Capacity Optimization in PJM

PJM’s Reliability Pricing Model (RPM) is designed to enable PJM to obtain sufficient resources to reliably meet the needs of electric consumers within their footprint. Savvy energy professionals can optimize outcomes in the RPM capacity market to earn incremental revenue or realize savings. This article provides insights on extracting optimal value from PJM’s RPM for consumers, featuring:

• A brief overview of RPM auctions
• The products and outcomes as a result of RPM auctions, and
• Load optimization strategies that consumers can employ for maximum gains

RPM Auctions

PJM’s RPM process includes a series of auctions that starts with a Base Residual Auction (BRA) conducted 3-years prior to a delivery year (June-May). Subsequently, three Incremental Auctions (IA) are conducted to adjust the resource commitments due to changes in capacity requirements, primarily due to load forecast adjustments.

Prior to each auction, demand curves are developed for each zone, and supply “sell offers” are submitted by generation resources, demand response resources and energy efficiency resources during the auction window. The auction clears based on the outcomes of how these demand and supply curves intersect.

Figure one (featured below) shows the amount of resources that have cleared in the BRA over the last five years, including the spread between generation, demand response and energy efficiency. With generation directly contributing to consumers’ overall energy spend and demand response and energy being programs that end-users can participate in, there are several opportunities for capacity optimization and monetization. Furthermore, the proliferation of intermittent resources such as wind and solar also allows for unique structuring prospects.

Figure 1: Resources cleared in BRA over last five years

RPM Products and Outcomes

The various capacity optimization opportunities related to RPM products and outcomes are summarized in table one below, with a more detailed discussion that follows.

The RPM rate, as established by the auctions, combined with an end user’s Peak Load Contribution (PLC) and utility scaling factors, account for that user’s capacity cost for the demand year. Consumers who have chosen capacity as a pass-through component of their commodity product can choose to manage their PLC tags through peak-shaving programs, during the tag setting months of June to September. They can follow seven-day PJM load forecast and project which hours are expected to be above the PLC setting coincident peak threshold and take corrective actions to reduce their demand. AEP Energy’s PeakAdvisory^® program is one such opportunity for consumers to manage their capacity spend.

Demand Response

These programs are designed to maintain the reliability of the grid and avoid service interruptions by calling load curtailment events when the grid is approaching emergency conditions. Consumers can participate in either annual or summer only demand response programs through a curtailment service provider. The annual program requires participants to be available for interruption throughout the year anytime from 6 a.m. to 10 p.m. EPT, depending on the season.

For a summer only option, resources are required to be available from 10 a.m. to 10 p.m. EPT only during the months of June to October and the following May. PJM does not offer a winter demand response product, though there are strategies that consumers can deploy, which we will discuss in a separate section below.

While demand response is a lucrative program for consumers to monetize their load, there are performance shortfall penalties that are assessed by PJM. These are based on the difference between the actual measured performance and the nominated load for curtailment. It’s important to note that measured performance is based on the consumer’s PLC during the summer or winter peak load (WPL) in winter, and not on the actual demand just prior to the load curtailment event.

Seasonal Intermittent Resources

Intermittent resources such as wind and solar, with capacity interconnection rights (CIR), can participate in the auctions as seasonal resources. The auction clearing algorithm seeks out, and if applicable, pairs all the seasonal offers with corresponding loads in the complementary season (e.g. for one MW of every winter resource, a corresponding one MW of summer resource must be found). This could make it challenging for these resources to clear in auctions, if equal quantities of opposite season resources are not submitted as sell offers. However, if cleared, individual resources are responsible for their respective seasonal commitment and are compensated by the capacity market seller accordingly.

Aggregated Resources

Through this program, equal quantities of resources from opposite seasons (summer and winter) are offered into the auction as an aggregate by a single capacity market seller. This could include a summer solar and a winter wind resource or a summer demand response portfolio and winter wind resource. This vastly improves the auction clearing potential for these resources since they have been paired prior to the auction clearing mechanism. The aggregate resource is considered to be located in the smallest modeled locational deliverability area (LDA) common to the underlying aggregated resource and, as such, gets compensated based on the lower of the clearing prices. While each resource is responsible for performance during its respective season, the capacity market seller is accountable for the annual delivery of the aggregated resource.

Capacity Tag Management and Demand Response – Seasonal Strategy

Consumers who are actively managing their capacity tags in summer are probably lowering their PLC to the extent that they are unable to participate in summer or annual demand response. However, they may still have a high WPL that could yield them demand response capability in winter. As mentioned earlier, there is no winter seasonal demand response product in RPM, but such customers may be able to monetize their load through winter demand response, in collaboration with the curtailment service provider.

To make this work, it is incumbent upon the curtailment service provider to balance their portfolio by having an excess summer demand response to offset the winter load. For example, if the consumer has no demand response capability in summer and a two MW demand response capability in winter, the curtailment service provider will register the load as an annual resource and then has to offset through two MW of summer demand response from their portfolio. The winter load will only be responsible for winter availability (and be compensated accordingly), but the curtailment service provider has to ensure their portfolio’s annual commitment to PJM is met. This way the consumers get a dual benefit of capacity cost savings coupled with demand response revenue, despite such an arrangement not being an RPM product.

