Demand Resources Demand Reflection

by Larry F. Eisenstat, Dickstein Shapiro LLP

As the prospect of large-scale generation retirements grows greater, so too does the willingness of many to believe that additional demand resources (DR) would best offset whatever capacity shortfall were to result from such retirements. DR's contribution will and should be major, but it is only one piece. Despite DR's potential contribution, the rules of the road for its integration, optimization and compensation remain a work in progress, particularly where DR is relied upon and compensated as a capacity resource. Already there is reason to wonder whether DR forecasts have tended to overstate the likelihood of DR's performing on its commitments and to understate the drop-off in expected DR availability as its share of a capacity market continues to increase.

Recently the Federal Energy Regulatory Commission (FERC) addressed complaints that PJM had been overcounting, and therefore overcompensating, DR capacity resources. While FERC, like the state commissions, does not yet have long-term data on the performance of DR as capacity resources, it ordered PJM to decrease by some 20 percent the amount of such resources that PJM was relying on for planning and forecasting purposes, effective in 2015. It remains to be seen how strongly this signals a general reluctance to view DR's use for reliability purposes as confidently as one views the contribution of more traditional resources such as baseload or midmerit power plants.

More fundamentally, any forecast of DR contribution to capacity available in peak or emergency situations should account for both DR nonperformance and DR fatigue factors. DR nonperformance refers to the failure of DR to perform under existing contracts. DR fatigue, also called DR saturation, refers to the degree to which DR's future availability will diverge from historical levels as its growth rate and overall percentage of total capacity resources within a delivery area increases.

In various degrees, regulators and grid operators already are aware of these factors. For example, recently released audit data from ISO New England regarding DR performance in its footprint showed that DR failed to meet its capacity obligations in at least June and December 2011. Likewise, two significant DR suppliers recently informed the Maryland Public Service Commission (MPSC) that they were unable to perform under certain terms of their contracts for the 2011-2012 delivery year. One provider attributed its failure primarily to having faced substantial competition from other providers. The MPSC quickly issued a show cause order requiring all DR providers with commission-approved capacity resource agreements to demonstrate their compliance with such agreements' terms. Given that there are locations in Maryland where DR is being counted on for reliability purposes and that DR contracted for in 2008 already is not performing and that by 2014-2015 dependence on DR is forecast to increase substantially, the MPSC had good reason to be concerned.

The existence of DR fatigue, while different from the risk of committed DR's failing to perform, suggests that forecast DR likewise be derated. While there is not yet long-term evidence to establish the level or location of DR fatigue, there is clear evidence of the exponential growth in the amount of DR that has participated in and cleared capacity auctions, and that is forecast to continue. It is reasonable to assume that as the economy improves the amount of DR available to be committed will diminish, although that has not yet been proven conclusively. Accordingly, when conducting or evaluating reliability assessments, state commissions with jurisdiction over utility supply forecasts and regional transmission organizations responsible for the reliability of the interstate network would be on solid ground were they to apply at least a 10 percent DR derate factor to account for DR fatigue. No one should bank on DR's performing at 100 percent of its committed or projected potential at all times over all years.

The surge of environmentally friendly DR is a tribute to the efforts of states such as Maryland and others in PJM and elsewhere to incentivize DR development and energy efficiency.

But taken together, nonperformance risk and DR fatigue suggest that regulators examine whether they are relying too much on this relatively new and in many respects still unproven capacity resource.

Given that electric capacity is not a luxury good but rather the cornerstone of a reliable electric system, the risk of relying unequivocally on DR to meet critical reliability needs is too great.


Author

Larry Eisenstat is the head of Dickstein Shapiro LLP's energy practice. Reach him at eisenstatl@dicksteinshapiro.com or 202-420-2244.

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