Getting the most from demand response—despite a flawed FERC rule.
On March 15 the Federal Energy Regulatory Commission (FERC) issued the long-awaited and controversial rule on demand response (DR) compensation—Order 745.1 As anticipated, the rule held that “comparable” treatment for DR resources with generation requires that they receive the same compensation, the locational marginal price (LMP). The justification cited was this syllogism: that if decreased demand had the same effect on power markets as increased supply, and if supply is paid LMP, then demand response should be paid LMP.
By contrast, several regional market organizations, PUCs and independent economists held that fair economic compensation requires subtracting the retail rate (G) to account for the benefit that load already receives by not paying for energy it doesn’t consume. In this view, full LMP compensation discriminates against real-time pricing customers, whose only benefit from curtailing is avoiding payment of LMP. Accordingly, (LMP – G) compensation equalizes treatment with real-time pricing customers while full LMP compensation distorts markets and creates opportunities to game the system.
These concerns are legitimate. However, with some care it actually might be possible to implement full LMP compensation for demand response without distorting markets.