FirstEnergy says demand response putting power plants out of business

FirstEnergy Corp. has a traditional view of wholesale electricity markets: They’re a competition between iron-in-the-ground facilities that can put megawatts on the grid when those megawatts are needed. Think coal plants, nuclear reactors and hydroelectric dams.

Missing from the definition is a consumer’s promise to turn off the lights when the grid is stressed — so-called demand response.

Instead of creating energy during peak times, demand response resources conserve it, freeing up megawatts that don’t need to come from generators.

The idea is not new and has been expanding in the territory of PJM Interconnection, a Valley Forge-based grid operator that manages the flow of electricity to 13 states, including Pennsylvania.

FirstEnergy, which owns power plants and utility companies across several states, wants PJM to abandon the demand response concept.

The Ohio-based energy company says demand response, which doesn’t require any kind of capital commitment, is “starving” traditional generation out of its rightful revenue in wholesale markets.

“We feel that it’s going to lead to even more premature closures of power plants,” said Doug Colafella, a spokesman for the firm.

Specifically, FirstEnergy is fighting to get demand response kicked out of PJM’s annual capacity auction, which ensures there’s enough electricity resources to meet projected power demand three years in advance. The auction establishes a single clearing price that will be paid to all successful bidders, like a retainer fee, in exchange for their promise to be available to be called upon three years from now.

During the May auction, which set capacity prices for the 2017-2018 year, the clearing price was $120 a day for each megawatt of electricity bidders committed. About 6 percent, or about 11,000 megawatts, of the capacity secured came from demand response.

FirstEnergy’s Bruce Mansfield coal-fired power plant in Beaver County failed to clear the auction. The company has since postponed upgrades to the facility, which could jeopardize its functioning beyond 2016.

Capacity payments are a stable source of revenue for baseload generation plants, Mr. Colafella said, and a price signal to the market about which way demand is headed, giving generators some indication about whether new facilities will be necessary and profitable.

Demand response distorts that dynamic, he said.

Since May, FirstEnergy has intensified its efforts to drive demand response out of PJM’s markets, having seized on a related court case involving the Federal Energy Regulatory Commission.

“FirstEnergy’s business model is that electricity consumption has been flattening, so they want to take a larger share of the market and how do you take a larger share? You bulldoze everybody out,” said Mei Shibata, CEO of The Energy Agency, a marketing and communications firm and co-author of a recent report on the market for demand response in the U.S. for GreenTech Media Research.

In May, the D.C. Circuit Court vacated a rule created by the Federal Energy Regulatory Commission in 2011 that said demand response should be treated the same way as power plants in wholesale energy markets. That meant demand response providers could offer to shut down a day in advance, when grid operators book electricity for the following day, and get the same price as megawatts from generation.

An electric power industry group sued the FERC claiming that the call to shut off electricity in exchange for payment is a retail choice and retail falls exclusively within state jurisdiction, not federal. The court agreed, setting in motion FirstEnergy’s challenge to demand response in capacity markets, which were not addressed by the court decision. If demand response is a retail product in one context, then it’s a retail product in all, the logic goes.

The same day the court issued its decision, FirstEnergy filed a lawsuit asking a judge to order PJM to recalculate the results of its May capacity auction stripping out demand response.

PJM objected. The Pennsylvania Public Utility Commission, which intervened in that case, charged FirstEnergy with “jumping the gun” on its logic and called its proposal an “unprecedented and wholly unnecessary disruption of the capacity market auction process.”

Even if demand response is excluded from the daily wholesale market as the court decision wills, the market for this resource will continue to expand, said Ms. Shibata.

If, however, FirstEnergy succeeds in kicking demand response out of the capacity market, “that would be a much bigger deal,” she said.

PJM leads the nation in demand response resources, according to Ms. Shibata’s research, and anything that happens to demand response at PJM would likely trickle down to the other grid operators around the country.

“By some mechanism, it has to remain for the U.S. grid to work,” she said.

Even before the matter is decided — an appeal is likely headed for the U.S. Supreme Court — it will continue to “spook anybody trying to make money on this,” Ms. Shibata said.

The stock of EnerNOC, one of the country’s largest demand response aggregators, has lost about half of its value since May. In a recent earnings call, EnerNOC’s co-founder and CEO Tim Healy told analysts that traditional power generators are going after companies like his because they feel threatened by innovation.

“In other words, if it's got a smokestack, it's legal. If it's innovative and software-centric, it's not,” he said.

Greg Dixon, senior vice president of marketing and sales, said in a recent interview that “over the past 10 years, demand response is a resource that has made the grid more economical, more reliable and more competitive.”

Capacity prices, which make up about 10 percent to 15 percent of a customer’s electricity bill, would double if demand response were taken out of the equation, Mr. Dixon said.

FirstEnergy hasn’t argued that point. In fact, in its court filings the energy company has said that’s proof that firms like FirstEnergy have been harmed by suppressed prices because of demand response.

Other major utilities seem to be of like mind. Last year, American Electric Power’s CEO Nicholas Akins called the inclusion of demand response in capacity markets “socialism,”or, he offered, “capitalism in a sandbox.”

“The rules seem to penalize long-term investors,” Mr. Akins said.

Jim Behr, president of Energy Savers Inc., a Ross-based energy consultancy that works with commercial building owners and managers, said he understands FirstEnergy’s motivation.

Mr. Behr has more than 100 customers signed up for demand response. Some have backup generators that they kick on when asked to curtail. Others simply shut off the lights.

A large manufacturer of naval destroyers gets paid about $20,000 a year to be available as a demand response resource, Mr. Behr said. “When they get a notice, they suspend testing and just send everybody home.”

FirstEnergy and other generators argue that the capacity market, which was created to give signals to generators about when supply will be necessary and how much they can expect to get for having it at the ready, no longer fills that purpose.

Demand response is an “unfulfilled dream,” Mr. Behr said. “It’s a stop-gap measure to take care of a current problem with no results that are going to take care of increasing demand when it’s going to come later.”

Anya Litvak: or 412-263-1455.

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