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.
peak needs. Generally, this requires a loss-of-load-probability or loss-of-load-expectation analysis.
Dispatchable DR can operate during transmission or distribution contingencies to reduce peak loads on equipment and increase reliability. In these settings, DR preserves reliability and lowers equipment replacement and maintenance costs. At specific grid locations, DR can reduce the need for reactive power and reliability-must-run plants, both related to shortages in T&D or local generation capacity. Accordingly, long-term dispatchable DR can avoid the need for new transmission and at the same time meet RA and OR requirements.
In a recent California settlement on cost-effectiveness, major benefits are attributed to DR that avoids the cost of transmission and distribution. DR benefits are particularly notable when they reduce T&D capacity requirements in load-growth areas. Avoided T&D benefits are attributable to DR resources that meet “right place” and “right certainty” criteria. These criteria are used to ensure DR is targeted to avoid specific T&D costs, namely: 1) in load growth areas where construction of new electricity infrastructure is required but for DR; 2) where specific DR resource increase power-delivery capacity; 3) where DR can provide certainty of long-term load reduction and little risk of after-the-fact retrofit/replacement; and 4) where DR is relied on to reduce local T&D equipment loads.
The track record for dispatchable DR shows that it produces a significant energy-efficiency effect. DR applied to residential air-conditioning might cause building temperatures to increase slightly, but the reduced on-peak energy use usually is greater than the increased shoulder-peak energy use (during the snap-back period). This energy efficiency effect generally results in less NOx, SOx, and greenhouse gases (GHG).
DR dispatched to meet reliability needs results in reduced capacity and energy costs and might yield congestion benefits. Areas with high local electricity costs can benefit substantially from DR, particularly if wholesale price caps are relaxed and prices reflect load-pocket and regional constraints without significant averaging. Hence, DR can be an excellent hedge against high local capacity, energy, and congestion costs.
LSEs in most ISOs/RTOs rely on out-of-market (OOM) power–that is, power imported from outside the market—during emergencies. As markets increasingly apply scarcity pricing to reflect super-peak market energy needs ( e.g., in ERCOT and CAISO), dispatchable DR can be delivered in OOM and scarcity pricing markets to provide additional benefits.
ISOs and RTOs have aimed to dispatch all DR before requests for OOM or scarcity pricing occur. But this stops DR from participating in these markets on comparable terms with generators. This suggests that revising ISO/RTO policies would enable DR providers to participate directly in OOM and scarcity-pricing transactions.
DR’s use is limited in most jurisdictions to an option contract to provide electrical capacity under emergency conditions. The full option value of DR, however, does not reflect its value as a hedge, particularly to reduce capital costs, fuel risk, price risk, counter-party risk, and to ensure sufficient fast ramping capacity given the increasing use of renewable resources.
DR has additional benefits because it is rolled out incrementally and can be used flexibly on a locational basis. Ideally, dispatchable DR