Customers and aggregators that act as demand response resources in organized wholesale energy markets should take notice of the Federal Energy Regulatory Commission (FERC)’s Order 745, issued on March 15, 2011. FERC Order 745 directs each organized market operator (ISO) to institute incentive payments for certain demand response resources that curtail energy consumption during certain hours that would confer a “net benefit” to purchasers of wholesale supply by reducing price volatility during those hours.
The incentive payment structure provides that participating demand resources will be paid the prevailing locational marginal price (LMP) at the wholesale market location at which the curtailment is instituted. This incentive structure permits participating demand resources to avoid the generation component of the bill during curtailments and, at the same time, to get paid that same generation component of the bill for such periods.
FERC issued Order 745 with the intention of removing barriers to the participation of demand response resources while trying to maintain the competitiveness of organized wholesale energy markets.
Order 745 states that, in order to receive the full LMP, a demand response resource enrolled in the applicable ISO program must be able to balance supply and demand, and the resource must be cost effective. FERC directed each market operator to establish a “net benefits test” to determine when such a demand response resource will be eligible for incentive payments.
In order to comply with Order 745, generally, each ISO will publish a price threshold for each month. When prices rise above the threshold, demand response activity is deemed to provide a “net benefit” and can be paid the LMP.
As a result of the Order, load in these ISOs may also be responsible for a new cost associated with these programs. The FERC Order indicates that customers benefiting from a reduced LMP – as a result of demand response participating in these newly designed ISO programs – should be allocated the costs of the increased compensation to these demand response resources. The Order provides that benefits may occur on a broader zonal basis, and that the costs should accordingly be allocated to customers within all appropriate zones.
In August and September, various ISOs – including CAISO, MISO, ISONE, NYISO and PJM – submitted to FERC compliance filings including tariff revisions to implement the Order’s requirements. FERC has reviewed each filing with the exception of NYISO. For additional detail about where the filings are in the approval and implementation process, please see the table below. Please keep in mind that these dates and details are subject to change.
PJM will implement Order 745 on April 1, 2012. The net benefits test threshold price has been posted for the month of April. You can access the April price of $25.86 and historical prices at the following link(http://www.pjm.com/markets-and-operations/demand-response/net-benefit-test-results.aspx). In PJM, in order to place the costs of Economic Demand Response settlements on load in compliance with Order 745’s requirements, such charges will be allocated to all Market participants with real time exports from PJM and Load Serving Entities within a zone that has an LMP greater than the Net Benefits Price. These charges will appear as separate line items on suppliers’ PJM bills.
ERCOT is not under FERC jurisdiction with respect to FERC Order 745, which means that the Order’s requirements do not apply to customers in that area.
We are following the Order closely and will continue to notify our customers regarding future developments. To view Order 745 on FERC’s website, go here. If you have additional questions, please reach out to your Business Development Manager.