The volume and magnitude of changes PJM is attempting to impose on demand response raise the question of whether the high-flying sector is still a growth business or one in retreat.

Comverge Inc. sees the industry as under an assault that threatens its growth. “The Commission should not allow PJM to use [shortcomings of the capacity auction] as an excuse to impose anticompetitive measures that will very likely arrest any growth in demand resource participation in its capacity market,” the company told the Federal Energy Regulatory Commission in a Dec. 3 filing.

PJM officials insist they are acting only to ensure reliability, fairness and operational flexibility. Generators echo PJM’s concerns, though their own rivalry with DR cannot be denied: With demand flat, DR market share gains come at generators’ expense.

Whatever the motivations, there’s no doubt that if PJM prevails in its plans, demand response will undergo a dizzying number of changes:

• The volume of limited DR clearing in the annual capacity auction could be reduced by as much as two-thirds.
• Many resources will be required to dispatch in 30 minutes, down from the current two-hour default.
• Curtailment Service Providers will be required to provide more detail to support planned resources (and planned resources could be banned altogether, if some generators get their way).
• Emergency energy prices would be cut by as much as 39%.

DR received a boost from Congress in the 2005 Energy Policy Act, which barred “unnecessary barriers” to DR participation in energy, capacity and ancillary service markets. The Federal Energy Regulatory Commission’s Order 745 allowed DR payment of full locational marginal prices beginning in April 2012.

But with its growth raising questions about market saturation, and with low gas prices pinching generator margins, DR has found itself increasingly on the defensive.

Both DR offers and cleared MWs declined in ISO New England and PJM’s capacity auctions this year. DR participation also has declined in NYISO.

Demand resources offered declined 27% (and cleared DR dropped 16%) in PJM’s 2013 base capacity auction versus 2012. The Market Monitor said the decline was the result of low prices, while Comverge blamed it on the “chilling effect” of PJM’s new rules requiring more documentation of planned resources.

Demand response’s participation in ISO New England’s forward capacity market declined this year for the first time ever, with cleared offers dropping 24% from 2012.

UBS Investment Research attributed the reduction to the imposition of ‘must offer’ rules similar to those for generators. Former EnerNOC executive Jim Bride also cites the must-offer rules, along with other changes approved by FERC in January (ER12-1627) — what he called “onerous” data requirements and the elimination of the capacity price floor in 2017.

“Many of the players from several years ago have left the market or substantially pulled back,” Bride, now president of Cambridge-based consulting firm Energy Tariff Experts LLC, wrote. “EnerNOC recently significantly reduced its position in the ISO-NE FCM as the market had become unprofitable for all but the largest customers or those with advanced automation.”

DR had shown steady growth in NYISO until recently. “However, changes in market rules to enhance estimates of providers’ ability to deliver demand response during peak conditions have led to a decline in program participation in recent years,” the ISO said in its annual report. “The increased use of demand response resources may also test the ability — and willingness — of some program participants to sustain their commitments.”

The ISO deployed DR on a record six days during the summer of 2012.

Growth Areas

To be sure, DR is not going away. “Regulators are hard pressed to look past this source of cheap demand reduction,” notes UBS.

And there are growth opportunities in other regions, including California, Texas and non-RTO markets. In September, ERCOT changed its rules to allow DR participation in its real-time market. EnerNOC, which has operations in Australia, Canada, the United Kingdom and New Zealand, says the international market will be three times the size of the U.S.

But in more mature markets, DR’s growth, if not over, surely has slowed.

In a report last month, UBS said the PJM changes approved and pending “could continue to pressure DR’s market share, as proposed reforms to both aspects of the market would ratchet up participation requirements.”

Bride sees similar challenges in New England. “I’m pretty sure that DR will thrive again in ISO-NE, but for the average commercial or industrial customer, DR will be on hiatus for a couple of years until these issues get worked out,” he said.

Long-term Outlook

UBS says more independent power producers and utilities could enter the DR industry, which could “limit further pressure on DR participation from a regulatory perspective.” NRG Energy acquired Energy Curtailment Specialists in August. Exelon’s Constellation unit owns a demand response business (formerly CPower).

Much will depend on FERC’s stance on the proposed changes. DR lost a strong supporter with the departure of FERC chairman Jon Wellinghoff and his replacement has not been named.

An early indication could come in the commission’s ruling, due by March 2, on PJM’s increased documentation requirements.

Market leader EnerNOC — influenced perhaps by the fact that it is publicly traded and doesn’t want to voice doubts that could hurt the stock — has taken a less alarmist tack than Comverge in response to the PJM proposals.

“New rules are happening all the time in these competitive wholesale markets. DR is under more and more scrutiny,” EnerNOC CEO Timothy Healy told the Credit Suisse analyst conference earlier this month. “Some days we have some good news on that front — Texas was exactly what we were looking for — then a couple weeks later: PJM.”

“This is a very cost effective resource. It’s a flexible resource,” he continued. “Public utility commissions love demand response. This too will fade and we’ll see that demand response continues its steady march in these markets.”