In our recent blog post Energy Markets 101: Regional Transmission Organizations, Independent System Operators and Energy Efficiency we discussed Regional Transmission Organizations (RTOs), Independent System Operators (ISOs) and wholesale electricity markets. If you’re not familiar with the RTOs and their capacity markets, go back and read Part 1. In this follow up, we’ll dive into how energy efficiency has historically participated in PJM’s capacity market and recent complaints filed with the Federal Energy Regulatory Commission (FERC) in more detail. In the Midwest, parts of Illinois, Indiana, Kentucky and all of Ohio are in PJM’s territory.
Map: PJM Interconnection Service Territory PJM- Territory Served
The Monitoring Analytics Complaint Against Energy Efficiency Sellers
As we discussed in Part 1 of this series, PJM operates a capacity market for electricity, and energy efficiency has participated as an eligible resource in the capacity market since 2009. When FERC outlined the characteristics of an RTO in Order 2000, it established a requirement for a market monitor to prevent wholesale markets from engaging in discriminatory practices. PJM established an independent company, Monitoring Analytics, to perform this function. Recently, Monitoring Analytics filed two complaints with FERC essentially calling for the removal of energy efficiency resources from PJM’s capacity market. The first complaint, filed in May 2024, is against certain energy efficiency sellers in PJM’s capacity market.
PJM issues and periodically updates a manual detailing the requirements for energy efficiency (EE) resources to participate in the capacity market. A company can receive payments on the capacity market for an EE resource, like the installation of a new system or new equipment, that results in a permanent and continuous reduction in energy consumption. Monitoring Analytics alleges in its complaint that several companies receiving capacity payments for providing EE resources have failed to prove they are responsible for causing a permanent reduction in energy consumption. The complaint alleges that these companies gather receipts for energy efficient appliances from large retailers, add them up and submit them for capacity market payments without showing any proof that the company’s EE program was responsible for the purchase and installation. Essentially, Monitoring Analytics argues that end use consumers are making independent decisions to purchase appliances, also known as freeridership, and are not being influenced to reduce energy consumption by these energy efficiency sellers on PJM’s capacity market.
Monitoring Analytics Complaint Against PJM
In a second complaint with FERC filed in July 2024, Monitoring Analytics argues for the removal of energy efficiency resources from PJM’s capacity markets. In their complaint they argue that the original rationale for including energy efficiency resources on the capacity market was that load forecasts at the time did not account for the impact of energy efficiency on future demand. The complaint argues that because PJM now includes the impact of energy efficiency on future demand in their load forecast via an “addback” method that energy efficiency should no longer be considered a capacity resource. PJM began using the “addback” mechanism in 2015 to adjust its load forecast in direct proportion to the amount of EE supplied in the capacity market. Effectively, this “addback” mechanism subtracts load on the supply side and adds that same amount on the demand side. This process negates the value of energy efficiency, requiring the subtraction of the EE resource to be met with an alternative resource.
The Consumer Advocates & U.S. Senators Complaint
Energy Efficiency advocates and several U.S. Senators have filed a separate complaint also taking issue with PJM’s use of the “addback” mechanism. The advocates and Senators, however, urge FERC to hold a technical conference to ensure EE resources can continue to participate in the capacity markets. Both Monitoring Analytics and the advocates claim the “addback” mechanism is being improperly used, as it was never approved by FERC. The consumer advocates argue that prior to PJM starting to use the addback in 2015, every megawatt hour of EE sold on the capacity market effectively displaced a more expensive megawatt hour of generation . The addback mechanism, they argue, means energy efficiency is not able to displace more expensive generation resources and ultimately more generation capacity is purchased at higher prices in the capacity market’s auction.
There is no deadline for FERC to respond to these complaints. PJM, however, has responded by filing an update to their tariff that would remove energy efficiency from their capacity market.
PJM Filing to Remove Energy Efficiency Resources from its Capacity Market
On September 6th, PJM filed a proposal with FERC to eliminate energy efficiency resources from its capacity market effective November 6, 2024. This would impact the capacity auction for the 2026/27 delivery year. In its filing, PJM agrees with Monitoring Analytics’ position that energy efficiency should no longer be included in the capacity market since it is accounted for in the peak load forecast on the demand side. Further, PJM stated in its filing they see no evidence that capacity market payments for energy efficiency resources lead to increased efficiency beyond what consumers would do on their own regardless of energy efficiency programs. Monitoring Analytics has indicated that if this proposal is accepted by FERC, it would drop its complaint against PJM but continue to pursue its May 2024 complaint against certain Energy Efficiency Sellers.
Ratepayer advocates oppose removing energy efficiency from the capacity market. Rather than seeing energy efficiency resources removed from PJM’s capacity market, these organizations urge FERC to improve the way energy efficiency resources participate so that EE is once again able to displace more expensive resources.
Ratepayer advocates argue that when EE resources properly participate in PJM’s capacity market, displacing more expensive resources, the ultimate cost to ratepayers decreases.
To follow this docket, you can subscribe to Docket ER24-2995 on FERC’s eLibrary.
MEEA is hosting a webinar about capacity markets in October with MEEA member TRC. Register for the webinar here. If you have any questions on this topic, you can submit them here.