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.
time-variable pricing and empowered with enabling technology, such as smart thermostats, average consumers respond to signals in tangible and significant ways.
A major study in California, for example, reported that on average, residential consumers on CPP-type tariffs reduced peak-period energy consumption by 13 to 16 percent. The percentage load reduction increased to 27 percent for those with “smart” thermostats. 12 Another study of commercial and industrial consumers on RTP tariffs around the country found average peak-load reductions of 12 to 33 percent. 13 Consumers, in short, respond to price signals in highly predictable ways—whether it is electricity, gasoline, or use of congested roads. As economic theory would predict, there is no such thing as inelastic demand (see sidebar, “There Is No Such Thing as Inelastic Demand,” p. 54).
With such overwhelming theoretical and empirical evidence, why aren’t we seeing more DR when it is needed the most, during emergency periods? The answer is not as easy as one might like, but boils down to two major obstacles:
• Lack of enabling technology to administer time variable pricing; and equally important
• Lack of standardized transaction management practices and business protocols, which are critical if DR is to become more widespread among large numbers of customers.
The first obstacle is widely recognized and understood. 14 Time-variable pricing and DR cannot be administered without sophisticated metering. Moreover, for such schemes to work, participating consumers must be able to receive and respond to signals in real time. FERC’s recent survey puts the current penetration of smart meters below 6 percent nationwide 15 —the glass is clearly not half full, it is 94 percent empty. Moreover, only 5 percent of U.S. consumers currently are on some form of time-based tariffs. FERC, which surveyed 3,366 entities and analyzed responses from 1,939, reported that only about 200 entities out of roughly 3,000 currently offer such programs in the United States. Clearly, there is plenty of room for improvement.
The second obstacle is less understood and, in our view, equally daunting. In simple terms, cost-effective implementation of DR requires:
• Fast, reliable, automated and secure communications between multiple players in the DR domain in real-time; and
• Standardized protocols for customer enrollment, DR event notification, and customer participation followed by timely and accurate business processes for invoicing and settlement.
Unless these two issues are successfully addressed, wide-scale implementation of DR will remain limited, slow, and problematic, especially if there are large numbers of small consumers.
Currently, system operators have limited capabilities to implement DR for a number of reasons. Most important, the protocols for enrolling customers and communicating with them when an emergency occurs is time-consuming, error-prone, and mostly manual. Frequent delays to get a signal out, receive confirmation, and obtain tangible results are common. This means that, in many cases, the operator may resort to involuntary load shedding simply because of inherent delays or uncertainties in implementing DR programs.
Today, when an emergency occurs, the system operator must send an alert to multiple utilities informing them of an impending crisis and requesting a response. This signal typically goes