Energy Legal Blog

Federal-State Cooperation Will Promote Demand Response in Power Markets

FERC has embarked on dialogue with state regulators about demand response — the designation assigned a variety of potentially promising measures consumers (as opposed to the suppliers) can take in power markets to reduce demand and prices.  The federal-state dialogue on demand response policies is auspicious because development of effective demand response that is capable of materially reducing prices will require coordination of federal regulation of wholes and state regulation of retail power markets. 

In response to directives in the Energy Policy Act of 2005, FERC prepared a report assessing demand response and advanced metering.  FERC’s August 2006 report concluded that demand response was promising and the subject of widespread interest, but yet illusory due to disconnects between wholesale and retail pricing (which fails to pass through wholesale price signals to retail consumers), economic disincentives for utilities to offer retail demand response, and other regulatory and industry barriers.  FERC also found that the use of advanced metering — meters that show consumers the present cost to generate and deliver power — varies greatly between regions and averages only 6% of electric meters nationwide. 

Discussion about demand response often lack focus.  In one sense it is any type of energy conservation, for instance turning off the lights in an empty room.  More complex versions of demand response include the incentive programs run by several regional transmission organizations and independent system operators.  These provide payments to users who reduce their power consumption under certain circumstances, in particular when demand is at its peak.  As a result, the RTO/ISO may be able to avoid dispatch of high-cost (inefficient) generators, which leads to a lower clearing price for the market and savings for other consumers.  This form of demand response does not necessarily conserve energy, as the participants in the demand response program may simply shift their energy consumption to other (non-peak) hours.  FERC’s report relies on a definition that encompasses both time-based use of electricity and incentive payments for reducing demand at times of high wholesale market prices or when demand is threatening system reliability. 

More ambitious discussions about demand response tout it as a potential substitution for power, capacity, transmission, and even ancillary services such as operating reserve.  In these contexts, demand response is seen not just as a means for customers to save money, but to allow new industries to earn money through demand response programs and measures.  The extent to which demand response can play this larger role remains to be seen and will turn in large measure on how effectively FERC and state regulators coordinate to induce suppliers to forego sales and, more importantly, to induce consumers to forego consumption in order to promote the common goods of lower prices and/or system reliability.