Last week, FERC issued a final rule amending regulations under the Federal Power Act regarding Demand Response Compensation in Organized Wholesale Energy Markets, putting an end to industry speculation over the value of demand response…hopefully. Regional Transmission Organizations (“RTO”) and Independent System Operators (“ISO”) must balance generation and load when clearing the day-ahead and real-time energy markets. Balancing can be accomplished by changes in supply or demand. The Commission found that in the organized wholesale energy market, demand response has the same balancing effect on supply and demand as generation. Therefore, demand response resources should be compensated on an equal basis to generation resources. However, two conditions must be met:

  1. The demand response resource has the capability to provide the service, i.e., the demand response resource must be able to displace a generation resource in a manner that serves the RTO or ISO in balancing supply and demand.
  2. The payment of LMP for the provision of the service by the demand response resource must be cost-effective as determined by the net benefits test.

What is the net benefits test? When is a demand response cost-effective? We will have to wait a little longer to completely answer these questions. RTOs/ISOs are ordered to conduct two studies: By July 22, 2011, RTOs/ISOs must submit an historical analysis of supply curves and revised tariffs. More than a year later by September 21, 2012, a dynamic benefits study must be filed. While time may not be a friend, EnerNOC is having an awesome month at FERC!

  • The FERC’s decision to require LMP compensation for demand response resources is a major benefit for DR at the wholesale level. Smart grid investments bring potential to increase total DR resources available in the US – as recognized by the FERC’s 2010 National Action Plan on Demand Response and NERC’s 2010 Long Term Reliability Assessment. Indeed, EnerNOC did have a good month at the FERC as aggregators are likely to benefit from this order, serving as a link between DR providers and the RTOs. Yet in the long run, Commissioner Moeller is likely correct that the real gain in DR will come from dynamic pricing at the retail level, which is beyond the FERC’s control.

    As for the net benefit test, the FERC is requiring RTOs to determine a price at which DR will be offered at an economies of scale large enough to produce system benefits that offset the LMP payments to DR. This is directly linked to the issue of cost allocation. The cost of paying DR resources the LMP must be accounted for because there will be no revenue from load, or in other words, no electricity sold to clear the market. Monthly data will set the trend, and we will see how the market performs after the first round of reports.