Demand Response in Capacity and Electricity Markets: What Role Can and Should It Play?

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1 Demand Response in Capacity and Electricity Markets: What Role Can and Should It Play? Professor Joel B. Eisen Austin Owen Research Fellow University of Richmond School of Law Austin Electricity Conference 2013 April 18, 2013

2 Demand Response Reducing total demand Energy efficiency improvements Reducing peak demand Time of day rates Interruptible service Load management Demand Response Changes in electric usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized. Involves traditional utilities, ISO/RTOs, & third parties (e.g. CSPs in PJM) More than simple peak shaving numerous opportunities for demandside measures to address grid needs

3 Demand Response Resources Load management/control Direct load control Interruptible/curtailable (I/C) Demand bidding/buy-back programs/energy markets Emergency DR programs Capacity programs Ancillary services programs Price-responsive demand Time-of-use (TOU) Critical peak pricing (CPP) Real-time pricing (RTP) Key distinction in all programs: Dispatchable = RTO, utilities, or aggregators directly control load responses Reactive = customers voluntary reactions to price or other signals

4 Smart Grid & Demand Response Grid managers cut a deal with the freezer: they pay it (and other freezers in town) to postpone defrosting. That helps the grid meet demand spikes without cranking up a fossil fuel power plant.

5 Technology Needs: Residential DR

6 Tech Example: CPS Energy Home Manager CPS Energy = muni serving 700K customers in San Antonio Early commercial rollout program participants receive: Device controller on high energy consumption devices such as water heaters, air conditioners and pool pumps Communicating gateway under electric meter glass Programmable communicating thermostat. Measurement & control devices communicate to gateway. Gateway communicates in real time to data center (via wireless).

7 unusually high demand... may cause the marginal cost of providing an additional MWh of electricity to consumers to increase fivefold or tenfold or more. = no price responsiveness Capacity must be available to meet predicted maximum demand = even if only needed a handful of times each year Why Do We Need DR?

8 DR Potential To Reduce Peak Demand

9 Compensating For DG Variability Regulation = control frequency Primary and secondary frequency control Use of DR to regulate Different production curve

10 Regulation Example - ERCOT Load Spike: Feb. 26, 2008 (3 to 9 p.m.) Load spiked by 4000 MW between 5:30 and 6:30 pm (evening peak) Less wind than forecast

11 Regulation Example - ERCOT Load Spike: Feb. 26, 2008 (3 to 9 p.m.) It appears to be the deployment of LaaRs which halted frequency decline and restored ERCOT to stable operation. -- ERCOT Event Report

12 Potential Demand Reductions Are Enormous FERC forecast 2009: DR can save up to 188 GW/20% of peak demand

13 Other Potential Benefits Creates potential alternatives to monopoly 3P providers offer services to manage energy use based on detailed data = this market seems likely to see substantial growth Consumer benefits Compensation for managing consumption Receive fine-grained usage information = manage demand and energy consumption and charges on a real-time basis

14 DR In Wholesale Markets Ancillary service market programs: Customers bid load curtailments in ISO/RTO markets as operating reserves. Bids accepted = get market price for committing to be on standby. Capacity market programs: Customers offer load curtailments as system capacity to replace generation resources. Energy market programs: Customers or CSPs offer bids to curtail based on wholesale market prices (day-ahead or real-time). PJM: offered to large customers (e.g., one MW and over) CSP can aggregate small customer DR load & bid into market. Emergency DR: Incentive payments to customers for load reductions during periods of reserve shortfalls.

15 DR In Wholesale Markets Price-Based Demand Response energy efficiency time-of-use rates day-ahead hourly pricing (RTP) real-time hourly pricing (RTP)/CPP load commitment timescales years system planning months operational planning day-ahead economic scheduling day-of economic dispatch < < min min power & load reduction delivery commitment dispatch capacity/ancillary services programs demand bidding/ buyback emergency programs interruptible programs direct load control Incentive-Based Demand Response

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17 DR: The Regulatory Environment Unclear lines between state & federal jurisdiction (affect retail rates vs. part of wholesale ratemaking) EPSA v. FERC (D.C. Circuit) Barriers to dynamic pricing = consumer and PUC resistance Issues with DR prompting behind-the-meter generation M&V challenges generally (e.g., EnerNOC/MD) Consumer education challenges/acceptance of DR techniques $$$ to procure/deploy AMI systems & associated technologies; standardizing technologies Compensation level in wholesale markets (FERC Order 745/net benefits test) Proper reward to new entrants? Over-compensation (DR paid double )

18 FERC DR Policies: Order No. 719 (2008) All RTOs and ISOs required to: Amend their market rules as necessary to permit an aggregator of retail customers (ARC) to bid DR on behalf of retail customers directly into markets unless the laws or regulations of the relevant electric retail regulatory authority do not permit a retail customer to participate. Modify their market rules to allow the market-clearing price during periods of operating-reserve shortage to reach a level that rebalances supply and demand so as to maintain reliability while providing sufficient provisions for mitigating market power Study whether further reforms are necessary to eliminate barriers to demand response in organized markets.

19 FERC DR Policies: Order No. 745 (2011) ISO/RTO must compensate economic DR resources at full wholesale price Net benefits test threshold: pay wholesale price only when economic to do so = wholesale price exceeds a threshold (PJM = $25.60/MWh in March 2013). Prior to Order 745 = compensation = difference between wholesale price (LMP in PJM) & retail price for G&T. G&T = retail price per unit a consumer would pay if it were to purchase the units it now reduces Controversy over whether DR should receive full LMP I have long been puzzled by the apparent inability of many smart people to understand that compensating some entity for producing a negawatt is inappropriate and involves simple double-counting Prof. Richard Pierce

20 Proper Level of Compensation?? If customers have not committed in advance to purchasing a quantity of electricity... determining the amount of demand response eligible for payment also requires a difficult counterfactual analysis. What would have been purchased but for participation in the program is inherently unknowable. Value of a MW of DR = avoided cost of supply... at a given moment = what s that? (LMP? LMP-G?) Difficult to assess customer participation rates given variability of DR programs/technologies If pay LMP = what impact on supply-side resources? subsidized demand response programs... create threats to the generation owner (EEI)

21 Economic DR in PJM On The Rise (Post Order 745)

22 Enormous Potential Remains: Little Participation By Small Consumers Residential demand response is an essentially untapped... resource

23 More Consumer DR = Need Dynamic Pricing Dynamic pricing = pricing structure changes w/market price Important for DR = price signal in real time, gives information on prices and market conditions, allows for more sophisticated responses Different types (VPP, CPP, TOU) with different designs/volatility to consumers Can yield significant savings... if consumers are willing to embrace it.

24 More Information Joel B. Eisen, Smart Regulation and Federalism For The Smart Grid, 37 Harvard Environmental Law Review, available for download at Joel B. Eisen, Who Regulates the Smart Grid?: FERC s Authority Over Demand Response Compensation in Wholesale Electricity Markets, San Diego Journal of Energy & Climate Law, available for download at