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Energy Efficiency in the Forward Capacity Market: Evaluating the Business Case for Building Energy Efficiency as a Resource for the Electric Grid

Two regional electricity grid operators – Independent System Operator-New England (ISO-NE) and PJM Interconnection Regional Transmission Organization (PJM) – use Forward Capacity Markets (FCMs) to induce the construction and maintenance of resources needed to satisfy future electricity demand. Increasingly, the meaning of ‘capacity’ has expanded from traditional wires-and-generators solutions to include greater levels of customer-sited resources, including energy efficiency. As with conventional merchant generators, the success of the FCM rests on whether it can send price signals to end-users powerful enough to mobilize investments in energy efficiency activities that otherwise would not take place. This article uses a cash flow analysis to assess the revenue opportunities that these markets offer to owners and operators of commercial buildings. The analysis investigates whether the costs and revenues associated with supplying energy efficiency capacity in the newest EE FCM, operated by PJM, are likely to support a compelling value proposition for large commercial buildings. The results show that the overall revenues an owner or operator might expect increase project returns only slightly. It finds that the market players best positioned to compete in it those able aggregate large portfolios of efficiency measures which can be bid into the market in a manner that diminishes their relative transaction costs.