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...
Optimizing Demand Response
A comprehensive DR business case quantifies a full range of concurrent benefits.
would be traded as a standard financial product. To capture option value, a DR trader must be capable of maximizing its value, which requires sophisticated management.
Most DR resources have characteristics similar to a limited hydropower resource, which uses a finite quantity of water each season and thus might best serve peak capacity needs. Optimizing its use is a challenge. Likewise, most DR is constrained by the number of hours and the specific times when it is available. This suggests DR’s value depends on optimizing its use for several key purposes:
• Meeting planning reserve margin (15 to 17 percent) or resource adequacy needs;
• Reducing super-peak prices and obtaining congestion benefits, directly or through congestion revenue rights (CRR) contracts;
• Displacing non-spinning or spinning reserves;
• Avoiding T&D capital and operating costs on specific circuits;
• Reducing emissions of NOx, SOx and GHG;
• Serving scarcity pricing or market-purchases at super-peak periods; and
• Exploiting the option value of load reduction.
Many of these value streams can be captured during normal DR operations with proper triggers and without double-dipping. A dispatchable DR resource concurrently can provide local resource adequacy, non-spinning reserves, and T&D avoidance, and then be dispatched to provide energy and congestion benefits, reduce grid losses, and lower NOx, SOx and GHG emissions. Of course, ISO/RTO rules must be observed to preclude false trading and to ensure committed resources remain available when called.
Today, DR is used largely as an emergency interruptible resource of value only after dispatch of all supply-side resources. This practice has constrained the role DR can play. Before DR can achieve its full potential as a cost-effective resource, a number of other impediments must be overcome, in both wholesale and retail markets. Most notably, supply-side and DR resources need to be valued on an equivalent basis. For example, in most wholesale markets, DR is credited with resource adequacy, but not with operating reserve benefits. A comparable CT, however, is credited with both.
To make a fair business case for DR, it should be compared directly with generation, transmission, and distribution resources. High-value DR captures a set of concurrent benefits, particularly when its use is optimized. Beyond this, DR coupled with AMI uses digital control and communications to produce higher-value services. Thus, next steps are to define the combined business case for DR plus AMI and energy efficiency resources. These combined resources will capture even greater concurrent benefits, allowing utilities to make the most rational and economical use of America’s energy resources.
1. See for example, C. Danforth and E. Woychik, Standard Practice for Cost-Benefit Analysis of Conservation and Load Management Programs , Joint Report of the California Public Utilities Commission and the California Energy Commission, February 1983.
2. See, Brattle Group, Quantifying Demand Response Benefits in PJM , PJM Interconnection and MADRI, Jan. 29, 2007; and Faruqui A., “ Breaking Out of the Bubble: Using Demand Response to Mitigate Rate Shocks ,” Public Utilities Fortnightly , March 2007.
3. See, e.g., California Public Utilities Commission Decision 07-12-052 (20 December 2007) on