Energy Efficiency in RPM

Energy efficiency resource in RPM refers to energy efficiency projects that can result in permanent, continuous reduction in an end user’s energy consumption during the entire demand year. These include projects such as lighting replacements, HVAC and refrigeration optimizations, process improvements through installation of variable frequency drives (VFDs) etc. These resources can be offered into the RPM auction similar to generation and demand response for a maximum of four consecutive demand years. Figure two (featured below) shows an example of how energy efficiency resources can be compensated as a capacity performance resource.

Figure 2: Representative chart of energy efficiency resource in RPM. The blue line indicates typical daily usage pre-energy efficiency project and the red line indicates usage post-energy efficiency project. The difference is the energy efficiency capacity performance value that can be offered into RPM

In order for the energy efficiency project to be eligible, it also should not have received incentives from the local utility. Please consult with your AEP Energy representative to check if your project is eligible.

Developing Strategies

With an understanding of the RPM structure and the associated products and programs, consumers can develop optimization strategies to maximize the benefit from their capacity load or asset. There is a three-step process for a thorough and rigorous approach toward capacity and DR value identification and extraction. At a glance, the strategy should follow:

1. Analytics: Conduct a detailed study of hourly usage data and facility characteristics to identify load curtailment opportunities.
2. Planning: Determine approach via either load shedding, load transfer to a behind-the-meter asset or utilization of a grid-connected asset as intermittent resource.
3. Optimization: Determine the appropriate product and/or program for maximizing benefit. 

Step 1: Analytics

Any optimization exercise should start with a detailed study of hourly usage data coupled with advanced analytics. Figure three (featured below) shows a representative chart which has the actual load profile of a site over one year (indicated by the blue line), as well as a “temperature neutral” load profile (yellow line), which represents load that has been adjusted for electric cooling and electric heating load. Taking the delta between the actual load and the temperature neutral load, points towards potential HVAC load curtailment opportunities during peak hours, such as a pre-cooling strategy. This goes to show that every load has an opportunity to be optimized.

Figure 3: Representative chart of load curtailment potential

Usage analytics can be complemented by detailed facility modeling and a “bottom-up” analysis of individual systems to determine demand control opportunities related to processes. With knowledge of what they can do, consumers can now focus on how to do it.

Step 2: Planning

The first question that needs to be answered is whether to curtail or transfer load. For a load curtailment route, insights gained from analytics help determine the optimum approach e.g., pre-cooling or HVAC set-point adjustment, etc. Other approaches such as shifting load to less critical (off-peak) hours can be applied towards manufacturing loads. Also, technologies such as Automated Demand Response can be deployed to remotely control loads rapidly to optimize response times.

Utilization of behind-the-meter (BTM) technologies such as back-up generation, solar and storage allows consumers to transfer load during program participation hours with minimum disruption to schedule or behavior. These technologies can be optimized as per the program to ensure compliance and maximum value. Figure four (featured below) shows representative examples of load curtailment (left) and load transfer (right).

Figure 4: The chart on the left shows a normal daily load profile (yellow) and with load curtailment (blue). The chart on the right shows net daily usage (blue) and offset due to solar (orange).

Off-Site Renewable Resources

This is also a good time to discuss strategies for offering intermittent assets as seasonal or aggregate resources. It starts by understanding your capacity rights, through a detailed understanding of the valuation on the front end as well as its fit with the load requirements. The end user should ensure that their share of Capacity Interconnection Rights (CIR) to capacity are clear and that then develop a strategy to monetize those rights, either as an annual or a seasonal resource.

Different considerations around managing performance assessment hours, non-performance charge risks, etc. should be discussed with the capacity market seller, along with other potential costs and risk associated with scheduling, contract, counterparty, etc. Finally, an understanding of MOPR is paramount to this strategy. The end user should consider how to value using their renewable energy certificates (RECs) for state RPS versus extracting capacity value and this should be within their total framework of REC retirement and management strategy. It only takes one participant to spoil competitive exemption and so all project participants should be aligned on strategy prior to any RPM commitment.

Step 3: Optimization

The final step is identifying the right program structure from all that have been discussed so far. Table 2 below summarizes all the capabilities and resources that any consumer may have and aligns them with the appropriate program and its commitment, while outlining the benefit.

Table 2: Resource Optimization Options and Benefits

Energy Efficiency Value Identification and Extraction

In order to effectively optimize capacity through energy efficiency projects, consumers should follow a six-step process:

• Identify Energy Conservation Measures (ECM) opportunities through a detailed facility analytics.
• Assess potential savings, value and financial profile for identified opportunities, including capacity revenue through PJM program.
• Develop a detailed execution plan for ECMs to be implemented in time for the committed demand year.
• Participate in auctions through a capacity market seller.
• Implement the ECM plan to be ready for the demand year.
• Establish a transparent framework for measurement and verification and reporting on projects.

In Closing

PJM RPM presents end-use consumers with incremental revenue opportunities through programs such as capacity performance demand response and energy efficiency, as well as through intermittent renewable energy resources. Consumers can develop optimization strategies based on analytics to identify the right programs and approaches to help them save and earn. AEP Energy covers the entire gamut of these strategies, starting with our deep knowledge of PJM programs, our unparalleled expertise in advanced data analytics and our programmatic approach towards developing both, energy efficiency and sustainability strategies. Please contact Ritesh Tipnis, Director Program Management at rtipnis@aepenergy.com if you have any questions or need assistance on any of these programs. If you’re already working with an AEP Energy Sales Representative, they will happily provide more information.

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