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One if by Wholesale, Two if by Retail

Which path leads to the smart grid?

Fortnightly Magazine - October 2010

demand. (See also “ LMP Works !” by Andrew Ott, Fortnightly, January 2010.)

As the meeting wound down, Centolella argued that too much emphasis on wholesale markets, with over-generous incentives for large-scale DR programs, would distort and frustrate the smart-grid vision. He continued by explaining that software developers, controls vendors, and appliance manufacturers had told him they were ready and eager to roll out consumer products that would shut off at a moment’s notice when electricity prices rose too high. Such innovations would arrive, Centolella insisted, only through real-time dynamic retail pricing, allowing mom-and-pop ratepayers to see and react to minute-to-minute variations in electricity prices, and make pocketbook choices on when to run appliances or to go without. Under Centolella’s vision of the smart grid, DR programs approved by FERC at the wholesale level would give way to consumers at retail acting in their own self interest.

But what happened next took the room by surprise:

Chairman Wellinghoff:

Paul, I can’t resist. With that speech I’m going to have to jump in here …

With all due respect, I believe the complete opposite. I think wholesale markets for demand response have in fact fostered technology [and] will foster it much faster than states will because I have no assurances as to when the states will put in dynamic retail prices …

I think the only way we are going to get this technology in place and move forward with it is … in wholesale markets.

And as soon as Wellinghoff switched off his mike, Moeller switched his on:

Commissioner Moeller:

I’m all with you Paul. I think without dynamic pricing we have the serious potential of residential consumers subsidizing wholesale consumers …

[W]e’ve got to do it through dynamic pricing …

I respectfully disagree with my chairman.

(For the full exchange, see “FERC Leaders Appear Split Over Smart Grid,” at www.outsmartingthegrid.com.)

The Gripe over DRIPE

FERC’s idea of rewarding DR just like a power plant gains credence only because the electric generation sector exhibits declining economies of scale. When demand is curtailed, the highest-priced peaking plants are backed out at the far end of the dispatch stack, driving down the market price for all consumers—not just the load that withdraws.

Experts describe this phenomenon as DRIPE (demand-response induced price effect), a term added to the lexicon through a study put together last year by Synapse Energy Economics. (See “Avoided Energy Supply Costs in New England: 2009 Report,” at www.synapse-energy.com.)

But DRIPE has spawned a big gripe—that it opens the door to market manipulation.

At the September conference, Next-Era senior attorney Joel Newton testified on the morning panel on behalf of the New England Power Generators Association that DRIPE, “in our view,” represents “the mirror image of a generator withholding.”

In such a scenario, power producers bid too high on purpose to keep a plant out of the market, forgoing revenues on one unit so as to push prices higher for all other remaining plants, making a larger profit overall.

Newton warned of promoting DR, “not because it is an economic