FERC’s new rule on compensation for demand resources tips the market balance toward negawatts. Arguably the commission’s economic analysis is flawed, and the rule represents a covert policy...
Demand Response: The Missing Link
Everyone is in favor of more demand response, but little gets delivered when system operators need it the most.
discretionary load that may be available. The consequence is that more expensive peaking units are brought on line to serve spiky loads—or in extreme cases—rolling blackouts are invoked to prevent the system from collapsing altogether. Both options are far more expensive than selective, targeted and voluntary DR.
Returning to the airline analogy, the former would entail keeping extra empty planes ( i.e., peaking units) and crew on hand to fly a few overbooked passengers to their destination—even if many are willing to take a voucher and wait for the empty seats on the next flight, which is an expensive proposition. The latter would be tantamount to canceling the flight—denying service to a large number of passengers—just because a few could not be accommodated, a financially suicidal idea. No airline would dream of doing either of these, nor should any cost-conscious utility or system operator.
How Much DR Is There When You Really Need It?
Study after study has confirmed the presence and the cost-effectiveness of demand response (DR) as a resource option when capacity is tight. A recent report by the Federal Energy Regulatory Commission (FERC), for example, provides some evidence. 5 One study claims annual savings of $15 billion per year in the United States for shifting 5 to 8 percent of consumption from peak to off-peak hours and for depressing peak demand by 4 to 7 percent. 6 Another study looking at the New England ISO’s service area claims annual savings of $580 million per year for reducing peak demand by as little as 5 percent. 7
But why bother with hypothetical studies when there is real-world empirical evidence? During the August 2006 heat wave, PJM Interconnection reported cost savings totaling $650 million attributed to DR programs. 8 On Aug. 2, 2006, alone, when PJM set a new peak-load record of 144,796 MW, it reported DR savings of $230 million—comparing the incentives paid to DR program participants versus the cost for acquiring peaking generation as determined by the market on that day. 9 Similar testimonials are available from other ISOs and RTOs around the country.
Likewise, a growing body of literature has documented the potential scale of DR as a resource (see Figure 1) . A U.S. Department of Energy study estimated current DR capacity around 9,000 MW, roughly 1.3 percent of the U.S. peak load, while putting the full potential around 20,500 MW or 3 percent of the peak load. 10 A more recent study by the Federal Energy Regulatory Commission (FERC) concluded: “Nationally, the total potential DR resource contribution from existing programs is estimated to be about 37,500 MW.” 11 The same study puts “the potential immediate reduction in peak electric demand that could be achieved from existing DR resources is between 3 and 7 percent of peak electric demand in most regions,” but points out that the low penetration of enabling technologies limits what can be achieved in the immediate future.
Finally, empirical evidence from research conducted in a variety of settings involving different schemes and different segments of population has demonstrated that when confronted with