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Higher Capacity Costs Expected from FERC PJM Demand Response Carve-
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February 1, 2011
Retail customers in PJM took another hit yesterday as federal regulators continued
to create market designs which will lead to higher capacity prices, this time in
approving the main tenets behind two new carve-
In short, FERC accepted PJM's proposal to establish an Annual DR [demand response] and an Extended Summer DR product in the capacity market, with minimum purchase obligations for each product. These new products are collectively referred to as "unlimited" DR products due to their greater dispatch flexibility (see 12/6 story for how the products are defined and work).
Several consumer advocates had protested PJM's design for these products, since PJM's proposal establishes fixed minimum resource requirements for the products that are met without regard to price or cost.
As explained by the consumer advocates, PJM's proposal would allow a very high price differential to emerge in order to clear the last increment of unlimited demand response capacity, "which would be a highly inefficient result," especially since traditional demand response is a very good substitute for the new "unlimited" capacity.
Furthermore, whereas RPM uses downward-
"The proposal to use vertical demand curves violates a fundamental precept of RPM
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In fact, "PJM's proposal can even lead to clearing a lower total amount of capacity at a higher price than if the auction were operated without the limits," consumer advocates said. "This would occur if by accepting resources out of merit order to satisfy the [Minimum Annual Resource Requirement] or [Minimum Summer Extended Resource Requirement], as PJM proposes, the supply curve intersects the VRR curve so no limited resources clear. This would provide less reliability and at a higher price and cost, an absurd outcome resulting from the inflexible demand for unlimited capacity independent of price (vertical demand curve)," consumer advocates noted.
FERC dismissed such concerns out of hand without any analysis, simply stating, "We
believe PJM's proposal will ensure that enough capacity is committed to meet the
area's needs, and also send a price signal to encourage the development of less-
The Illinois Commerce Commission noted that a PJM analysis of using the minimum procurement mandates showed that total costs of acquired capacity increased 10.97% and 9.05% compared to the base case of not specifying minimum amounts of annual and extended summer DR resources. "While PJM's example appears to be based on a LDA of approximately 1,150 MW, the total cost impact for the RTO region as a whole could be very substantial (and much greater than that shown in PJM's example) if constraints bind for the PJM RTO region and cause a percentage increase in cost like that in PJM's example because the PJM region involves a much greater amount of MWs (approximately 150,000 MW)," the ICC noted.
The ICC offered an example, using conservative assumptions about price separation, showing that the mandates for the unlimited DR products could result in an increase of $474.5 million in capacity costs, or 12.38%, for the entire Base Residual Auction. Less conservative and more realistic pricing assumptions indicate additional capacity costs of $1 billion, the ICC said.
The Illinois Commission argued that such cost increases could be mitigated, while still creating the new unlimited DR products, by placing the procurement of the products in the incremental auctions rather than the Base Residual Auction, but FERC rejected this approach.
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