Advanced Energy Perspectives

In New Report and Before the Supreme Court, Demand Response is in the Spotlight

Posted by JR Tolbert

Oct 22, 2015 4:20:59 PM

    

Boston-July2015-Robbie-Shade-flickr-061933-edited

Actual peak load forcast in Massachusetts in 2015 was 12,287 MW. Photo: Boston from above via Robbie Shade.

Demand for electricity can spike during just a few hours a year, and typically 10 percent of our electric system capacity is built to meet demand in just 1 percent of hours during the year. This comes at a significant cost to consumers. Last week, Advanced Energy Economy released a new report, “Peak Demand Reduction Strategy,” showing that states that implement peak demand programs can significantly reduce costs for customers, strengthen reliability of electric service, and ease compliance with EPA’s Clean Power Plan. The day before, the U.S. Supreme Court heard oral arguments in a case that will determine whether the Federal Energy Regulatory Commission (FERC) has authority to regulate payments for demand response, a primary mechanism for reducing peak demand. In all, it was a big week for efforts to get spikes in electricity demand under control.

The AEE report, prepared by Navigant Consulting, finds that for every $1.00 spent on reducing peak demand, at least $2.62 can be saved by ratepayers in Illinois and $3.26 by ratepayers in Massachusetts. Over a 10-year period, more than $350 million and up to $833 million in costs could be avoided by Massachusetts utility customers, between $1.8 billion and $2.5 billion by Illinois consumers.

Demand Response (DR) is a proven tool for reducing peak demand. DR enables grid operators and electric utilities to relieve stress on the electricity distribution system by compensating commercial, industrial and residential customers for curtailing electricity use at times of peak demand or during a system emergency.

The use of DR has been primarily driven by two policies: state rules requiring that utilities reduce peak demand by a certain percentage each year and wholesale electricity market rules that allow measures that lower electricity demand to receive payment for the generation they make unnecessary. Although the report focuses on state policy, it notes that realization of many of the benefits of state peak demand reduction efforts are predicated on demand response participation in wholesale markets.

DR participation in these markets is currently under review at the U.S. Supreme Court. FERC v. EPSA seeks to determine whether or not the Federal Energy Regulatory Commission has the authority to set the rules used by wholesale capacity markets to pay for reductions in electricity consumption and to recoup those payments through adjustments in wholesale rates. (For more on demand response, the court case, and why it all matters, see this great explainer by Chris Mooney of the Washington Post: “The electricity innovation so controversial it’s now before the Supreme Court.”)

The D.C. Circuit Court ruled in May that FERC did not have the ability to regulate payments for demand response, citing states’ exclusive rights over retail energy markets. The Justice Department called on the Supreme Court to uphold the Federal Energy Regulatory Commission’s Order 745, which directed grid operators to pay for demand response services on par with power generators in wholesale markets, saying that Order 745 makes demand response providers “actual and integral participants” in wholesale markets, and thus subject to FERC authority.

In a webinar hosted by AEE, former FERC chairman Jon Wellinghoff defended FERC’s jurisdiction over demand response, and predicted that, should the case get to the Supreme Court, “we will win hands down.” But the oral arguments proved to be a sparring match, largely over where FERC’s authority over wholesale electricity markets ends and the states’ authority over retail markets begins.

The Court’s ruling on the case will have a profound impact on the DR market. A ruling against Order 745 would limit the availability of these demand side resources and force utilities and grid operators to rely on more expensive peaking plants to meet demand at its highest. The result would be higher electricity prices for consumers – and an uncertain market that depends on states putting strong peak demand standards in place.

Companies such as Boston, MA-based EnerNOC and Arlington, VA-based Opower, both AEE members, provide DR services to electric utilities and grid operators across the world, including in New England and the Midwest. Despite DR’s proven reliability and cost-effectiveness, it remains underutilized in these regions, and elsewhere.

“By passing peak demand reduction mandates into law or creating peak demand reduction programs, policymakers and utilities in Massachusetts, Illinois, and neighboring states could significantly reduce costs for ratepayers, strengthen reliability, and facilitate compliance with the Clean Power Plan,” states the report.

The report evaluates the benefits and costs of reducing peak demand in two states, Illinois and Massachusetts, and the feasibility of utilities to procure the resources to meet demand reduction goals over 10 years. In each of three scenarios, the cost-benefit ratio is highly positive, with the ratio of benefits to cost increasing as the standard rises.

Massachusetts and Illinois were chosen as case studies for the report due to ongoing policy discussions that would make use of DR. This month, the Massachusetts Department of Public Utilities (DPU) will receive final three-year energy efficiency plans from the Commonwealth’s investor-owned utilities. These plans, following review by the DPU, will determine the size and design of the DR market moving forward. 

In Illinois, policymakers have been debating comprehensive reforms to the state’s energy policy since January including potential changes to the state’s energy efficiency and renewable energy programs. While Illinois is a state with a wholesale market structure that accommodates DR, as well as overall energy efficiency measures that can lower demand overall, it has not yet set a meaningful standard for demand response.

Historically, demand response has been used in the commercial and industrial sectors. Peak load reduction measures are customized for each facility and can include turning lighting, air conditioning, pumps and other non-essential equipment down or off without affecting business operations, comfort, or product quality.

More recently, technological advances have opened up opportunities in residential demand response. Advanced metering infrastructure and two-way communicating load switches and smart thermostats are now facilitating effective demand response programs for participating residential households.

What is needed now is regulatory certainty – i.e., FERC’s authority confirmed by the Supreme Court – and state action to make demand peaks a priority, allowing resources that curb excess demand to compete in the marketplace against excess supply.

Read AEE's new report, “Peak Demand Reduction Strategy,” which shows that states that implement peak demand programs can significantly reduce costs for customers, strengthen reliability of electric service, and ease compliance with EPA’s Clean Power Plan. 

Download the Report

Topics: State Policy Update

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