Objections to Demand Response are Ludicrous

Posted on January 07, 2015
Posted By: Jessica Kennedy
 

Demand response is making national news thanks to some disconcerted utilities and a New Mexico senator.

 

Utilities, including FirstEnergy and several New England generators, are petitioning the Federal Energy Regulatory Commission (FERC) to eliminate demand response as a resource in capacity energy markets. Capacity markets involve power generators (or demand response providers) promising to deliver a certain amount of electricity generation ahead of time. For example, an electric generator in Pennsylvania may enter 100MW of electricty into a capacity market because that is what the power plant is sure to deliver. In PJM, capacity auctions are held every year, with the date of energy “delivery” occuring three years into the future (i.e. if a generator comits to deliver 10MW of electricity, it must be able to provide that electricity in 2017.) Demand response aggregators have participated in these markets successfully for decades.   

What is demand response?
Demand response (DR) is an energy efficiency program in which participants are compensated for reducing energy use during periods of high stress on the power grid. Customers get paid for energy reduction as if they had generated the additonal power instead of providing it via curtailment. The environmental benefits are clear: less energy use means a reduced need for power plants. They are expensive and emit sinful amounts of greenhouse gases into the atmosphere.



What’s the problem?

Utilities petitioning FERC are concerned that more DR resources in the energy market will force the closure of power plants.

How is this argument valid?

Demand response should beputting power plants out of business; it’s supposed to reduce our reliance on expensive peaking power plants! Energy that is reduced is just as valuable (if not moreso, given environmental concerns) as energy generated from fossil fuels, which make up the majority of the United States’ energy mix.

While I’m disappointed to see an emerging shift in the utility paradigm from energy efficiency to energy consumption, I’m also optimistic to see utilities behaving this way. These all but desperate attempts by energy companies to boost demand for electricity indicate that revenue is falling for the fossil fuel power industry. The world is transitioning away from fossil fuels, and that’s outstanding progress.  

Petitioning against a program designed to stabilize the electric grid, for doing exactly what it is supposed to do, is absurd. Companies are petitioning the Federal Government to remove competition in order to boost profits.

That represents everything capitalism is not.

FERC’s authority to regulate policies is meant to hinder questionable or illegal activity, not to help unhappy companies boost their bottom line.

The Government Steps In

The Federal Government is turning some attention to the issue of adding demand response to our energy mix. Senator Martin Henrich (D-NM) is introducing a bill to give demand response a prominent position in the modern electric grid. According to the official press release,

  • The bill clarifies that the Federal Energy Regulatory Commission (FERC) has the legal authority to require regional grid operators in interstate wholesale markets to allow consumers to be compensated for voluntarily reducing their electricity consumption-a tool referred to as demand response. By providing incentives for consumers to reduce their use of power, demand response lowers overall electricity costs, improves reliability and efficiency, and reduces emissions.
Senator Heinrich said, “Modernizing our electrical grid is central to becoming a nation that's more energy efficient and provides cost savings for everyone. There is no kilowatt-hour more valuable than the one you don't use in the first place.”

In May 2014, the US Court of Appeals for the District of Columbia overturned FERC order 745, which required grid operators to pay the full market price of electricity to economic demand response resource in both real-time and day-ahead markets. According to the court, the reason for the ruling was that FERC overstepped its authority by mandating prices and payments for demand response resources. Sen. Heinrich’s bill would give FERC authority to oversee demand response under the Federal Power Act, which, according to FERC’s website, grants FERC jurisdiction to “[Regulate] the transmission and wholesale sales of electricity in interstate commerce.”

Benefits for Customers or Corporation?
Robert Kelter, an attorney for the Environmental Law and Policy Center in Chicago stated, “It's clear from this filing that they want . . . to be able to sell more higher-priced electricity and are throwing their customers under the bus.”

It certainly looks that way. FirstEnergy’s stance seems to be a little more than a ploy to increase profit, and it doesn’t seem like a positive step for customers losing efficiency perks. 

FirstEnergy even scrapped efficiency incentives and programs for customers. Clearly, the company is rolling back on customer care to conserve the cash it believes it is losing.

If making money is the primary concern for utilities upset with DR, perhaps they should diversify their interests.  The number one way to do that is to invest in alternative energy and energy efficiency. The energy industry is not done with fossil fuels yet, but that day will come, and the energy companies that survive will be the ones that invest in clean and sustainable electric generation. Utilities that strive to preserve their old-fashioned business models will find themselves without business.

