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Negawatt Pricing

Economists take sides in the battle for DR’s soul.

Fortnightly Magazine - December 2009

Back when the U.S. economy and power consumption still were bubbling, PJM reported in August 2006 that customer curtailments during a week-long August heat wave had generated more than $650 million in market-wide energy savings—all at a mere $5 million cost, as measured in direct payments made to the demand response (DR) providers, set according to wholesale power prices prevailing at the time.

Where else but the lottery can you get an instant payoff of 130-1?

Yet, it wasn’t long after that gain that FERC allowed PJM’s economic load response program (ELRP) to expire, explaining that paying the full spot market price to customers for voluntary curtailments undertaken for their own economic benefit amounted to an unwarranted subsidy, thereby denying a complaint by the PJM Industrial Customer Coalition (ICC) that had sought to extend the life of the program. ( See, Order Denying Complaint, Docket EL08-12, Dec. 31, 2007, 121 FERC ¶61,315 .)

Ever since, a debate has raged in policy circles about how much compensation grid operators ought to pay to customers who volunteer to curtail demand strictly on the basis of price under so-called “economic” DR programs—as distinguished from DR programs designed to preserve reliability, or to ease temporary supply shortages.

This debate has become fiercely rhetorical, pitting populists versus economists, arguing over competing definitions of “consumer welfare,” “market efficiency,” and “value of trade,” and whether electric customers are unfairly “double-dipping” when they receive a direct payment for curtailing demand that’s keyed to the market price of power, because at the same time they avoid a charge on their retail power bill for the electricity they don’t consume.

The debate was given prominence by none other than FERC Chairman Jon Wellinghoff, who dissented from the 2007 ICC case that let PJM’s economic DR program die. Aided by Commissioner Suedeen Kelly, who joined the dissent, Wellinghoff chided his colleagues on the majority for “mischaracterizing” the market-based payments to DR providers as subsidies, and for “squandering” the chance to develop a factual record to document the exact effects of DR curtailments on regional power prices and the scope of consumer benefits they might provide.

Ñow Wellinghoff might get a second bite at the apple—assuming, of course, that he hasn’t changed his view. That’s because PJM now has proposed to restart its supposedly discredited economic DR program, complete with the same sort of “incentive” (or “subsidy,” if you will) that Wellinghoff’s colleagues struck down in 2007.

To be precise, PJM now has proposed, during the year’s highest-priced 9 percent of hours, to pay the full spot market price without any setoff ( i.e., the full locational market price, or LMP) as a reward for voluntary curtailments by so-called fixed-rate customers—that is, the typical retail ratepayer, whose bill doesn’t vary directly with the ups and downs of LMPs. For other retail customers—those high-demand industrial and commercial (C&I) customers whose retail rates track dynamic price changes in the day-ahead or real-time LMP—PJM

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