How Energy Efficiency and Demand Response are Turning Electricity Supply and Demand Upside Down – and Saving Money

Posted by Prusha Hasan on Jun 29, 2020 12:30:00 PM

IssueBrief EE & DR-1

In the last decade, technology has changed nearly every facet of our lives. We’ve traded in touch-tone phones for smartphones, replaced cabs with ride sharing apps, and upgraded bulky desktops for sleek laptops. While technology has changed life in so many dramatic ways, less obvious, but no less dramatic is the way technological advancements have changed the way we use electricity. Most notable is the way technology has allowed us to gain control over electricity demand, through energy efficiency and demand response. The challenge now is to make sure that newfound power to reduce and manage demand gets fully utilized in wholesale electricity markets.

Since the inception of our electric grid more than a century ago, customers have had very little control over their electric bills; they used the electricity they needed, then paid the price. Similarly, utilities had no control over total electricity demand; they simply kept building large power plants to meet this demand as it grew. Covering the enormous expense of these power plants, some of which stood idle waiting for the days and hours of peak demand, came back to customers, who paid it off over time through monthly bills. The only way to decrease those bills was to turn off lights or unplug appliances. 

Energy efficiency and demand response have altered this dynamic. These technologies reduce our energy bills and the need for expensive power plant construction without requiring us to make drastic changes in behavior. 

Energy efficiency (EE) reduces electricity use – and electric bills – by letting us use our electric gadgets the way we want to but consuming less energy as we do so. So instead of putting off running your dishwasher, with an energy-efficient dishwasher you can get your dirty dishes clean with less electricity, and a lower bill. 

Whereas EE is about using less electricity whenever you need it, demand response (DR) is about using less electricity when it matters to the electric power system overall – that is, during hours of peak use when electricity prices are highest and the least-used power plants need to run. Your utility might provide you a financial incentive to turn down your air conditioner or turn off non-essential appliances during these times when demand for electricity is especially high, reducing strain and costs for the system overall. 

Many utilities offer these programs directly to customers, especially large ones, but new business models allow these technologies to provide benefits to more people and the grid. DR and EE, sometimes combined as aggregated resources, are participating in wholesale electricity markets. For example, a company can bundle the savings from LED light bulbs in a city and offer it as a resource in the market. This unique resource then competes against traditional power plants to meet overall power needs in the region served by that market.

The presence of DR and EE in wholesale markets is good for customers and grid operators. 

Grid managers use these flexible resources to relieve stress on the grid during peak hours, extreme weather events, or outages. 

In the short term, these resources reduce electricity costs by decreasing the need to turn on more expensive sources of generation. Over the long term, they can help us avoid the construction of additional plants altogether. DR and EE also increase the number of participants in the energy market, which increases competition and lowers costs for ratepayers. 

As you might guess, various parties have fought hard to keep these resources out of the market. In 2016, power generators even sued the Federal Energy Regulatory Commission (FERC) when it issued Order 745, which directed grid operators to pay for demand response services on par with power generators in wholesale markets. In 2017, regional grid operator PJM Interconnection proposed a rule change that would have given states in the PJM territory the right to bar or restrict energy efficiency resources from entering the wholesale market following an effort by Kentucky utilities to reduce their spending on demand-side management programs. AEE called on FERC to clarify that it has sole jurisdiction on this matter, and the Commission ultimately issued a rule that prevented state regulators and regional grid operators from barring energy efficiency from their markets without prior approval. 

FERC has often acted to preserve technology-neutral markets where unique and innovative technologies, like demand response and energy efficiency, can participate and compete with traditional power generators. But a December 2019 Order by FERC undermines certainty and potentially threatens demand response, and energy efficiency participation in PJM, the nation’s largest wholesale market.

In an effort to combat what the Commission calls “State Subsidies,” FERC’s Order – known as the Minimum Offer Price Rule, or MOPR – establishes an artificial price floor for new and some existing DR and EE resources that receive or are eligible to receive support from programs to meet state energy goals. This artificially raises the price of DR and EE, which are among the cheapest options in PJM because they have little to no production cost. This is in stark contrast to traditional resources such as coal plants, which are expensive to build and operate. Instead of allowing DR and EE to bid into the market at prices that reflect their actual economics, this new price floor forces these resources to enter the market at a price determined by PJM. (To view an AEE webinar on how PJM proposes to implement this rule, click here.)

While this FERC decision only applies to PJM, the Order sets a precedent across other RTOs/ISOs that could impact DR and EE resources across the country. Left in place, these price controls deprive these resources of an important revenue stream and discourage investors from backing these products. This harms competition and innovation on a much wider scale, thereby taking the 200 million of us who receive our electricity through wholesale markets back to the era of clunky desktop computers and touch-tone phones. 

For a new brief on EE and DR in wholesale markets, along with six other wholesale market briefs, click below.

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Topics: Wholesale Markets, Energy Efficiency