 
 
Authored By:
Jessica Kennedy has worked in the energy industry since 2008. She earned her bachelor's degree in English from the State University of New York at Geneseo. She earned her master's degree in Physical Geography & Environmental Systems from the State University of New York at Buffalo. Jessica's primary area of study is environmental conservation and climate change. Jessica is also an avid reader, painter, and guitar player.
 

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Comments

January, 07 2015

Richard Vesel says

There should be a correction to the Senator Heinrich's statement, at least as far as I would state it: "There is no kilowatt hour more valuable than the one you get paid not to use!"

Demand response programs in the New England states are designed as negative auctions, where bidders in the DM program say how low they will go in terms of their demand response compensation. The ISO takes the lowest bids, up to the limits of the expected DR needs, and enters contracts with those bidders. If and when DR is needed, then these bidders are required to reduce their demand in accordance with their contracts, and they are compensated for that action. The ISO is "buying back" power at a much cheaper rate than they would have to pay for incremental generation during peak power "crunches" that often see power prices skyrocket to $200-2000/MWhr. The ISO is getting a bargain, and the DR supplier gets fairly compensated. Win-win!

I suspect that the people who are making the biggest complaints about more widespread DR programs are traditional beneficiaries of peak power crunch scenarios. Often, these are the IPP's (independent power producers), who spin up their (inefficient) open-cycle gas turbines for a few hours a day to capture peak power sales at these very high rates. Major utilities also are known to keep spinning reserves online when they know from weather forecasts that the air-conditioning demands are going to be exceptionally high, or when nearby unit outages provide them with better opportunities to sell more. For example, a unit in good condition that has a 500MW nameplate rating may be bid into the power pool at 450MW in the day ahead market, with the idea that they can push the unit to 520MW in the spot market, capturing power sales at 10x or more times their normal margins.

If these crunch opportunities are substantially reduced, or even eliminated by effective DR programs, then these "gravy" opportunities disappear...and we know that EVERYBODY loves "gravy"!

So you can see why the resistance might be there. It helps to understand the who benefits and who might not like it. Follow the money...

RWV

January, 07 2015

Michael Keller says

Strikes me the underpinnings of the power market are only loosely based on economics and are more of a government contrivance. The regulated power markets are by definition not "free markets". Attempting to apply some form of economic logic invariably leads to all types of peculiar pricing formulations that more or less lead to inane results.

Stop trying to deploy a "pretend" marketplace, admit it is essentially a monopoly and charge the cost of production plus some reasonable rate of return on the investments. Those companies that abuse the process get financially penalized (lose a chunk of their allowed return). Folks who use less energy pay lower bills.

January, 08 2015

Ferdinand E. Banks says

I'm with Michael on this one. This year's Winner of the Nobel Prize in economics, JEAN tIROLE, gave a nuthouse lecture in both Stockholm and Uppsala in which he convinced his very large audience that he knew something about regulation and deregulation. Of course, nobody understood what the ____ he was talking about, but he graciously summed up his efforts for his fans by saying I'M A ROCK STAR.

January, 08 2015

James Carson says

The problem with Demand Response as a capacity resource is that experience has shown that it is not really there. It's easily gamed.

Mr. Keller, your perspective is twenty years stale.

January, 08 2015

Richard Vesel says

Michael,

If we could turn the clock back, and have somehow prevented the gamers from Enron first convincing ERCOT, then the whole of Congress and FERC, that their "free market" approach was designed to make money for themselves through trading, scheming and gaming, then maybe we would have a more sensible system and plan for it.

Now we have to rely on market "biology" to evolve Grid 1.0 into "something", with the hope that we'll get what we need. Grid 1.0 didn't work so well under state regulators either, tho. PUCO's prevented many necessary investments in proper maintenance, upgrades, new facility construction, etc. - all in the holy name of saving the consumer a few bucks on their utility bills. Penny-wise and pound foolish approaches to soooo many issues.

Mr, Carson,

Demand Response DOES work - it has been a key element in the New England ISO for over a decade.

http://www.nyiso.com/public/webdocs/markets_operations/committees/bic_prlwg/meeting_materials/2003-09-18/agenda3_iso_ne_demand_resp_prog081903.pdf

It will be even more critical now with the generation capacity reductions scheduled between now and 2020. I am not sure where this "experience shows" claim comes from. The NE ISO would not continue a program that didn't net them substantial results, because they pay out a LOT of money in the DR auctions, and if DR didn't work, then it is the ISO who takes the financial hit when they have to pay $1000MWhr for peak power.

