISO/RTO territories dropped from 33 gigawatts at the start of last year to 31 gigawatts in the first quarter of 2017.
It’s important to note that low capacity prices are actually a good thing, representing greater efficiency in keeping the grid running, as well as lower utility bills for consumers.
Indeed, Jennifer Chen, attorney with NRDC’s Sustainable FERC Project, criticized PJM for procuring too much coal and nuclear power to shore up more-than-adequate reserve margins, while instituting market policies that have left cleaner renewable and demand-side resources languishing on the sidelines. Wind and solar made up only about 2 percent of capacity cleared in this week's auction.
Other companies managed to hold their own in the low price environment.
EnerNOC announced Wednesday that its share of Tuesday’s auction added up to 34 percent of total cleared capacity, or about 2.7 gigawatts according to back-of-envelope calculations -- roughly in line with its traditional share of about 3 gigawatts, and a growth metric for a company that’s been struggling in recent quarters.
Large power plant operator Calpine announced that it cleared 5.3 gigawatts, for capacity revenues of about $326 million.
As for distributed energy resources, GTM Research notes that their participation as demand response in PJM's capacity market dropped from 2.7 gigawatts, or 23 percent of overall capacity, for the 2015-2016 delivery year, to 1.2 gigawatts, or 12 percent of overall capacity, for the 2016-2017 delivery year. That’s almost entirely due to the loss of diesel gensets under Environmental Protection Agency regulations.
At the same time, the volume of PJM’s market for fast-responding frequency regulation services has doubled since 2015, supported by a 98 percent increase in the use of lithium-ion battery-based systems, the report notes. While this market may be saturated, FERC has asked the country’s grid operators to consider ways to open up wholesale markets to aggregated demand response, energy storage and other distributed assets, providing another growth opportunity.