The discussions on the changes to the rules regarding how companies are compensated for Demand Response participation in PJM’s Emergency Demand Response program are certainly heating up! Over the weekend I read the newly released “Open Letter” by three large Demand Response providers in regards to these rule changes, PJM’s response to the “Open Letter” and a Reuters piece by Nichola Groom saying FERC needed more time to consider this issue before making a final ruling – wow!

The rules and language being used in these articles can be confusing and hard to decipher if you do not work in these markets on a regular basis. The bottom line here is that PJM is in charge of administering wholesale electricity markets in an impartial manner and must provide grid reliability. One way they do this is through the creation of Demand Response programs. If you look at any other ISO/RTO throughout the country, they all have some form of Demand Response programs in place to help them manage their capacity challenges. One common thread to all of the Demand Response programs that are being utilized is the fact that they continually evolve.

What do I mean by this? Again, these markets and the available Demand Response programs are complex, so the initial rules created often do not operate as intended. Examples of this abound: recently the NYISO changed their baseline analysis for their own Emergency Demand Response programs (ICAP/SCR) to better measure the reduction levels from customers, and in Texas we are seeing efforts to expand the EILS Demand Response program due to issues surrounding participants’ unexpected fulfillment of capacity obligations that arose as a result of the February 2^nd and 3^rd rolling blackouts. Thus, adjustments have to be made to try and make these programs operate as effectively and efficiently as possible.

These program “changes” often have many ramifications for Demand Response providers who enroll customers into Demand Response programs. The bottom line in this case is that PJM is looking to mandate that each customer is compensated for the amount of load they reduce on an individual basis whereas, currently, Demand Response providers can aggregate the load they have under management for many of their customers and bid it into these capacity markets on a portfolio basis. Demand Response providers’ contention seems to be that as long as they deliver “x” amount of MWs when called upon, it should not matter if one customer “underperforms” and another customer “over performs,” as long as they deliver the intended and promised load reduction goal.

The problem here is that if each customer is measured and compensated on an individual basis, Demand Response providers can lose a lot of revenue, because, in my opinion, the current baseline analysis being utilized by PJM is flawed and some customers are not being compensated for the load they can actually reduce when called upon. The current ruling does not address this “baseline analysis flaw” whatsoever, but instead focuses on closing a “loophole” in how Demand Response providers bid their customers into the market. The outcome of this is that Demand Response providers will lose revenue even though they can deliver the intended load they have under management.

I think if we want clarity in these markets there is a need to address the baseline methodology before/during any ruling comes out that changes how Demand Response providers bid their customers into the capacity market. Although it makes sense that PJM would want to measure and compensate each facility on an individual performance basis, I do not think the order in which this is being done is the way to go. The ultimate goal is to have clear, transparent market rules with an even playing field for everyone, and the markets are naturally evolving in this direction.

I think we need to adjust how this is being done by first addressing the baseline methodology rule and then addressing how Demand Response Providers bid their customers loads into the markets. If we go this route, and assuming a new baseline methodology captures what each facility can really shed when called upon, then Demand Response providers will earn revenue for the nominated MW’s they bring to market, and PJM will be able to measure sites on an individual basis.

This could make this issue less contentious and close the loophole that is creating unintended advantages for some Demand Response providers, as I explained recently here.