In a contentious move that could reshape the energy efficiency landscape, PJM Interconnection has proposed to discontinue capacity payments for energy efficiency resources in its auctions. With far-reaching implications for both consumers and energy providers, this proposal has sparked a lively debate among stakeholders, regulators, and industry experts.
PJM’s Proposal and Its Rationale
Background and Historical Context
Since 2009, PJM has included energy efficiency resources in its capacity markets, incentivizing investments through capacity payments. These payments were intended to encourage consumers to adopt more energy-efficient measures, thereby reducing overall energy demand. However, PJM now argues that such payments have outlived their usefulness. The regional transmission organization contends that the initial rationale—stimulating new investments in energy efficiency—no longer applies given the current market and technological contexts. PJM’s shift in strategy highlights a broader trend toward questioning the sustained utility of older incentive structures.
For over a decade, capacity payments have acted as a significant financial stimulus for both consumers and providers, making energy efficiency projects more economically appealing. Yet, the evolving landscape has seen substantial improvements in energy-efficient technologies, coupled with more stringent federal and state programs aimed at promoting energy efficiency. These changes have lessened the need for capacity payments as standalone motivators. PJM’s argument hinges on the notion that today’s market dynamics and regulatory frameworks have naturally integrated energy efficiency into the energy ecosystem, reducing the need for additional financial incentives.
Current Capacity Payments and Their Impact
For the delivery year 2025/26, PJM plans to allocate $144 million for energy efficiency capacity payments, a notable increase from the previous year. However, PJM claims these payments do not significantly spur new energy efficiency projects. They argue that consumers already benefit from lower capacity costs and reduced energy bills by cutting down peak load obligations. This indirect benefit, PJM asserts, is sufficient to drive investment in energy-efficient technologies without needing additional capacity market payments.
PJM points out that the current capacity payments largely go to non-utility energy efficiency providers, with an estimated 89% of payments for the current delivery year flowing to such entities. This has raised questions about whether these payments are efficiently targeting areas that need the most support. Given the high penetration of energy-efficient technologies in the market and the effectiveness of state and federal programs, PJM believes that cutting these payments will not deter further efficiency improvements. Instead, it will make the market more streamlined by eliminating redundant incentives, ensuring that resources are allocated more effectively across the board.
Support for the Proposal
Alignment with Monitoring Analytics
Monitoring Analytics, PJM’s independent market monitor, has long supported removing energy efficiency resources from the capacity market. This entity echoes PJM’s viewpoint, asserting that capacity payments for energy efficiencies contribute little toward encouraging new projects. A sector-weighted supermajority of PJM stakeholders has also endorsed the proposal, underscoring a significant consensus on the issue. The market monitor shares PJM’s concern about the potential for double-counting benefits, which they argue leads to market inefficiencies and inflated costs for consumers.
PJM and Monitoring Analytics argue that energy efficiency resources are already accounted for in capacity planning through peak load forecasts. This integration means any additional capacity payments for energy efficiency result in double-counting the benefits, making the system less efficient. By discontinuing these payments, PJM aims to reduce these inefficiencies and create a more effective market structure that better aligns with modern energy use and efficiency practices. This alignment between PJM and its market monitor underscores a coordinated push towards refining market operations to better reflect contemporary needs.
Advances in Technology and Regulation
PJM underscores that advancements in energy-efficient technology and stricter state-regulated programs have lessened the need for capacity payments. Modern energy efficiency initiatives are often driven by federal and state incentives or market prices reflected in retail energy bills, making additional compensation through capacity markets redundant. The accelerating pace of technological innovation has made energy-efficient solutions more accessible and cost-effective, diminishing the need for supplementary financial incentives from capacity payments. PJM believes that state and federal regulatory frameworks have evolved to cover the necessary support for energy efficiency, thus rendering capacity payments obsolete.
Moreover, stringent state-regulated programs now mandate higher energy efficiency standards, ensuring compliance and encouraging investments irrespective of capacity payments. These programs, often supplemented by federal guidelines and incentives, have succeeded in driving significant advances in energy efficiency across multiple sectors. Consequently, PJM argues that energy efficiency has become an intrinsic part of energy market operations, supported by robust state and federal policies. Eliminating capacity payments, therefore, would not hinder progress but would instead streamline and enhance market efficiency by removing redundant financial incentives.
Points of Opposition
State Ratepayer Advocates and Public Utility Concerns
Opposition to PJM’s proposal is strong and multifaceted. State ratepayer advocacy offices, alongside utility companies like Public Service Electric and Gas and Monongahela Power, have raised concerns over the plan. They argue that capacity payments still serve as a crucial incentive mechanism to maintain and promote energy efficiency investments. These stakeholders contend that the absence of such payments could slow down or halt ongoing and future energy efficiency projects, negatively impacting long-term sustainability goals.
