Since the May 2014 decision by the DC Court of Appeals (“EPSA decision” or “EPSA”), which vacated FERC Order No. 745 mandating that RTOs and ISOs compensate demand response resources at the same locational marginal price (LMP) as other energy products, a number of parties have advocated differing positions on how demand response should be handled. Most recently, PJM Interconnection released a white paper proposing an alternative treatment of demand response and seeking to address some of the key issues raised by the EPSA decision:
PJM’s goal is to develop an alternate path that would minimize market disruptions until the litigation process is complete and the issues have been settled in the courts. In particular, PJM is against the idea of re-settling the most recent auction outcomes after removing the demand response bids as has been proposed by FirstEnergy and other stakeholders. PJM cites a risk of significant market disruption if the three-year forward capacity commitments established in previous auctions are reversed and resettled.
Key Details of the Proposal
Although the decision to overturn FERC Order 745 slashed the projected annual growth rate of U.S. demand response almost in half, dropping it from 8% to 4.9% through 2023 (GTM Research report on demand response), demand response supporters believe it is too late for legal challenges to do long-term harm to the demand response marketplace—demand response is here to stay. However, the final fate of Order No. 745 could have significant implications on how demand response is regulated and by whom, as well as direct financial implications for customers in the PJM market. Public Utilities Fortnightly estimates that if FirstEnergy succeeds in having the PJM auction results thrown out and recalculated without demand response, the customers in PJM’s territory would be forced to pay out an additional $9.3 billion for capacity in the 2017-2018 planning period.
The FERC has until December 16 to decide whether to file an appeal and send the EPSA decision case to the Supreme Court, leaving these issues unsettled for some time to come. In the meantime, Senator Martin Heinrich of New Mexico has introduced a bill that would clarify the authority of the FERC to regulate the treatment of demand response in wholesale markets, though it is not yet clear if or when the bill will be taken up in Congress. In light of these circumstances, PJM is hoping their new proposal can provide a reasonable way to harness the value of demand response resources and provide certainty in the market until Order No. 745 is settled.
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