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80-Year Old Law Determines Whether Demand Response Can Bid in to Wholesale Electricity Markets

Ari Peskoe's picture
, Harvard Law School Environmental Policy Initiative
  • Member since 2018
  • 16 items added with 5,374 views
  • Oct 5, 2015
Bob Meinetz's picture
Bob Meinetz on Oct 5, 2015

Ari, what evidence do you have that DR resources lower prices for consumers, or make the grid more reliable?

This seems to be an oft-repeated theme with no basis in fact.

Paul O's picture
Paul O on Oct 5, 2015

There is one reason and one reason alone that folks are advocating DR  and that is to find  a way to Shoehorn odd-ball RE into the grid.

To be clear, Not all RE is odd-ball. grid opperators could be required to reduce Carbon footprint, and they would then have to find a way to do so, that doesn’t destailize the grid or entertain the DER fancies and fantasies of odd-ball environmentalists.

Ari Peskoe's picture
Ari Peskoe on Oct 5, 2015

As implemented by FERC’s Order 745, DR lowers wholesale market prices.  DR is paid LMP only when it passes a “net benefits” test that ensures the reduction in market prices due to DR is larger than the amount paid to DR providers.  

FERC’s annual report on DR calculates that DR reduced peak demand in wholesale markets by about 30 GW.  Wouldn’t this necessarily reduce prices and enhance reliability?

The report also has some discussion of the role that DR played during the polar vortex in early 2014.


Bob Meinetz's picture
Bob Meinetz on Oct 6, 2015

Ari, FERC 745 hasn’t been implemented so it doesn’t lower anything yet.

Perhaps the intention is to lower wholesale prices. If so, it’s a simplistic approach which instead shifts the burden of electricity generation from producers to consumers. Although that’s portrayed by trust-funded activists with solar arrays as empowerment, reducing peak demand does nothing to reduce consumption – it merely shifts it to the least opportune times of the day for the people who can least afford it. It’s unlikely the single mother working two jobs who has to do her laundry at 1 AM, or keep her A/C turned off during the worst dog days of summer, feels empowered.

Customers who pay LMP are already motivated to use electricity more efficiently, so the answer is to replace flat-rate pricing with LMP – not create artificial rewards based on some arbitrary “imputed” level of consumption. William W. Hogan of Harvard University’s John F. Kennedy School of Government:

“[FERC 745] is based on the premise that it is necessary to pay demand response providers the LMP for all demand reductions in order to place generation and demand response on a level playing field, but this premise is mistaken…Because the demand response programs that the proposed rule would mandate would make payments to some demand response providers when such payments are unnecessary to induce efficient behavior, and would make payments to other demand response providers that exceed what is needed to induce efficient behavior, they would not “move prices closer to the levels that would result if all demand could respond to the marginal cost of energy,” as the Commission intends. Instead, the proposed rule would encourage inefficiently large amounts of imputed demand response. The cost of payments made to participants in these demand response programs would be borne by consumers who are unable to participate in these programs. Consequently, these consumers would be asked to pay not only the cost of purchasing electricity for their own use, but also payments made to other consumers.”

Ari Peskoe's picture
Ari Peskoe on Oct 6, 2015

Bob – My understanding is that Order 745 has been implemented. For instance, PJM has a report entitled “2012 Economic DR Performance Report: Analysis of Economic DR Participation in the PJM Wholesale Energy Market After the Implementation of Order 745.”

I agree with you that DR may not lower overall consumption, but you asked whether DR lowers prices.   Reducing peak demand lowers prices. 

Replacing flat-rate pricing with LMP could have harmful effects on the “single mother with two jobs” in your hypothetical.  She can’t moderate her consumption when there are price spikes, and so she ends up paying more during times of peak demand.  

I don’t think Hogan’s quote proves that DR raises prices.  I thought the “inefficiency” that Hogan is concerned about is about overall social welfare, which includes consumer surplus and producer surplus.  Because FERC’s net benefits test focuses on consumer surplus, it’s not clear how producers (i.e., generators) fair and it’s possible that total welfare is lower.  But, wholesale market prices are still lower than they otherwise would be.  How else could DR clear the market if it were not less expensive than generation?

Bob Meinetz's picture
Bob Meinetz on Oct 6, 2015

Ari, reducing peak demand lowers monetary cost at the expense of customer convenience. It doesn’t do our hypothetical single mother any good if she can use the A/C at night or do her family’s clothes at 1:00 AM and save a few cents/kWh.

If FERC really wanted to do well by customers they’d put strict price controls on the wholesale market to limit marginal price spikes and build up price floors. But of course, that’s anathema to renewables and net-metering advocacy (especially solar), which takes advantage of daytime price spikes to cover 80% downtime. The goal of DR, a thoroughly modern stepchild of renewable energy, is to make renewables’ intermittency consumers’ fault – “it’s not that we don’t have electricity to sell at the right time, it’s that you want to use electricity at the wrong time.”

The 80-year-old law is more relevant than ever.

Ari Peskoe's picture
Thank Ari for the Post!
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