Public utility concerns often center around the practical implications for both large-scale and smaller energy efficiency initiatives. For instance, utilities argue that without capacity payments, the financial attractiveness of energy-saving projects would diminish, potentially leading to a slowdown in implementation. This could have far-reaching implications, from increased energy costs for consumers to a slower transition to a more sustainable energy grid. These concerns highlight the broader risks associated with removing a previously relied-upon financial incentive, fearing that it might upset the existing balance of energy efficiency efforts.
Issues of Market Distortions and Fairness
Critics, including entities like Tangent Energy Solutions and Enel X North America, highlight that removing these payments could distort the market, potentially disadvantaging smaller, non-utility energy efficiency providers. They contend that without these incentives, achieving long-term energy efficiency goals might become more challenging. Smaller providers often rely on capacity payments as a significant portion of their revenue, and removing this financial support could lead to reduced competition and innovation in the energy efficiency sector.
There is also concern over market fairness and the uneven impact on different types of providers. Non-utility companies, which often drive innovation and cater to niche markets, may struggle more than larger utility companies with diversified revenue streams. Critics argue that this proposal could lead to market consolidation, where only the largest players can sustain operations without capacity payments. This could stifle innovation and reduce the overall effectiveness of energy efficiency initiatives, ultimately leading to higher costs and less effective energy-saving measures for consumers.
Key Arguments from PJM
Double-Counting Efficiency Benefits
A central argument from PJM is that current capacity market practices lead to double-counting the benefits of energy efficiency measures. With these measures already factored into peak load forecasts, any additional compensation through capacity auctions results in inefficiency. PJM contends that this redundancy creates an imbalanced market where the same benefits are paid for multiple times, inflating costs without adding value. By removing these duplicative payments, PJM aims to create a more streamlined and cost-effective market system.
PJM’s stance is that the energy efficiency market has matured to the point where it no longer requires supplementary financial stimuli to thrive. The double-counting issue not only inflates market costs but also complicates capacity planning and procurement processes. PJM believes that eliminating these redundant payments will simplify market operations and allow for more precise and efficient capacity procurement. This streamlined approach is intended to reflect the current state of energy efficiency, where technological and regulatory advancements have diminished the need for additional financial incentives.
Seeking FERC’s Approval
The proposal has been submitted to the Federal Energy Regulatory Commission (FERC) for approval by November 6, ahead of PJM’s next capacity auction in December. Approval would eliminate capacity payments for energy efficiency resources and address complaints about current practices lodged by market monitors and state ratepayer advocates. The decision by FERC will be pivotal, determining whether PJM can proceed with its plan to reform capacity payments and reshape how energy efficiency is incentivized within the market.
FERC’s decision will carry significant implications for the future of energy efficiency in PJM’s operational areas. If approved, the policy change would align market practices with contemporary technological and regulatory landscapes, eliminating what PJM and its supporters deem redundant incentives. However, the decision could also face legal challenges and pushback from opponents who view capacity payments as essential for sustaining energy efficiency initiatives. The outcome will set a precedent for how capacity markets across the country might evolve to incorporate energy efficiency in the future.
The Broader Implications
Balancing Innovation and Regulatory Reforms
The debate encapsulates the complexities of regulating energy efficiency incentives. On one hand, it is vital to foster ongoing innovation and energy-saving initiatives. On the other, regulatory reforms must ensure market efficiency and prevent redundant compensation mechanisms. PJM’s proposal underscores a broader attempt to streamline market operations by removing outdated incentives that no longer serve their original purpose. The challenge lies in balancing the need to maintain progress in energy efficiency while ensuring that market practices remain efficient and cost-effective.
Innovation in energy efficiency continues to be a driving force in the energy sector, with new technologies and methods emerging regularly. Regulatory reforms must adapt to these developments without stifling innovation or creating financial instability for providers. PJM’s proposal reflects an effort to modernize the market, aligning incentives with current needs and technological capabilities. However, this approach must be carefully managed to avoid disrupting ongoing projects and to ensure that the benefits of energy efficiency continue to be realized across all sectors of the market.
The Future of Energy Efficiency in Capacity Markets
In a bold and controversial move, PJM Interconnection has proposed ending capacity payments for energy efficiency resources in its auctions, a decision that could dramatically alter the landscape of energy efficiency. This proposal has significant implications for a wide range of stakeholders, including consumers, energy providers, regulators, and industry experts, who have engaged in a vigorous debate over its potential effects. Consumers could face higher costs as energy efficiency programs, which help reduce demand and control costs, may become less financially viable. Energy providers, on the other hand, could see changes in how they are compensated for implementing energy efficiency measures.
Regulators and industry experts are scrutinizing the proposal, weighing its potential to disrupt current energy efficiency initiatives and questioning its long-term impact on the sustainability of the energy grid. This outcome could reshape the way energy efficiency resources are valued and compensated, raising crucial questions about the future of energy policy and environmental responsibility in the region overseen by PJM Interconnection.
