Demand Response: An Underutilized Energy Resource

Demand response. To the vast majority of the public, those words don’t mean very much. To the electricity world, however, demand response is an increasingly valuable resource to meet electricity demand, maintain reliability, and be used as part of a broader resource mix in a move away from traditional fossil fuel-based generation.  Demand response has been used by utilities for decades, and Minnesota is routinely ranked in the top 10 of states around the country in their energy conservation savings, which includes demand response and energy efficiency.  However, demand response is only achieving a small part of its full value. For the most part of the year, if not all of it, demand response merely sits as a benchwarmer in the range of options our utilities can choose from to meet demand.

Demand response is the action where demand (you and me) is reduced via a signal, be it a price signal, a reliability need, or other system need.  If you are aware of demand response, the program you are most likely aware of is air conditioner cycling, or “Saver’s Switch” as it’s marketed by Xcel Energy.  In this case, you are paid a dollar value (usually a credit against your electricity bill) in exchange for allowing Xcel to turn off your air conditioner during certain days of the year- usually a hot day where demand is high and the grid is constrained.  In response for that payment, Xcel is able to keep the operational benefits of this resource that can be called on to reduce demand during these handful of hours during the year.  However, this program is not often called, and hasn’t been called at all over the past several years.  Instead, in order to meet demand, utilities will rely on their own generation units- as demand increases, the cost of generation increases as well, so instead of using these demand response programs, which ratepayers have already paid for, utilities will use their own generating units to meet demand.  These costs will be recovered through your rates, rates that already include the unused demand response programs.

As a former staffperson for the Minnesota PUC, I sat through many agenda meetings where the utilities discussed their resource mix, including the use of demand response.  In several of those meetings, utilities routinely would note that their programs were already borderline cost-effective and that it was just not worth the additional cost to expand on their programs.  These demand response and energy efficiency programs are mandated by the state.  Yet, year after year, the utilities easily meet or surpass their mandated savings and spending goals.

According to the economist Alfred Kahn, “[t]he essence of regulation is the explicit replacement of competition with governmental orders as the principal institutional device for assuring good performance.”  In other words, regulation is used in places where competition cannot be said to exist, such as with a natural monopoly, but regulation should attempt to mimic competitive pressure upon the monopoly.  What this means for demand response is that perhaps it is time to allow actual competition into the world of demand response.

This is not so crazy as it may seem.  In fact, since 2008, it has been the policy of the Federal Energy Regulatory Commission (FERC) to allow demand response aggregators to directly participate in wholesale markets.  These third parties offer demand response products and services directly to customers, aggregate those products for sale into wholesale energy markets, and manage the customer experience under those contracts.  In making this rule, FERC sought to enhance competition in wholesale markets by “providing more supply options, encouraging new entry and innovation, and spurring deployment of new technologies, promoting demand response and energy efficiency, improving operating performance, exerting downward pressure on costs, and shifting risk away from consumers.”[1]  As part of this decision, FERC left the decision on whether to allow customers to participate up to the states.  Minnesota, like most of the Midwestern states, have, to date, not allowed third party demand response aggregators to participate in their states.  Instead, these states maintain and protect legacy utility demand response programs.  At the same time, customers are purchasing internet-enabled thermostats like the Nest or offerings from Honeywell or EnergyHub, customers are purchasing electric hot water heaters that for pennies more can be out-fitted with a WiFi receiver.  A potential significant benefit from these investments, by aggregating that demand response and bidding it into the wholesale market or participating in an all resource utility RFP, sit unrealized.

As FERC itself has noted, both in the above-referenced decision but also in many others, competition breeds innovation, and existing rules designed for the past are hinderances to progress and innovation.  With the continued investment in advanced technologies and distributed energy resources, demand response can now be used for far more than just the blunt shutting off/turning on of air conditioners; other technologies, such as storage or electric vehicles, can be used as a demand response resource to follow variable resources, such as wind and solar.  In the future, demand response can even be used to consume electricity in times of over-supply, such as any excess of wind or solar generation; these resources can be called upon to consume the excess generation.

In a recent Notice of Proposed Rulemaking from 2016, FERC continued to investigate additional ways for resources like demand response to participate in wholesale markets.  In support of its initiative, FERC noted that it “has an ongoing interest in removing barriers to resources that are technically capable of participating in the organized wholesale electric markets.”[2]  For far too long, states have maintained a policy inertia- by adopting policies that erect barriers to entry, erect barriers to the market, and limit choice, competition, and innovation for customers.  A key first step in addressing this situation is to reconsider the role that competition can play in achieving greater participation in demand response resources, and allow those resources to be used to meet demand.

[1] Order 719 at P 1.

[2] Electric Storage Participation in Markets Operated by Regional Transmission Organizations and Independent System Operators, Notice of Proposed Rulemaking, 157 FERC ¶ 61,121 at P 6 (2016).

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