Demand Response: An Essential Element in all Markets

Few will argue against the law of supply and demand, but many seem perplexed by how prices can and should be made visible to electricity consumers. Clarity seems elusive in part because customers are so diverse in their price-responsive behaviors.

Nevertheless, the search for the silver bullet in regulatory circles presses on. It seems simple, across-the-board solutions are more palatable than the reality that markets are no longer monolithic.

Many today prognosticate that prices will be soft and, therefore, assert that demand response is not cost effective. Our belief is that while the soft forward markets may depress general price signals, transmission congestion is mounting because it is nearly impossible to build “power towers” near people any longer. Demand response (DR) may offer a viable non-construction transmission alternative.

Another idea that needs revisiting is that of independent curtailment service providers (CSP)—enterprises with the mission of recruiting, organizing and dispatching DR. The current trend, which favors CSPs rather than Load Serving Entities (LSE) to operate demand response businesses, is idealistic and impractical. Markets with rules favoring CSPs cannot succeed without an adequate long-run demand response value proposition. Just as a long-term value proposition was necessary to solidify energy efficiency, it will also be critical to demand response. If no one will “make the market,” then the LSEs must be held accountable.

Regulatory cost recovery models have always deemed energy efficiency and demand response resources cost effective if their costs were lower than the supply side option. If we expect the free market to use the same mechanism, we either must stabilize the forward valuation of capacity (for DR) or require LSEs to use DR with criteria (rules) such as minimum standards. Therefore, one solution might be to specify that the LSEs must have some percent of their load served with DR either by acquiring it from others or themselves. Left to themselves, regulated LSEs, are likely to use short-run, least-cost planning as their business model and thereby expose the regional markets to risks.

Finally, believing that some “middle ground” will occur through negotiation between the supply side and demand side participants at the ISO/RTO level is proving naàƒ¯ve as well. The question before the industry today is whether such minimum standards are a social cost for all market participants, or should they be left to the politics of stakeholder groups. The latter often requires a severe crisis to occur before anything is done and the action is often a reactive “patch” rather than a well-thought-out solution.

Rather than hope for a miracle from federal or state agencies, Apogee Interactive Inc. and several industry participants are working out a free market solution using a reserve bank concept. The idea is to use free market fundamentals to acquire a portfolio of proven demand response and sign it up for fixed reservation payments plus pay-for-performance rewards.

Traditional free market measurement and validation agents operating in the role of third party appraisal authorities can provide assurances to these Regional DR Banks that customer demand response is a proven resource. With this assurance, the “structured agreements desk” in the bank’s regional trading markets can interact and trade DR with regional energy marketers as well as the ISO/RTO.

Establishing such a risk-pooling mechanism is vital to the growth of demand response. Without it, regional demand response resources are likely to be squandered over time due to the lack of incentives in current business relationships, the inability to aggregate the resources into a sufficient block to clear markets against supply, and the non-standard nature of customer demand response as an alternative to supply side resources.

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Joel Gilbert (jgilbert@apogee.net) is a nationally recognized industry strategist and speaker, most recently addressing FERC and DOE working sessions on the future of the industry. He is founder and CEO of Apogee Interactive Inc., the energy industry’s leading provider of Web-based energy content, educational courses, evaluation tools and demand response programs (including THE DEMAND EXCHANGE® transaction platform) for energy consumers in the United States.>

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