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Special Section On Metering: Needed in New England: Stronger Market Connections, Savvier Electricity Usage

The region’s retail and wholesale electricity markets should be linked via dynamic pricing.
Fortnightly Magazine - April 2006

costs) would be only about $12 million over the same five-year period. Like energy efficiency, the actions of a few customers can result in significant benefits for all customers. Given the impact that rising energy costs are having on the nation’s economy, the benefits from dynamic pricing no longer can be ignored.

Stronger Connection

To advance the concept of dynamic pricing, we need to create stronger links between wholesale and retail electricity markets, so that customers can respond to changes in wholesale prices in real time. The greatest barrier to achieving more price-responsive demand is the lack of a retail price signal for customers to respond.

The implementation of more dynamic retail pricing will require changes in state regulatory policy; investment in metering, communications, and software technology; and education of customers to enable them to respond appropriately. Although it may seem as though customers responding in real-time to wholesale price indicators is a hazy and distant vision, the advancements made to date with demand-response programs give us hope.

ISO New England has pioneered efforts to build infrastructure and markets for demand response at the wholesale level. We offer two types of demand-response programs that allow customers to be compensated for not using electricity during capacity shortages or high-price periods. Since these programs operate at the wholesale level, customers must be enrolled through a wholesale market participant or eligible demand-response provider (ISO New England does not have jurisdiction over the retail markets).

Under our reliability programs, customers respond to ISO New England requests to curtail based on system conditions, and receive both capacity and energy payments. Under our price programs, customers voluntarily can respond to real-time or day-ahead wholesale prices and receive energy payments based on the wholesale prices. The new day-ahead program gives customers the flexibility to specify the price at which they will interrupt and schedule their reduction a day in advance. ISO New England currently is working on a project to demonstrate demand response’s ability to provide reserves.

In the past three years, participation in our demand-response programs has grown six-fold, to more than 600 MW, and these resources have proven highly valuable. Research done by ISO New England and others has shown that even when a few customers reduce their consumption during times of high wholesale prices, this action can help lower costs for all customers. In 2005, these programs resulted in more than 13,000 MWh of decreased electricity use, helping us manage the system under extreme conditions and lowering both short-term and long-term wholesale electricity prices.

But ISO New England’s price-based demand-response programs, as with any centrally administered programs, have inherent design problems. For one, the financial incentives given to participating demand-response customers are collected from other market participants, resulting in out-of-market transfer payments. Because such out-of-market transfer payments are vulnerable to changes in public policy and market stakeholder sentiment, the long-term sustainability of such demand-response programs is questionable. To address this vulnerability, price-responsive demand should be directly integrated into the retail electricity market—that is, the savings in electricity costs produced by price-responsive behavior should be the incentive