The recent PJM capacity auction has sent ripples through the energy market, highlighting the growing challenges of maintaining grid stability amidst rising energy demands. As capacity prices surge, driven by the need for a significant increase in generating resources to meet growing electric demand in the region, demand response programs have gained renewed importance.
These programs are essential for balancing the grid, preventing overloads and blackouts, and now, with higher incentives on the table, they offer significant financial benefits for businesses looking to mitigate rising capacity costs and optimize their energy procurement strategies.
Demand Response Programs 101
Demand response programs function by calling on businesses to reduce their energy load during periods of peak demand. For example, during the height of summer, when air conditioning usage is at its highest, the grid’s electricity demand surges. If there’s a risk that the grid won’t meet this demand, participants in demand response programs are asked to reduce their energy consumption, sometimes with as little as fifteen to thirty minutes or even an hour's notice.
Participants are compensated for their readiness to reduce energy consumption, with compensation tied to the capacity price, which has recently seen substantial increases. Each participant commits to reducing a certain amount of load, and this commitment is tested to ensure they can deliver. Even if no events are called throughout the year, participants receive incentives for being available to help manage the grid's demand.
Eligibility for demand response programs varies depending on the execution partner, but generally, businesses need to be of a certain size, typically medium to large companies. Small businesses may not qualify. Ideal candidates are those who can easily shut down or shift operations within short notice. Flexibility is a must, and businesses with backup power sources, such as generators or batteries, are especially well-suited, as they can switch to backup power without interrupting operations.
Recent Trends in Demand Response Programs
In recent years, participation in demand response programs declined due to low capacity prices that didn’t justify the costs for many businesses that face significant expenses when shutting down operations.
"The recent changes in capacity pricing have significantly increased incentives, reversing the decline in participation. We expect businesses to rush to enroll in demand response programs due to these higher incentives," Erin Schmerschneider noted.
Historically, demand response programs have seen relatively passive participation with few events called. This is likely to change as the grid faces increasing demands and potential constraints, leading to more frequent events in the future.
Pilot Energy’s Energy Procurement Strategies and Demand Response Program
Following the recent PJM capacity auction, Pilot Energy has adjusted its demand response program to better support businesses in managing rising energy costs.
Types of Programs: We offer two main types of demand response programs: emergency response and voluntary programs. Emergency response programs offer higher compensation but require strict adherence to performance when called upon, with penalties for non-compliance. Voluntary programs offer more flexibility but lower compensation.
Expert Advice: We ensure that businesses make accurate load reduction commitments, aligning their capabilities with their energy obligations to avoid penalties and maximize benefits. We also provide education and support, preparing businesses for potential events and making sure they are well-prepared to participate effectively.
Overcoming Implementation Challenges: Businesses might not know what load they can reduce or may be concerned about the frequency of events. Setting realistic expectations and providing proper support is essential. Pilot helps businesses by identifying their nominations, explaining their operations, and evaluating their flexibility. This helps businesses feel confident about their commitments and guarantees they are prepared for any potential events.
Navigating Regulatory Changes: Regulatory changes significantly impact demand response programs and the incentives they offer. The capacity price, driven by regulatory changes, influences the financial attractiveness of participating in demand response. Some utilities have mandatory programs for customers at certain rates, requiring them to have interruptible loads. If grid constraints continue to worsen, more mandates for demand response participation may emerge as a solution to manage limited power production capabilities. Pilot monitors regulatory developments nationwide, adjusting strategies to align with the latest requirements, and proactively communicates changes to clients.
About Pilot Energy
Founded in 2001, Pilot Energy is an unbiased and independent energy procurement advisor that empowers leaders to confidently know when, where, and how much energy to purchase by leveraging our unique blend of industry knowledge and innovative digital platforms. Putting our know-how to work daily, we drive clarity and control in decision-making and take pride in providing unparalleled personalized service. Guiding businesses with strategic innovation while committing to sustainable solutions.
Ready to talk demand response strategies? Schedule a consultation with our energy experts today and start navigating market timing and volatility with confidence.
