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?
Last fall, Frank Wolak, chair of the California ISO Market Surveillance Committee, joined with co-authors James Bushnell (Iowa State) and Benjamin Hobbs (Johns Hopkins) in a widely cited paper questioning FERC’s emphasis on traditional DR. ( Bushnell, Hobbs & Wolak, “When it comes to demand response, is FERC its own worst enemy?” CSEM WP 191. Also published in Electricity Journal, Oct. 2009, Vol. 22, No. 8, pp. 9-18 .)
The Wolak paper, first released by the Center for the Study of Energy Markets, University of California Energy Institute at Berkeley, argues that FERC’s DR efforts were “likely to work against the ultimate goal of increasing the benefits that electricity consumers realize from formal wholesale electricity markets.”
The authors even suggest that traditional DR programs are so complex that customers (and one assumes this reference points to large-scale C&I loads) might be able to game DR programs and take advantage of FERC’s largesse:
“There is an important distinction,” the authors explain “to be made between traditional demand response programs and dynamic pricing.
“Traditional [DR] programs typically pay customers to reduce their consumption relative to an administratively set baseline level of consumption. Unfortunately, individual customers will always know more about their true baseline than the administrator of a DR program, and can likely profit from that knowledge.”
If it Costs Too Much, Don’t Buy It
The opening salvo was fired back in May of last year, when Sipe and CDRI challenged ISO New England’s ideas on how to comply with FERC Order 719, including the notion (see last September’s column) that an RTO need not strive to ensure just and reasonable rates. Sipe articulated his vision in his audacious 89-page white paper, “Defining the Product: Market Theory for an Essential Service and the Proper Role of Demand Response.” ( See Comments of CDRI, FERC Docket ER09-1051, filed May 24, 2009. )
That’s the white paper that begins with a retelling of Jonathan Swift’s 1729 satire suggesting that Irish farmers should eat their children as the most economically efficient means of staving off famine. The paper critiques the market-centric goal of maximizing the value of trade in electrons, along with the smart grid and its vision of consumer choice through real-time dynamic pricing, which Sipe simplifies as, “If it costs too much, don’t buy it.”
Seven months later, in the PJM tariff case, came a rebuttal to William Hogan’s theory that proper compensation for demand response requires an offset for the retail power price (LMP – G) in order to maximize overall societal welfare, which Hogan defined as the sum of producer and consumer surplus.
“The notion of ‘social welfare,’ as used by Professor Hogan, is not a real world guidepost for action,” wrote Sipe, explaining that market proponents engage in circular reasoning by assuming at the start that LMPs are perfect reflections of social utility. In this way, Sipe explained, market proponents engage in a “quest to accidently stumble upon social welfare by assuming you have already found it.” ( See, Comments of AFPA. FERC Docket EL09-68, filed Dec. 14, 2009 .