Price-Responsive demand, EPA regulations, and merger policy will be on the agenda for the coming year as the Federal Energy Regulatory Commission works its way through the list of key cases that...
Biling, Blackouts, and the Obligation to Serve
Complex billing is one way to minimize the size and frequency of blackouts.
The search continues for the smoking gun responsible for the Northeast blackout last August. Absent a clearly defined single cause, analysts turn to the usual suspects: Is the grid large enough? Does it require additional investment? Given that the grid was never designed to handle a competitive industry, is it reasonable to require that it now do so?
At the core of these issues is the obligation to serve. The grid is sized correctly when the industry can meet that obligation at the lowest reasonable cost.
Defining that obligation, then, is key to blackout prevention. But the electric industry and its policy-makers-and the nation as a whole-have yet to reach consensus. Some seek to maintain the . Others believe the obligation should be expanded to include emerging customer needs and niches. Some define the obligation as local. Others have a regional or national view.
A consensus definition of the obligation to serve may be long in coming. In the meantime, the public rightly demands that we focus on near-term blackout prevention. Doing so means acting in the face of uncertainty. But failure to act is not an option.
The Value of Demand Response
Given these circumstances, it makes sense to concentrate first on maximizing the efficiency of the existing grid. Demand response programs clearly fall into that category. While they require complex billing software, that investment is far smaller than such grid-expansion remedies as more towers, more line, and more rights of way.
Demand response is an updated, flexible, and market-driven replacement for the interruptible rates that have long given grid managers the option to remove large customers from the grid on short notice. Utilities that use the demand-response approach instead ask facilities to reduce load during a specific period and reward those that do with financial incentives geared to the length and size of the reduction. While not yet widespread, these programs have proven so valuable in solving some grid constraints that the Federal Energy Regulatory Commission (FERC) has become a strong advocate. 1
Demand response comes in two varieties.
- Reward programs. Utilities ask commercial and industrial customers if they might consider demand reductions at an indefinite time in the future. When a problem arises, utilities request a reduction in use from those signed up to participate. They reward those who implement reductions with a financial incentive geared to the problem's size and duration.
- Price-based programs. Customers determine in advance a set price at which they will reduce demand. This gives grid managers a clearer picture of likely demand as wholesale prices vary. 2
Within these basic types are dozens of variations. Utilities may place limits or guarantees on length of cutbacks. Customers may have different lengths of time in which to signal their participation. Some programs penalize customers who sign up but fail to participate over a defined period. Some utilities combine the two types of programs: Customers specify a price at which they will consider a utility request to reduce demand.
In the Nick of Time