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...
Two Hands Clapping
Has demand response hit an evolutionary dead end?
pool public resources across society at large for the greater good. Under this theory, DR acts not as a stepping stone on the way to the smart grid, but as an end in itself, as a sort of utility service in its own right.
Maybe it’s the tenor of the times. Perhaps the economy and the severity of the “great recession” have colored FERC’s thinking. The fear is that FERC might be taking a step backward.
Confronting the Enemy
The economist and blogger extraordinaire, Lynne Kiesling, famously describes today’s electric power industry as “one hand clapping.”
Kiesling, who wasn’t first to use this metaphor,* sees the solution in terms of individual and digital entitlement:
“The technology is like one hand clapping, which is why regulatory reform to allow dynamic pricing, and ultimately retail competition, is necessary for creating the potential value from digital energy technology.” ( See knowledgeproblem.com, May 28, 2009, Want better electricity information? Do it yourself! )
FERC, while ostensibly touting the smart grid like Kiesling does, still continues to promote traditional, top-down, administrative DR programs as a key to wholesale power competition and open access. And therein lies the conflict.
In 2008 for example, in its landmark Order 719, setting out mandatory improvements for grid system operators with regional power markets, FERC took a strong stance in favor of traditional DR (a promise not to consume) as a key market enabler. For example, it instructed ISOs and RTOs to remove barriers that might make it difficult for the demand side of the market to bid and offer DR as virtual power supply to provide ancillary services. ( Order 719, Docket RM07-19, Oct. 17, 2008, 125 FERC ¶61,071 .)
More recently, FERC released for comment its draft “National Action Plan on Demand Response,” an unfortunate chore mandated by section 529 of the Energy Independence and Security Act of 2007. The action plan must help states maximize deployment of DR, help design a national PR program for customer education, and help provide model contracts and regulatory provisions for utilities, regulators, and DR providers. ( FERC Docket AD09-10, Mar. 11, 2010 .)
But is that where the future lies? It’s rarely a good sign when an idea needs its own “action plan” to get off the ground.
To its credit, small investments in traditional DR sometimes can produce huge dollar savings. One example was given in the December column, when PJM in August 2006 reportedly created more than $650 million in market-wide energy savings (from lower overall prices), simply by paying $5 million to wholesale customers to induce them to curtail their purchases.
Yet the traditional DR plan comes with a full set of baggage. There’s the baseline problem, the free-rider problem, and the inescapable fact that customers don’t like being told what to do. If the DR resource isn’t dispatchable ( i.e., controllable) by operators, then elaborate rules are required for measurement and verification. And customer loads generally still cannot see real-time dynamic prices, nor are ratepayer actions integrated with price-setting algorithms. Consumer sovereignty isn’t fully served. The grid