Charles Landau, MPA, Staff Writer, Brief Policy Perspectives
In early 2014, a long, dry, cold spell, dubbed the polar vortex hit the Eastern United States. PJM, a regional power grid operator that primarily covers Pennsylvania, Maryland and Virginia, experienced record-setting demand for power and adverse market conditions, which forced the company to take an unusually high number of power plants offline that January. It was one of the toughest months for their grid in recent history.
So what? That was years ago.
After the vortex, PJM changed how one of their utility markets, the forward capacity market, treats energy resources. PJM operates an energy market, where generators sell the energy itself, and a capacity market, where generators sell a promise to be available for energy production later at a given price. These forward capacity markets are designed to help pay generators in PJM territory or for the value they deliver to the grid by being available, regardless of whether they are used. Other grid operators like ISO New England have similar forward capacity markets. Over time, the capacity market has become an important source of income for generators of all types. The chart below illustrates an indicator of revenue share for generators among the three markets by percent of total wholesale production cost, where the capacity market has accounted for between 10 and 30 percent of revenue in every year since 2008.
PJM’s response to the 2014 vortex was, among other reforms, to change their internal rules on what renewable energy and energy efficiency generators on the grid could participate in the capacity markets, based on whether the grids could operate year-round. Year-round availability typically isn’t a problem for traditional generators, but many of the renewable, distributed, and energy efficiency resources are only available seasonally.
Demand response, in the most reductive terms, is getting paid to use less energy when the demand response administrator requests that companies use less energy. Renewable energy generators were impacted by PJM’s rule change, but demand response programs may have been the biggest loser because they are seasonal – an efficiency upgrade to your heating system often does not change your cooling needs. So in the past three years, the amount of demand response in the capacity market has decreased. Demand response can be difficult for grid operators to handle, but it’s also one of the cheapest and most business-friendly ways to incentivize energy efficiency.
Back to the Future
Back to our original question: this happened years ago, so why do we care now? Capacity markets actually work three years ahead. That means that the capacity market for delivering power today was determined while the polar vortex was an important concern for PJM and their administrators. Since then, the question of what services and benefits need to be valued remains a point of contention. PJM markets continue to wrestle with impacts of the new categorizations and rule changes.
Regulators have also attempted to adjust the market to the energy market changes since the polar vortex. In August, the Department of Energy released a report arguing for a reliability-first approach, noting that reliability services from traditional sources of energy like coal and nuclear were not properly valued in the market, which led those power plants to go out of business. Some renewable energy industry groups preempted and opposed the report’s findings, arguing that a reliability-first perspective no longer fit the market because renewable energy and demand response resources were changing the way we use energy.
In response to the Department of Energy report, Secretary of Energy Rick Perry requested that the Federal Energy Regulatory Commission change how traditional resources are compensated in the markets, but because of the three year lag in capacity markets, those changes may very well have more impact on your electricity three years from now. If Secretary Perry wants to improve the way we reward services delivered to the grid, it makes much more sense to take an “all of the above” approach and encourage grid operators to recognize the value of all resources accurately and holistically.