Demand response is a tool for reducing peak demand, balancing the electric grid, managing transmission congestion and reducing cost.
Certain kinds of demand response have the potential to help integrate intermittent renewable generation resources, particularly wind and solar, coming onto the electric grid in the years ahead.
Federal and state regulators are calling for greater quantities of demand response in both wholesale and retail markets. The Federal Energy Regulatory Commission has created market rules that put demand response on a basis essentially comparable with generation dispatch.
Demand response is now competing in capacity and reliability markets at a cost per kW curtailed that can be lower than the cost of generating that kW.
As it has become a viable resource on par with generation, grid operators, regional planners and utilities are incorporating demand response into their planning and operations.
This emphasis on demand response brings new expectations. Utilities in numerous states are expected to bid demand-side resources in wholesale forward capacity markets. Not all are prepared to respond strategically given complicated and changing rules and standards for measurement and verification.
Utilities in ISO New England and PJM Interconnection states have bid conservatively to avoid potential penalties for under-performance. A foremost challenge for market participants can be selecting the number of MWs to bid into capacity auctions and the commitment length. Capacity prices have been low and the future is uncertain.
Utilities are additionally hesitant to pursue supplemental wholesale market options such as reconfiguration auctions and bilateral contracts. This is because the rules are complex and utility regulation does not reward risk taking.
Electricity markets will continue to evolve to allow even greater quantities of demand-side resources to compete in wholesale markets.
FERC Chairman Wellinghoff’s vision of a supra-region electric grid with large amounts of demand response rests on an accurate accounting of this resource.
Complex measurement and verification can impose significant transaction costs. This is because M&V involves the counter-factual; it is necessary to estimate how much power would have been consumed in the absence of curtailment. Estimates of baseline consumption need to be created to estimate savings. Baselines have become the most complex and contentious element of M&V.
Demand response markets will continue to evolve. FERC intends to pursue additional market reforms in 2012-13. These include adopting M&V standards developed at NAESB, eliminating barriers to integration of demand-side resources into wholesale markets and pursuing market rules permitting energy efficiency resources to participate more broadly.