Sunday, April 12, 2009

Benjamin Franklin Would Be Proud

Benjamin Franklin is known for his saying “A penny saved is a penny earned.” Given Franklin’s fondness for frugality and his precarious kite-flying experiments with electricity, I’m sure he would agreed as well that “A kilowatt-hour saved is a kilowatt-hour earned.” Although most traders and power markets don’t quite see it this way, PJM – the US’s largest Regional Transmission Organization (RTO) managing 163,500 MW of generating capacity over 56,350 miles of transmission lines—recently announced plans to move towards Benjamin Franklin’s vision.

In order to maintain adequate generation capacity on the electrical grid, PJM runs an annual capacity auction (called the Reliability Pricing Model) to pay new power plants to simply show-up and commit to selling their power into PJM’s grid regardless of whether those plants are actually dispatched during the year. This process began in 6/1/2007 and although the results of the auctions are complicated by the various pricing locations across PJM’s 13-state territory, the capacity auction can clear at roughly $60/kW per year of capacity to be paid each year over a 4-year period.

Franklin would argue (as do I), “If PJM will pay me $60 to commit a new kW of supply, why wouldn’t they pay me that same $60 to reduce a kW of demand of equal reliability?” The answer is that starting in PJM’s 2009 RPM, they will. (See p. 91 of link). PJM has allowed demand response resources to bid into the RPM since the auction began. But they are just beginning to allow energy-efficiency to participate as well. To qualify, energy efficiency projects must represent permanent base-load reductions in electrical usage, must not already be include in PJM’s load forecast, and must include a measurement and verification (M&V) plan to demonstrate that the savings were actually realized. It is unclear, however, exactly which conservation assumptions are included in PJM’s current load forecast. For example, much of the federal stimulus plan funds weatherization and energy efficiency programs. Were these considered in the PJM’s forecast? If so, could these efficiency projects collect both stimulus funds and RPM funds? PJM will need to clarify their definitions of “additionality” and free-ridership.

PJM is not the first RTO to pay an equal market price for efficiency and supply. In February 2008, the New England ISO allowed energy efficiency to bid in their capacity auction referred to as the Forward Capacity Market. To the surprise (and dismay of the generators bidding), nearly 18% of all new “capacity” was purchased from energy-efficiency resources (see figure). Combined with demand response resources, demand-related resources accounted for over 65% of all of the 1,814 MW procured by the 2008 Forward Capacity Market. The figure below shows the breakdown of these resources. (Data adapted from ISO New England Forward Capacity Market Presentation). When supply and demand resources are both given an equal footing, past markets have clearly shown a preference for efficiency and other demand side resources which can typically be deployed more rapidly, more reliable, eliminate the need for a reserve margin (i.e. 1MW of demand savings “counts” as 1.09 MW of avoided supply with a 9% reserve margin requirement), eliminate all associated emissions, avoids complicated siting/NIMBY issues, and provide better press than new coal plants. I think Franklin would be pleased to see our energy markets slowly becoming more “healthy, wealthy, and wise”.

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