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Demand Response Drivers

Identifying correlations between adoption rates and market factors.

Fortnightly Magazine - January 2012

of a centralized capacity market. 13

Strength of Policies and Regulation

While the structure of the electricity market and its operating conditions provide a foundation for demand response, there are also policies that affect the uptake of DR in a particular state. In the U.S., it’s common for electric distribution utilities—especially investor-owned utilities but also cooperatives—to be regulated by a commission of elected or appointed officials. In addition, many state legislatures have mandated improvements in energy efficiency and other demand-side initiatives, with an increase of this trend in recent years. Even in so-called “deregulated” jurisdictions, FERC is active in defining the rules by which the markets are run. Policy is therefore a crucial component of the DR landscape in any area.

Two data sources are employed to examine the impact of policy on the penetration of DR: 1) legislative or regulatory actions that directly support demand response, as reported in a legislative primer document produced by the Demand Response Coordinating Council, including state-by-state assessments of DR policy in the U.S.; 14 and 2) the general legislative climate supporting energy efficiency in the state, as analyzed by the ACEEE state scorecard. 15

Both strong demand response policy and a high energy efficiency score correlate with higher levels of demand response. Figure 4 shows the average DR levels for states with and without devoted DR policy, indicating that states with supportive demand-side policy have more than double the penetration of DR than those without, with a statistical confidence of 95 percent. 16

A similar effect is evident when comparing the energy efficiency scorecard ratings of states—a general indication of a state that takes a proactive approach to demand-side initiatives. As displayed in Figure 5, states with a higher score for energy efficiency also see higher levels of demand response, even though the ACEEE rating doesn’t explicitly account for demand response.

Interestingly, the impacts of DR policy and energy efficiency policy are similar when it comes to driving demand response participation. This can partially be explained by the cognitive link between these two from both the utility and policy perspectives. In many organizational structures, both demand response and energy efficiency are included as “demand-side management,” and indeed there’s significant overlap between the states with DR policy and those scoring high on the energy efficiency rating.

Again, neither of these correlations is strong enough for policy to be considered the only factor shaping the penetration of demand response. But directionally, it’s clear that policy plays a role.

Generation Mix—Hydroelectric Power

An interesting exception to the link between progressive policy and demand response is the Pacific Northwest, where regulators, utilities, and other interested stakeholders have been pursuing efficiency for decades and yet have little DR participation today. 17 One explanation for this discrepancy is the high quantity of hydroelectric generation in the region, which provides significant peaking capacity but is energy constrained. In addition to the renewable nature of the resource, hydro power has built-in energy storage capacity, as operators can adjust the flow of water through turbines to accommodate changing demand.

By relying on its inherent