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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

into the reserve system.

As in all commercial banking terms, there would be a limit to the level of investment based upon the intrinsic value of the resource. If the commercial terms were fundamentally in line with any given level of investment, and the customer were deemed a prudent investment candidate, the bank would underwrite the appropriate portion of the investment.

The full extent of this business proposition is significant because demand response is an alternative to supply along a time domain continuum similar to the supply-side options. At one end of the time-vlaue continuum, investments could be made into energy efficiency as opposed to generation itself; third-party energy services companies have made a business of doing so with customers. Seasonal energy management alternatives could follow the same model, once again providing a value signal based upon displaced or avoided energy costs. In both cases, the customer and the free market agent have a clear and repeatable value proposition, since the savings do appear each and every year.

On the other hand, demand response valuation for day-ahead and day-of markets can, for years, have so little value that no commercial terms are viable. While the value in a year with significant price spikes can be impressive, the uncertain nature of that result is likely to discourage both the customer, and certainly the free-market counterparty, from continued involvement.

ISO/RTO organizations can offer capacity payments to encourage such activity, but that mechanism is not widespread. The recent FERC SMD suggests that the capacity payment model is less desirable than open-market structures. Therefore, the concept of a commercially underwritten resource bank may well prove to be a viable candidate solution.

A simplified conceptual diagram appears above.

The electricity market may one day be so robust that commercial banks in demand response will be as common as banks are today in monetary markets. However, to get this market going on stable footing, some level of exclusive aggregation seems necessary at the moment. Putting all of the resource into one regional bank for an area presents the best chance for aggregate value and liquidity. Once the strategy is proven to work, further granularity is likely to evolve.

The establishment of these banks and the associated audited valuation will permit customers and third-party entrepreneurs to confidently offer customers more options. These options will include the traditional third-party shared energy savings, performance contracts, and a host of other creative energy options we see today. The mechanisms would be similar to the way local and regional banks do business. However, unlike traditional bankers, this bank would understand the wholesale power market and its nuances. As a result, the division of the bank that offered structured products could design commercial interfaces to the energy retailers, generators, ISO/RTO organizations, or other entities the bank determined were rightful market counterparties.

The bank also would be a natural neutral third party to market participants to develop the required resources and to act as the public price transparency agent and arbiter of fair terms. ISO/RTOs would no longer have to worry about the acquisition of