The Midwestern ISO (MISO) also has a limited demand response program.

http://elpc.org/wp-content/uploads/2010/09/Final-MISO-DSM-webinar-Presentation-9-28-10.pdf

One consumer, an Alcoa aluminum smelting plant, spent tens of millions revamping their production electrification, such that they could participate in the DR program, slowing down production in order to capture DR dollars, and even sell on-site energy to the grid under some circumstances. Their payback was very short, under five years, I believe.

We all have to keep in mind that DR is not a be all and end all solution. It is just another tool to manage prices and costs, while reducing the probability of involuntary power losses for power consumers. The financial incentives can be very attractive for both sides.

RWV

January, 08 2015

Michael Keller says

Strikes me that putting significantly more direct emphasis on energy conservation and efficiency improvements is much simpler and much more productive than convoluted DR programs that are an element of the contrived marketplace. Further, the whole existing rate structure is a perfect example of major players lining their pockets at the expense of the middle-class.

January, 13 2015

Richard Vesel says

Michael,

DR helps with energy conservation and efficiency, and Alcoa used it. The first thing they did was examine their usage and usage patterns. Identified critical areas of the plant that could not go down, such as the melt pots. They then prioritized their consumption, optimized their response to a DR "event", and determined what they could bid for the DR contract with MISO.

As far as rate structure is concerned - different topic. However, isn't just about every commodity one can think of sold at price points that reduce the price based on volume? Why should the residential consumer of 3kwhr per day get the same price break as a factory that consumes 120MWhr? Wholesale consumption gets wholesale pricing, and retail consumption get retail pricing. That's a free market approach, isn't it?

It would just be in everyone's interest to make their consumption, at whatever level be 1) Energy efficient 2) Economically efficient (when not in gross conflict with #1)

RWV

January, 16 2015

Michael Keller says

Commodities are provided by all manner of suppliers with all manner of transport methods, electricity isn't. Therein lies the fundamental problem.

As to the small user, charging them exorbitant rates that grossly exceed the actual cost of production is fundamentally unfair as the user has no practical alternatives (only one set of wires coming into the house).

DR is really nothing more than government sanctioned theft because of the monopolistic nature of the the electric market. If solar energy can be made more or less dirt cheap for the residential user, then the dynamics may change. However, that is clearly not currently the case.

January, 19 2015

Richard Vesel says

Michael,

What exactly is your understanding of Demand Response and how it is implemented?

Shouldn't a utility be able to encourage a customer, of any size, to curtail consumption temporarily, as long as an economic incentive is provided? Here in NE Ohio, First Energy provides DR incentives to residential users, for example. In other regions, DR to large scale power consumers is offered, backed up with financial compensation, to those who volunteer their participation in the DR auctions. No one is forced to participate, and this is far better than the possibility of involuntary participation resulting from rolling blackouts.

I don't see anyone who loses out financially in such a situation, but perhaps you can enlighten me.

As far as the "one set of wires" into a facility - that seems to be a specious argument these days. I can go online, and buy my power (the kwhr, but not the T&D services) from hundreds of suppliers. I have recently done this, and even though my region is serviced by First Energy, I have chosen AEP as my supplier, due to their green energy program, paying only a slight premium over traditional generation rates.

If you still live in a regulated market, you may not have these choices, but they are certain to arrive in the near future, or you could be lobbying your state government to permit it. I cannot find such a program for Kansas, which is where you live, if I recall from our earlier exchanges. However, in Ohio, we have this:

http://www.energychoice.ohio.gov/

Literally hundreds of choices...

RWV

RWV

January, 19 2015

Michael Keller says

My objection to DR is that it is an element of of an intrinsically ill-conceived government attempt to emulate free markets. The power markets are inherently monopolistic.

Hundreds of choices? But do the choices represent lowest costs? The power has to be routed through all manner of nodes/portals with middlemen adding their fees. Hard to see how that could be cheaper than say power supplied by say a localized municipal provider.

If you wish to pay more for your power, that is your prerogative. I prefer that power be supplied at a fair reasonable price, while recognizing that the current monopolistic markets are readily gamed by those attempting to unfairly enrich themselves, Since that is the case, the markets need to be regulated in an even-handed fashion.

I do not think Kansas is likely to follow the route of Ohio. The laws here more or less require that power be supplied consistent with the concept of lowest cost. The legislature is also quite conservative so they are not normally inclined to experiment.

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