Wholesale Markets and How Efficiency Has Financial Value

Dan Griffiths

KEEA Energy Efficiency Conference

September 21, 2010

How Prices Are Set in Wholesale Markets

Our Supply Curve

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$100

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$500

$600

100 200 100 100 50 20 5 1

Megawatts

A Few Acronyms and Definitions

• Bus – a point where a generator or the local distribution system connects to the grid and where locational market prices are set

• Capacity (UCAP) – the reservation of generating facilities, primarily to ensure reliability. Every customer must pay for a specific portion of this reserve.

• Congestion – limits on electric transmission capacity that cause prices to increase

And from a PJM Perspective

• Demand Resources – price response and conservation. At the wholesale level, these can be sold in both the energy and capacity markets.

• Energy Efficiency – verified reductions in consumption

And some more…

• FERC – The federal electricity regulator.

• LMP – locational market price– Day-ahead market – the auction in which sufficient

energy is acquired to meet tomorrow’s expected demand.

– Real-time market – the auction which fills any gap between expected demand (day-ahead) and actual demand.

• NERC – the North American Electric Reliability Corporation, the federally chartered company that sets rules designed to keep the lights on.

And, finally.

• PJM – the grid operator that also operates the daily wholesale market and other markets

• Security-constrained economic dispatch – PJM brings generating facilities on line from cheapest to most expensive but this rule is superceded for reliability, specifically, when a plant is loaded out of economic merit in order to maintain reliability standards

What This Is Not About

• Environmental regulation

• Alternative energy

• Siting of facilities

• Cost of construction

The Grid• Generation – Owned by independent

companies, electric cooperatives and independent affiliates of local electric utilities. Limited federal regulation.

• Transmission – The network that transports energy form generating facilities to the local utility system. Owned by affiliates of local electric utilities and by electric cooperatives. Federally regulated and operated by the PJM Interconnection.

Capacity

• PJM reliability standards require that there be sufficient reserves to ensure that the grid fails no more than 1 day in 10 years

• This is done by requiring that all peak load be matched from generating facilities, demand response or energy efficiency resources – “iron in the ground.

• In addition, each company selling to retail customers MUST buy additional capacity to reflect the fact that some resources will fail – this is the “reserve margin.”

Valuing Energy Efficiency

Reliability Pricing Model settlement in December 2006 stated that:

“utilities can supply their energy needs

through a combination of generation, transmission, and demand response, including

energy efficiency.”

This was the first recognition in PJM that efficiency should have value similar to other resources.

2009 was the first auction in which EE could bid.

Capacity Market Exists to Protect the Grid’s Reliability

• Goal of RPM is to ensure reliability of the grid by

• Aligning capacity pricing with system reliability requirements

• Have prices that are reasonably stable and predictable so as to encourage investment and

• Provides clear information to all market participants far enough in advance for actionable response to the information.

Capacity Market – Resource Options

• Electric generation,

• Demand response resources,

• Energy efficiency measures, and

• Electric transmission.

The RPM Auction

• Auction held in May for the “Planning Year” 3 years in the future…the 2013/2014 planning year was just auctioned.

• Auction geography based on PJM’s analysis of reliability requirement for each “Zone.”

• “Incremental” auctions held to fill in requirements not apparent in the initial auction.

(Some of) the Rules

• In exchange for committing as a capacity resource, the resource must perform when called – must not need to be turned on

• Most resources, but not efficiency, must participate in the market.

• EE resources may participate in the capacity auction for four years.

• Must be shown to be effective between 3 p.m. 15:00 Eastern Prevailing Time (EPT) and 7 p.m. during all days from June 1 through August 31, (excepting weekends and federal holidays).

PJM Capacity Market: Manual 18

PJM Capacity Market: Manual 18

• http://www.pjm.com/~/media/documents/manuals/m18.ashx

PJM EE M&V Requirements: Manual 18B

• http://www.pjm.com/~/media/documents/manuals/m18b.ashx

Qualifying EE Resources

• Must be in the bidder’s portfolio throughout the delivery year (DY).

• Must be scheduled for completion prior to DY.

• EE installation is not already in the peak load forecast posted by PJM.

• EE installation exceeds relevant standards at time of installation as known at time of commitment.

• EE reduces load as planned during defined EE Performance Hours.

• EE installation is not dispatchable.

In Addition• Submit Initial M&V Plan no later than 30 days prior to RPM

Auction.

• Submit Updated M&V Plan no later than 30 days prior to next RPM auction in which EE Resource is subsequently offered.

• Establish credit for Planned EE Resources.

• Submit Initial Post-Installation M&V Report no later than 15 business days prior to first Delivery Year that the EE Resource is committed;

• Submit Updated Post-Installation M&V Reports no later than 5 days prior to each subsequent Delivery Year and

• Permit Post- Installation M&V Audit(s) by PJM or Independent Third Party.

Determining the Value of EE

• The Value of an EE Resource is the expected average demand (MW) reduction.

• The minimum Nominated EE Value accepted in the PJM Capacity Market is 0.1 MW.

• Payment is based on the auction price times the number of verified MW.

Prices in the 2013/2014 Auction

• PEPCO - $247/MW-Day

• MAAC East - $245/MW-Day

• Rest of MAAC - $226/MW-Day

• Rest of PJM - $28/MW-Day

• There are 365 MW-Days in the PJM Planning Year.

Credit Requirements• Participants must establish an RPM Credit Limit

prior to an RPM Auction. • For Planned Energy Efficiency Resource, the

Credit Adjustment Factor will be (1-X), where “X” is the confirmed EE Value (via a PJM approved Post-Installation M&V Report).

• For RPM credit purposes only, if a supplier has a history of being a net seller into PJM, on average, over the past 12 months, then PJM will count as available unsecured credit twice the average of that participant‟s total net PJM bills over the past 12 months.

Failure to Deliver EE

• Shortfalls are penalized financially

• Makeup resources may be identified

• Makeup resources must be in the same geographic area in which the original resource was sold into the auction

Summary

• If you care about money: $ 82,490• If you care about reliability:

– Required reserve margin.– Auctions run 3 years forward to ensure that we know

when there will be a shortfall– There’s a backstop in case the auctions don’t

stimulate new resources.

• If you care about the environment: resources are on a level playing field so that EE, DSR and renewables can compete.