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One if by Wholesale, Two if by Retail

Which path leads to the smart grid?

Fortnightly Magazine - October 2010

technical conference is misbegotten,” he claimed, “because it flows from the wrong answer.”

But perhaps the most damning case against treating DR as the moral equivalent of generation supply involves market monitoring. If you reward DR like a power plant, why not force DR to pass the same smell test as RTO market monitors use for supply offers from power producers?

In an entirely separate docket, where PJM has proposed a scarcity pricing regime that would allow the real-time energy price to rise as high as $2,700/MWh, the DR industry leader, EnerNOC, in written comments asks PJM not to allow emergency DR resources to set the market-clearing price, fearing that such a move would expose DR providers to inquisition from independent market monitors.

“[R]equiring emergency demand response to set price can raise market power concerns… [I]t would perhaps lead to notions that demand response resources should be subject to market power mitigation, including a requirement for bidding based upon marginal costs.” (See, Protest of EnerNOC, FERC Docket ER09-1063, filed July 30, 2010.)

EnerNOC continues:

“It is exceedingly difficult, perhaps impossible, to determine the true marginal cost of demand response …

“What is the opportunity cost of using energy for an industrial customer that stops production in the face of a crucial deadline for filling an order? … What is the opportunity cost to a big box retail store of curtailing in the middle of its Independence Day or Back-to-School sales?

“It is this uncertainty that causes concern if demand response will be required to set prices in energy markets.”

Missing Money

Given a choice between A) serving load entirely with generation supply, versus B) offsetting some of that generation with DR, a retail load-serving utility (LSE) likely would choose option A, since less generation means less revenue from actual retail energy sales. This is the same missing money problem that some revenue decoupling efforts are designed to fix, and it weighs heavily on FERC’s proposal to pay full LMP to DR. But with DR compensation set at LMP - G, the missing money dilemma is resolved.

For example, with real-time LMP at $150/MWh, and the retail rate at $120 (or 12 cents/kWh), the utility becomes revenue-neutral and indifferent to the missing money by paying $30 to the DR provider (LMP - G), and assigning responsibility to pay this cost to the LSE. The LSE thus earns $150 ( i.e., the cost avoided by not having to buy power at wholesale), and suffers an equal loss of $150 ($120 in lost retail revenues, plus the $30 cost it incurs to pay LMP - G to the DR provider).

In comments filed at FERC, PJM suggested three alternative cost-allocation schemes for dealing with the missing money if FERC insists on paying full LMP for DR, but concluded that all three were unworkable in one sense or another. (See Comments of PJM, pp. 11-16, FERC Docket RM10-17, filed May 13, 2010.)

By contrast, Maine attorney Donald Sipe (Preti Flaherty Beliveau & Pachios) and his ad hoc group, the Consumer Demand Response Initiative, proposed their