Forward Capacity: New Revenue Source for Energy Efficiency Projects

Energy efficiency projects are well-known for their long-term cost savings and permanent energy load reduction. In the PJM Interconnection, they can also generate unexpected but substantial revenue streams when offered on PJM’s forward capacity market as a capacity resource. Proper measurement and verification, though, is the key. How does energy efficiency help regional transmission organizations stabilize the power grid?

When a facility reduces its energy use, the grid no longer has to dedicate as many resources to it and can instead reinvest them elsewhere. Think of the electric grid as an office parking lot, where the grid’s capacity for energy is the same as the parking lot’s capacity for cars. The lot only has so many spaces! If one office can reduce the number of commuters who use parking spaces, then there are more spaces available and the parking lot has a lower chance of reaching capacity. In the same way that a reduction in parking demand can be considered a source of newly available parking spaces, a reduction in power demand can be considered a source of newly available energy.

PJM Interconnection is the regional transmission organization for the mid-Atlantic region, which coordinates the movement of wholesale energy and secures power resources for future electricity demand. The balance between demand and supply of electricity is always critical due to potential generation shortages and grid overloads. In order to assure the stability of the power grid, PJM runs an annual forward capacity auction.

A forward capacity auction solicits bids to meet capacity resource commitments to an amount that PJM estimates as future peak demand (four years ahead for the initial auction). PJM then provides revenues to the capacity providers, such as energy efficiency projects, that can fulfill their expected commitments. The revenues are called “capacity payments” and are competitively determined by the forward capacity market.

Eligible energy efficiency projects, such as lighting retrofits, HVAC upgrades, variable frequency drives, LEED buildings, and many other common energy efficiency improvements can be rewarded for their reduction in energy use through the PJM Interconnection forward capacity market. After a project is completed, the demand reduction must be measured and verified by an authorized provider, such as CPower Energy Management. Accurate identification and analysis of the change in electricity demand that your project generates serves to authenticate its value in the PJM market. Once a project’s eligibility has qualified, a Conservation/Curtailment Service Provider can offer it on the forward capacity auction.

For larger projects, this means there could be significant revenue just waiting to be captured with very little effort. A customer with a project or projects that reduce energy demand by a megawatt could make up to $100,000 over four years through monetization. This “found revenue” can be rolled back into additional energy efficiency projects that produce even more financial value upon completion as well as the long term savings realized in the permanent reduction of energy use by efficiency upgrades.

If your facility is contemplating energy efficient upgrades, or has completed a project within the last four years, consider seeking capacity payments as an additional benefit from, or incentive for, your energy efficiency improvements. There is usually no monetary risk, and very little action required to learn if your project is eligible.

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