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Demand-Side Dreams

FERC would relax price caps—sending rates skyward—to encourage customers to curtail loads.

Fortnightly Magazine - November 2007

proposed tariff would feature a minimum price of $3,500/MWh, which, according to MISO, reflects its best estimate of VOLL, or Value of Lost Load, in the event of an involuntary curtailment to customers. Through a combined “co-optimization” of markets for reserves and energy, this $3,500 clearing price in the reserves market would carry over to the energy market. The result could be a day-ahead energy price in MISO of $3,500/MWh, consistent with the region’s averred plans to establish an “energy-only” market. That means MISO markets would operate without such capacity incentives as New York’s ICAP market, New England’s Forward Capacity Market (FCM), or PJM’s Reliability Pricing Model (RPM)—all designed to solve the so-called missing money problem. Generators in MISO would collect their full compensation from energy prices, missing money and all. (See FERC Docket No. ER07-1372, filed Sept. 14, 2007.)

The MISO plan remains very complex, defying easy explanation in this space. Suffice to say it mirrors many ideas summarized last spring by Harvard Professor William Hogan, in a paper he prepared for FERC’s technical conference on demand response (See Hogan, William W., “Acting in Time, Regulating Wholesale Electricity Markets,” FERC Docket AD07-7, May 8, 2007). Later, Hogan filed his own comments to FERC’s ANOPR, recommending a MISO-style demand curve.

Hogan argues, essentially, that RTO/ISO markets fall short by failing to reflect in their algorithms many of the informal and unofficial, seat-of-the-pants, stop-gap steps grid operators take during shortages before ordering involuntary curtailments.

“These operating practices are in general a good thing,” writes Hogan in his comments.

“What is not a good thing is that these many operating practices have not been integrated with the pricing provisions in the organized markets.”

Approval of MISO’s scheme is not assured, but FERC OK’d the basic outlines of the MISO plan, including the $3,500 scarcity price, in a “guidance order” on an earlier version of the MISO plan. (See Docket No. ER07-550, June 22, 2007, 119 FERC ¶61,311.)

Yet MISO’s plan wins a Bronx cheer from TAPS, the Transmission Access Policy Study Group. Writing for TAPS, lawyers Robert McDiarmid and Cynthia Bogorad, of Spiegel and McDiarmid in Washington, D.C., say the MISO plan is inconsistent with consensus-building decision-making because FERC failed to win approval from regional stakeholders.

“One can readily imagine,” they write, “the cries directed to Capitol Hill that the commission is proposing ‘son of SMD.’”

Infrastructure Requirements

The U.S. Department of Energy has defined “demand response” as:

“Changes in electric usage by end-use customers from their normal consumption patterns in response to [a] changes in the price of electricity over time, or [b] incentive payments designed to induce lower electricity use at times of high wholesale market prices, or when system reliability is jeopardized.”

The FERC staff endorsed the DOE’s demand-response definition recently in a monumental study offering a wealth of information about opportunities and developments in DR, including results of programs offered both by load-serving entities (LSE) and by RTOs and ISOs (See FERC Staff Report, “Assessment of Demand Response & Advanced Metering,” September 2007).

The FERC staff report also highlights progress