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DR Distortion

Are subsidies the best way to achieve smart grid goals?

Fortnightly Magazine - November 2010

attract. When PJM eliminated the full LMP subsidy in 2008, DR participation in energy markets decreased, as expected, but the total amount of DR capacity increased. 14 Capacity payments have been the primary source of revenue for DR, which suggests that LMP-based energy payments have not been the primary reason for new DR to enter the market with or without the full LMP subsidy. 15

Funding AMI directly could enable a large fraction of customers to be price responsive and enable increased DR participation in both energy and capacity markets. With AMI in place, state commissions could further promote price responsiveness by making dynamic retail rates the default rate structure and allowing customers to opt out. Dynamic rates have an advantage over fixed rates with DR opportunities: They avoid having to define a hypothetical customer baseline load. Customer baselines potentially can indicate some false reductions since they are based on customers’ past volatile consumption patterns and can’t provide a perfect forecast of future consumption that would occur absent DR. Baseline definition has been controversial in all RTOs that have relied on them, and they likely would become more controversial if a large fraction of customers were relying on them for settlement purposes. 16

Enhancing market competitiveness : The Electric Power Supply Association (EPSA) argued in its recent comments on the FERC NOPR that markets already are competitive and that any exercises of market power are mitigated. 17 However, markets are never perfectly competitive structurally, and market monitors never can mitigate with perfect precision, given their imperfect information about suppliers’ costs. Moreover, markets that are competitive under normal circumstances may become less so under very tight market conditions with transmission constraints. The presence of DR does indeed make markets structurally more competitive, especially under extreme conditions. Thus, it’s important to enable more customers to be responsive during such conditions. This might be accomplished more effectively by enabling large amounts of load with smart meters and dynamic pricing (or interruptible rates) rather than subsidizing existing DR providers to reduce or shift load under any market conditions.

Reducing emissions : DR may increase or decrease emissions slightly, depending on whether the load is eliminated or shifted and depending on market conditions. 18, 19 In either case, the effect on cumulative emissions is likely to be very small since DR typically is active in so few hours. Energy efficiency and clean generation, however, clearly reduce emissions, and they do so over many more hours than DR operates.

Facilitating Wind Power Integration : The integration of large amounts of unpredictably intermittent wind resources to meet state renewable portfolio standards (RPS) poses substantial challenges for maintaining the supply-demand balance on the system. Inevitable fluctuations in wind output will necessitate other resources to provide compensating increases or decreases. Traditionally, adjustments to system fluctuations have been provided by generation resources on various timeframes from day-ahead scheduling to real-time dispatch. Generation also has provided ancillary services, which require it to be prepared to respond in contingencies ( e.g., operating reserves) or to respond to 5-second dispatch signals