PennFuture's E-cubed is a commentary biweekly email publication concerning the current themes and trends in the energy market. If you have trouble reading this email, please see the document on our website (www.pennfuture.org) under Pressroom & Publications. 
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August 24, 2001
Vol. 3, No. 16

A Cool Heat Wave

From August 6 to August 10, record peak electricity demand driven by a sweltering heat wave severely tested the reliability of the competitive PJM market. The PJM market passed its stress test with little public notice or credit. As usual, only ships that sink or planes that crash draw headlines.

With air-conditioners battling near 100-degree temperatures, consumers set three new peak usage records on August 7, 8, and 9, with demand hitting 53, 464 megawatts (MW), 53,910 MW, and 54,176 MW respectively. These new records smashed the old peak of approximately 51,700 MW set in a 1999, and contributed to unhealthy air in large parts of the Mid-Atlantic region. They also highlight the need to enact better demand response programs and energy efficiency policies in order to reduce the strain placed on power supplies as well as to protect the environment and public health. 

The ability of the PJM competitive market to meet record demands and keep consumers cool sharply contrast with California's inability to keep the lights on even in periods of low-seasonal usage from late 2000 through March of this year. Speaking of PJM's impressive reliability performance, PJM President Phil Harris concluded, "This week's accomplishment is testimony to how effective markets and efficient operations work in harmony to reliably serve the electric customer." But keeping the lights on should never be taken for granted.

Prior to restructuring, in January 1994, rolling blackouts occurred throughout the PJM power pool when demand for about 45,000 MW couldn't be met. These blackouts occurred primarily because huge numbers of plants, which were rate based and operated by fully regulated monopolies or non-utility generators with PURPA contracts, experienced mechanical and fuel problems at the same time. 

This painful experience ensured that policymakers made reliability a top priority and a major topic of discussion when enacting the state's Electricity Competition and Customer Choice Act in 1996, asking questions like, would a competitive market attract sufficient investment to build necessary plants? Would existing plants perform better or worse and experience less or more outages? Could consumers be paid market prices to reduce demand at peak usage times in order to increase incentives for energy conservation? 

The last five years and meeting record peaks both in 1999 and 2001 answer those questions and prove the reliability of the competitive PJM market. The market is producing lots of new generation - most of it new natural gas plants and some wind power, and all of it much cleaner than the coal and nuclear plants which dominated the generation market more than 10 years ago. Plants in PJM have never operated better and have reduced their forced outage rate by about 50 percent since 1996. Additionally, a few customers participated in PJM's emerging demand response programs during the August 2001 heat wave. 

But many more customers would reduce usage in peak periods in return for market-based compensation if they only had the ability. Though demand response has its nose under the generation tent, it still hasn't reached most Pennsylvanians. Neither Pennsylvania nor any other state has taken policy steps to ensure that a necessary infrastructure of time-of-use meters and appliance control devices is deployed throughout every home and business, a failure which amounts to regulatory malpractice. Until the Pennsylvania Public Utility Commission requires the deployment of these available technologies over a reasonable period, prices for electricity will remain higher than they need be, pollution will be worse than it should be, and reliability will be less than it could be. 

Keeping the lights on
During the recent heat wave, PJM encouraged general restraint in usage, implemented its demand response programs, and reduced voltage by 2 percent to 3 percent for brief periods - undetectable to most customers. Beyond not failing, the system performed so well in large part because of the competitive market, not despite it. Several factors worked to maintain system reliability, including better power plant performance, new generation, imports, skillful management of the operation of the transmission system and demand response. 

Improved Generation Plant Operation. Of all these factors, dramatically better plant performance is the single, biggest key to competitive PJM's impressive reliability performance during the last five years. Generating plants are operating much more reliably now than during the monopoly era. In 1996, the forced outage rate at PJM generation plants was 12.7 percent, meaning that a plant scheduled to be available was in fact unavailable for operational reasons 12.7 percent of the time. The forced outage rate of generating facilities in PJM declined to 11.2 percent in 1997, 6.5 percent in 1998, 5.7 percent in 1999 and to 5.2 percent in 2000. In 1996, when you really needed a generator, there was a 1-in-8 chance that the unit wouldn't be available. But in 2000, the odds that a generator would be forced out of service at any particular time had fallen to 1 in 20. 

Under price regulation, generators for the most part got paid even if their plants were unavailable to generate electricity because of operational or maintenance problems. With the move to market-based prices, generators have a built-in incentive to be there, especially when demand and prices are high. Even the PJM capacity payment - still a relic of rate-based generation - has moved from a payment simply because a plant was physically built, to one based upon the generating unit's historical availability to provide generation when needed. The decline in unforced outage rates is a testament to the change in how generators get paid. At the 5.2 percent 2000 average forced outage rate, about 3,000 MW would have been unavailable - at the 12.7 percent average forced outage rate for 1996, more than 7,300 MW would have been unavailable. Every generation owner deserves credit for this superb performance. 

