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Demand Response Drivers

Identifying correlations between adoption rates and market factors.

Fortnightly Magazine - January 2012

present a complete picture of the drivers of DR in that state or region. In addition, factors that don’t reveal a correlation in recent data might be emerging as drivers, and a similar analysis performed two or three years from now might give different results.

Cost of Electricity

One of the natural places to look for a driver for demand response is the price of power, especially during peak times. By calling on customers to curtail load, utilities and grid operators can avoid the need to purchase expensive peak power on the spot markets. In theory, regions with high costs of electricity would benefit the most from demand response and should therefore pursue more programs and resources. Similarly, customers in high-price systems should have a stronger incentive to enroll as they can receive higher monetary benefits through shedding load. A further benefit of DR to customers is the potential for wholesale price mitigation, which is the overall lowering of the marginal electricity price during DR events due to a downward shift in the demand curve. In markets where supply is tight, this impact on market prices can be significant. 6

A simple proxy for the total (or “all-in”) cost of power is the average retail electricity price, 7 available at the state level through the U.S. Energy Information Administration. Average price is different from peak price and therefore isn’t the ideal variable, but is analyzed due to data limitations. The plot of DR enrollment against retail price of electricity is presented in Figure 2. For the 49 data points in this set (50 states and Washington, D.C., excluding outliers 8) there’s a positive correlation between average electricity price and DR enrollment. 9

Despite this apparent correlation, however, there are important subtleties behind the numbers suggesting that the retail price of electricity isn’t the only factor in driving DR. Some states, such as Hawaii—which is excluded as an outlier—have high electricity prices but no significant demand response resources. This could be due to customer attributes— e.g., low saturation of central air conditioning—or the evolution of policy supporting demand-side measures in these states.

Market structure also plays a role. In restructured states where electric generation is separated from retailer providers—yellow points in Figure 2—the correlation between average price and level of demand response is strong. However, states with regulated wholesale markets—blue points—show no correlation.

A wide distribution and relatively low R-squared value suggest that, although average retail price appears to be significant, there are certainly other factors impacting the level of demand response enrolled in a particular state.

Electricity Market Structure

The economics and the logistics of demand response vary significantly across the U.S. and in other developed countries. While the basic concept is consistent everywhere, there are numerous variations in the details, such as communication formats between grid operators and customers, notification times, event-triggered incentives or time-dependent prices, and measurement and verification requirements. Market structure is important to demand response; in many cases an organized wholesale power market facilitates demand response, and the rules and conditions of the particular market define