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Reconsidering Resource Adequacy, Part 2

Capacity planning for the smart grid.

Fortnightly Magazine - May 2010

response and price-responsive demand, as documented in a recent FERC staff report, 2 leading to future peak loads becoming much more manageable and price-responsive. While large industrial and commercial consumers have been compensated for standing ready to provide peak load reductions for a long time, smaller commercial and residential consumers also will be offered advanced metering and pricing programs that provide incentives to reduce or delay consumption when electricity is relatively scarce or expensive. Residential consumers will be able to control how their air conditioners, refrigerators, washers, dryers and other appliances respond to such signals, reflecting their individual preferences for comfort, convenience and savings. Longer term, in addition to price-driven reductions in consumption, energy storage devices, on-site generation, and electric vehicles increasingly will sell power back to the grid in peak hours, reducing capacity needs.

The strong push for advanced meters, demand response and price-responsive demand reflects the expectation that substantial benefits will result from these investments. The primary benefit of demand response and price-responsive demand is the reduction in peak load and peak capacity requirements; fewer generating plants and transmission lines will be needed.

Realizing the enormous potential for price-responsive electricity demand will require changes to wholesale and retail pricing approaches that encourage and reward reductions in consumption at peak times. Because reducing peak loads can obviate the need to build additional power plants, large incentives to reduce demand or sell back power at such times are economically justified. Wholesale “scarcity pricing” regimes are being implemented to ensure that prices for energy and short-term reserves rise to high levels if there is insufficient price-induced supply and demand response to maintain reserves close to target levels. More and more customers will be offered real-time pricing, critical peak pricing or critical peak rebate programs 3 that include substantial inducements during peak periods to reduce or delay electricity use. These changes will occur in conjunction with consumer protections at the retail level ( i.e., through critical peak rebate approaches, or bill protection provisions) and wholesale level ( i.e., addressing the potential for exercise of market power in peak or near-peak periods).

Pilot programs have shown that these innovations can lead to substantial reductions in peak loads. The FERC staff report cited earlier estimates potential 2019 reductions in peak load ranging from 6 percent to 13 percent in various parts of the country even under “expanded business-as-usual” assumptions, with much higher reductions under “achievable participation” assumptions. 4

Creating Price-Responsive Demand

In recent years, demand-side reductions ( i.e., primarily direct-controlled load reductions by industrial and large commercial customers) have been treated as capacity resources for capacity planning purposes in some regions. Load reductions resulting from energy efficiency measures also can be treated as capacity resources in some regions. 5 However, treating demand-side reductions as capacity resources requires identification of baseline consumption levels, measurement and verification procedures, and other administrative complexities. As the quantities grow, concerns may increase about the performance and reliability of these reductions. Peak load forecasting also becomes problematic, as load reductions treated as capacity resources (but not other reductions or