New Generation. Another reason the lights are staying on despite record peaks is the new generation built to serve the Mid-Atlantic market. The development of competitive power plants continues to accelerate in PJM, with over 4,000 MW scheduled to come on-line in 2002, and even more for 2003. In contrast, demand in 2002 is expected to grow by less than 1,000 MW. 

The Mid-Atlantic experience documents that new generation can be supplied in a competitive market. The market is delivering plenty of new generation that is dramatically cleaner and more efficient than that built during the monopoly era. Transparent prices in a competitive, efficient market are encouraging investors to build. Unlike the previous generations of power plants, no captive monopoly consumer had to guarantee any investor in a new generation plant a single penny return of the investment or a single penny return on the investment. Unlike many of the previous generation of power plants, these new plants use mostly natural gas instead of coal or nuclear fuel, cost billions less to build, can be planned and built more quickly, and don't pollute nearly as much. And these plants will never receive a penny in stranded costs.
 
Imports. The PJM transparent competitive market sends price signals to generators in its territory - to encourage them to build new supply and to keep their plants in service and available, especially at peak demand - as well as to national electricity markets, especially in the Midwest and Virginia. Peak demand and relatively high peak prices in PJM enabled PJM to benefit from surplus supplies in adjacent regions and import significant amounts of electricity - often over 3,000 MW of net imports - when it was needed most. 

PJM Operations. Properly managing the electric grid isn't an easy task on a typical day, but during a heat wave it's particularly challenging. In August, PJM showed exceptional restraint and skill in managing a potential crisis without overreacting, relying on the market and voluntary reductions while avoiding the more intrusive controls at their disposal. The 2 percent to 3 percent reduced voltage levels for a few hours were the only non-voluntary reductions, measures imperceptible to most consumers.
 
Demand Response. PJM called upon industrial customers to curtail usage through traditional interruptible service in which large customers receive a discounted rate in exchange for having service interrupted when supply is limited, and requested that all customers, especially large industrial customers, voluntarily limit consumption and turn on on-site generation. PJM also successfully utilized several new, market based curtailment programs, and estimates that approximately 2000 MW of peak load was avoided through incentive programs and implementation of its pilot demand-side response program. There was an increase of nearly 400 MW of Active Load Management (ALM), which accounted for a good portion of the demand response programs instituted by PJM. Unlike the previous year, ALM was not excluded from participating in the PJM demand response programs. Additionally, about 100MW of non-ALM resources have enrolled in PJM's emergency and economic programs. While this represents a humble start, the effects during the peak hours can still be significant. 

Prices. Peak demand produces peak prices in a competitive market, but PJM market prices remained well under control because new development, imports and plants in service provided adequate supply, and because PJM has a market rule limiting bids to $1,000 per MWh. Average peak hour prices (7 a.m. to 11 p.m.) at the PJM western hub were about $250 MWh. In many hours, prices remained less than $100 MWh, while during a few hours prices were constrained by the $1,000 rate cap. These peak prices are quite moderate compared to the extreme volatility that was seen in the Midwest in 1999, with prices rising to several thousand dollars per MWh, or the recent price spikes in California. 

Indeed, one-year forward contract prices within PJM have collapsed since June, and the August heat wave hasn't reversed the sharp declines. An all-hours 2002 PJM contract now can be had for about $29.00 per MWh. June, July, and August 2002 contracts have fallen 50 percent from summer 2001 prices.

These forward prices are now reflecting the PJM spot market prices that fell in 2000 compared to 1999, and have hovered around $30.00 per MWh for the last 24 months. Both the PJM spot price and the forward contract price are up to 50 percent less than what most Pennsylvania customers paid their monopolies for generation in 1996. If they were paying only competitive prices, instead of competitive prices plus stranded costs - primarily for nuclear plants - every Pennsylvania customer would have a huge rate cut.

And the award goes to.
Congratulations to PJM and its staff for operating the PJM market reliably and competitively in the most difficult, challenging circumstances it has faced so far. Their service to the public is unfortunately not widely recognized and is taken for granted. Thanks as well to the plant operators who have never operated their plants better and to those fortunate consumers who had the ability to participate in demand response programs and reduced their usage for compensation. 

Public safety, economic competitiveness, consumer savings, and environmental protection demand that all consumers, not a fortunate few, have the chance to save real money by reducing energy usage through demand response technologies. 
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E-cubed is available for reprint in newspapers and other publications. Authors are available for print or broadcast.

PennFuture (www.pennfuture.org), with offices in Harrisburg, Philadelphia and Pittsburgh, is a statewide public interest membership organization, which advances policies to protect and improve the state's environment and economy. PennFuture's activities include litigating cases before regulatory bodies and in local, state and federal courts, advocating and advancing legislative action on a state and federal level, public education and assisting citizens in public advocacy.

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