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Demand Response & Reliability: Follow the Fed Model

Regional demand resource banks, based on the Federal Reserve Bank system, would make for greater use of customer demand response mechanisms while ensuring long-term resource adequacy.
Fortnightly Magazine - May 1 2003

a natural model for any resource that has extreme variation in time-based need. Because the reserves must be reasonably close to where they are needed, we suggest a set of regional resource banks, following a similar model to the way wholesale markets are now being organized (e.g., RTOs).

These resource banks would be places where customers could deposit their existing demand response capabilities (in exchange for periodic interest payments, plus performance-based use transaction fees). These could also be places where customers (or their agents who would construct resources at their locations) could borrow money to invest in additional demand response resources, similar to the way customers finance their homes and business investments. The bank would arrange for an independent audit of these resources (much like the combination of building inspectors and property appraisers) and would retain the rights to use these resources for regional electricity markets, consistent with a set of approved operational guidelines.

Once the resources were proven deposits, their capabilities could be made available to all market counterparties: ISO/RTO organizations, retailers, generators, and even other customers (perhaps facing undesirable real-time prices). These counterparties could all purchase capabilities from these banks and sign aggregate call options against these resources with assurance that the capabilities would perform and were financially firm. The bank also would assure all market counterparties that the demand response resources were not being sold beyond their proven capabilities-in other words, no gaming permitted.

Buyers from this bank would naturally have quite varied interests. Some might want only the reliability-enhancement, near-real-time resource benefits. Others might want capa- city and energy cost avoidance benefits, and still others might want to shift energy patterns from one part of the day to another.

Some of these concepts are complementary, some not. There will be times when a customer's demand trading capabilities can be bought by multiple parties in a month, or even on any one day. Some customers will have precedent relationships due to bilateral agreements for their resource, and times when their resource is open to see a bid from anyone in the market. And some customers will want to exercise their options themselves, while some would naturally wish to designate others as their agents.

The bank concept permits all of this commercial transaction flexibility while assuring all counterparties that the customer's demand trades are fungible, reliable, and exercised with appropriate compensation to all those involved in the transactions. The source of funds into the bank could come from energy counterparties who want to invest (and thereby share in the reward derived by the bank), as well as from pure financial interests. Customers would be free to shop as often as they want, or stay with the incumbent energy provider, while keeping their resource on deposit for all parties.

The acquisition of the customer capabilities would come from customers who want to place their resources on deposit, as well as from third party intermediaries (similar in concept to curtailment service providers). Technology-enabling partners (controls, distributed generation, etc.) could also look to the bank for commercial loans to invest the resulting capabilities