In a move likely to create more opportunities for demand response resources, FERC has conditionally approved substantial modifications to PJM’s capacity market framework, known as the Reliability Pricing Model (“RPM”).  Many industry observers believe this will lead to substantial increases in capacity prices, thereby spurring the development of demand response resources.

Driven in part by the forced outages, poor capacity performance, and price surges caused by the January 2014 “Polar Vortex,” PJM concluded that the RPM’s incentive structure required reforms to ensure adequate capacity performance and increased reliability.  PJM’s proposed market reforms will increase performance requirements for all market sellers, including demand response resources.

FERC’s order authorizes PJM to replace the RPM’s existing capacity products in its 13-state territory with a new capacity product, the “Capacity Performance Resource.”  This new product will impose stronger performance and availability requirements than the existing capacity requirements.  The new performance requirements will allow PJM to assess significant charges for poor performance, provide credits for superior performance, and impose a must-offer requirement on established or prospective Capacity Performance Resources other than demand response, energy efficiency, intermittent energy (such as wind and solar), and capacity storage resources.

The Capacity Performance Resource will be phased-in over five years.  During this transition, PJM will gradually build-up the quantity of Capacity Performance Resources and phase out “Base Capacity Resources,” a new lower performance expectation product that is being adopted on an interim basis.  The goal is that by 2020, PJM will procure all of the region’s capacity requirements in the form of Capacity Performance Resources.

A Capacity Performance Resource must be capable of sustained, predictable operation that allows the capacity resource to be available to provide energy and reserves whenever PJM determines an emergency exists.  PJM will have the authority to reject capacity offers that cannot reasonably be relied upon to meet their capacity obligations during emergency conditions.  External Generation Capacity Resources will ineligible to submit a Capacity Performance Resource Offer unless they are pseudo-tied to PJM, or will be by the relevant delivery year.

PJM acknowledged that demand resources provided significant value to the region during the Polar Vortex.  However, their load reductions were entirely voluntary, unlike the mandatory reductions during the summer peak period.  Thus, PJM proposed, and FERC accepted, a replacement of the three existing demand response resource products (Annual Demand Resources, Extended Summer Demand Resources and Limited Demand Resources) with one Annual Demand Resource product.  Annual Demand Resources can submit stand-alone Capacity Performance Resource sell offers in a MW quantity consistent with their average expected output during peak-hour periods, and will have to meet the operational and performance requirements of a Capacity Performance Resource product or face the same non-performance charges.  Annual Demand Resources, like generation resources, will have the ability to participate in RPM auctions as Base Capacity Resources during the phase-in.

PJM also acknowledged that the sustained and predictable operational requirements of the Capacity Performance Resource product will be difficult for many demand response resources to achieve with stand-alone offers.  Thus, PJM’s new framework allows demand response resources to combine with other eligible resource types to submit a single Capacity Performance Resource offer.  More specifically, demand response resources will be permitted to aggregate with capacity storage resources, intermittent resources, and energy efficiency resources that are located within the same locational deliverability area to submit a Capacity Performance Resource offer.  FERC believes that aggregation will enhance the ability of such resources to provide reliability benefits and also increase competition in the capacity market.  FERC, however, rejected PJM’s proposal to allow aggregation across deliverability areas, due to concerns about its feasibility and possible performance shortcomings during emergency conditions.

There has been much debate concerning the role of demand response resources in energy and capacity markets, and their capabilities during emergency events such as the Polar Vortex.  While it remains to be seen whether PJM’s new Capacity Performance Resource product will improve capacity performance enough to justify the cost, PJM and FERC clearly believe that demand response, energy efficiency, and other non-traditional capacity resources can play a vital role in ensuring reliability at the lowest cost to consumers.  The lingering elephant in the room is whether FERC will continue to play a leading role in promoting demand response resources, or whether PJM’s treatment of demand resources in its RPM and energy market will need to be revisited after the Supreme Court issues its decision in FERC v. Electric Power Supply Association, No. 14-840, where FERC’s very power to regulate the prices paid to demand response resources is at issue.