In a new report, the Regulatory Assistance Project (RAP) finds that energy efficiency resources can play a critical role in organized capacity markets – meeting power system resource requirements while also lowering clearing prices and total costs. Energy Efficiency Participation in Electricity Capacity Markets – The U.S. Experience summarizes the rules governing how efficiency resources have successfully participated in the ISO New England and PJM capacity markets, the impact of that participation, and lessons that can be applied in other jurisdictions that are designing capacity mechanisms. These lessons are increasingly relevant in Europe, where several nations are considering new capacity mechanisms as a form of resource adequacy insurance in response to changing national and regional generation mixes.

“Energy efficiency and other demand-side resources make significant contributions to meeting system resource needs,” said Richard Cowart, managing director at RAP and coauthor of the report. “For example, without demand resource participation, New England would have been nearly 800 MW short at the auction floor price during its auction to secure 2015 capacity. However, demand-side resources filled that gap and provided an additional 2,800 MW of capacity.”

The authors also find that energy efficiency and demand-side resources lower market clearing prices in regional capacity markets, producing large economic benefits to consumers. “In New England, that translates to consumer savings of $173 million to $345 million in 2015 alone,” added Mr. Cowart. This is in addition to other consumer savings, reliability improvements, and environmental benefits.

Allowing demand-side resources to participate in capacity markets also produces long-term policy benefits, such as assuring skeptical supply planners that efficiency resources are “real” and generating a more detailed understanding of the characteristics of energy savings. The authors believe this is particularly important because it sheds light on how various efficiency measures affect peak demand and what role they might play in addressing local transmission and distribution constraints.

The authors caution against relying on capacity markets alone to drive substantial investments in efficiency. Energy efficiency provides many benefits to the electricity system, but capacity markets allow investors to recover just a small portion of the value of their investments. Other policies, such as energy efficiency obligations, an energy efficiency feed-in-tariff, or a dedicated revenue stream are needed to get closer to an economically optimal level of investment in efficiency.

The report was prepared by Mr. Cowart and Energy Futures Group’s Chris Neme at the invitation of the Green Alliance and the UK Department of Energy and Climate Change (DECC).