This week, a ruling by the Federal Energy Regulatory Commission opened the door to the broader use of demand response to lower society's energy costs. This ruling, called Order No. 745 (116 page PDF), has the potential to transform energy markets across the country and to provide electricity consumers a tangible benefit.
Part of the nation's smart grid strategy, demand response -- when customers respond to signals about the scarcity of electricity by temporarily reducing their consumption -- helps us reduce the height of the peak demand for electricity. If we can reduce the height of those peaks, we can minimize the need for expensive peaking generation units that only run during the few hours a year when the grid is most stressed. Demand resources can thus function much like generators, by creating "negawatts" instead of megawatts. Because most electricity markets are designed so that power from marginal peaking generators is more expensive than baseload generation, it can often be cheaper to pay a demand resource to curtail its load than to pay a marginal generator to start up and run for several hours.
The value of demand response is clear, but until Tuesday's FERC ruling, how people should be compensated for demand response was up in the air. The United States' electric grid is made up of a number of interconnected but distinct organized wholesale energy markets. Each of these markets has been compensating demand response resources differently. Some markets, like the Midwest ISO and California ISO, paid the same wholesale energy price to demand resources for their negawatt-hours as generators received for their megawatt-hours. Other markets, like mid-Atlantic grid operator PJM, paid demand resources a reduced price for their negawatt-hours.
In Order No. 745, FERC found that this lack of uniformity of compensation across the nation's energy markets created barriers to reaching demand response's full potential. FERC also found that other barriers to demand response existed under the status quo, including a disconnection between the wholesale and retail rates for energy. By establishing a nation-wide policy that -- as long as they are cost-effective and capable of displacing the need for generation -- demand resources should be paid just like generators in organized wholesale markets, FERC hopes to eliminate these barriers.
So what does this mean? In the wake of Order No. 745, we are likely to see greater use of demand response as a tool to save energy and lower its cost. A number of businesses already help consumers participate in demand response, providing the technologies and strategies needed to make consumer participation a success. Through the elimination of uncertainty and the establishment of a clear and fair compensation standard, these companies may see their businesses grow. End-use consumers will also see a benefit, whether or not they participate in demand response. Those consumers who do enroll in demand response programs will now know that they will be compensated fairly for their negawatts, a strong incentive to help the grid by curtailing their load during peak demand. Even for those consumers who don't directly participate, greater implementation of demand response will lower everyone's electricity costs by displacing expensive marginal peaking generation. Smart grid technologies are touted as capable of saving consumers money; through Order No. 745, the potential consumer savings have become more real.