Growing Role for Demand Response in ISO Operations

By Robert Burke, ISO New England; and Bahman Daryanian, Tony Georgis and Mark Gabriel, RW Beck

In recent years, demand response (DR) has been going through an evolution that far outpaces the original demand side management (DSM) activities of the 1980s and 1990s. This is due in part to the rapid advances in metering, communication and a host of technologies–in part because of the convergence of policy and market forces, and in part because of a growing number of independent companies providing services to meet the increasing demand for DR. Following the 2005 Energy Act, DR has become embedded in national energy policy. Further, DR, together with energy efficiency, is one of the few near-term options for large-scale reduction of greenhouse gases, and fits strategically with the drive toward clean energy technology, as well as efforts to reduce reliance on fossil fuels. Economically, DR looks increasingly attractive as the costs for new electricity generation and fuels skyrocket.

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As a result, DR will almost certainly play a much more critical and valuable role in the electricity system of the future. Properly integrated into power system operations, DR can improve overall system reliability, provide financial benefits to utilities and customers alike, and contribute greatly to meeting national and regional energy and environmental objectives.

Independent system operators (ISOs) have already begun a long journey toward the formal integration of DR resources into their day-to-day operations. They recognize its value as an operating reserve, but also recognize that the integration of an inherently dynamic element will take time. The complexity of integration arises from the need for nearly instantaneous interaction between a central system operator and a large number of small, widely dispersed and highly variable end-use resources. The emergence of third party aggregators to facilitate this linkage may be the only feasible way to make the communication and dispatch financially viable.

It was against this backdrop that the ISO New England (ISO-NE) asked R.W. Beck to undertake a broad assessment of the state of the art of DR, including options, alternative approaches and the technical and institutional issues. ISO-NE was particularly interested in how DR was integrated into other comparable electricity markets in North America, and what options are currently available to ISO-NE. The assessment involved three main steps:

  • Surveying the current DR literature, including articles and reports by industry experts and consultants, as well as the pioneering work at the U.S. National Laboratories.
  • Interviewing the ISOs in North America to gain their experience and insights on DR integration.
  • Interviewing the top commercial providers of DR systems and services to gain perspective from the customer’s point of view, and to assess the viability of current systems for communication and control of DR resources.

Key Observations

No single best practice emerged from the broad assessment of DR in North America. One central observation coming out of the study was that no ISO-type market appeared to have a fully integrated program that includes single and aggregate DR resources of all types. The reasons cited for lack of full-scale integration range from lack of experience and precedence to hurdles posed by existing policies and standards. Currently, there are varying degrees of integration of DR resources, particularly in energy and capacity markets, but no electricity market has yet integrated DR resources as full participants in the reserve and ancillary markets. Some are in the early stages of developing rules for participation, while others have DR programs under active management of third party providers. Today, none provide full, real-time visibility to the grid operator; those that have functioning programs remain hidden or at best opaque to the grid operator.

Although the ISOs foresee growing value from the use of DR, they tend to approach it differently. Overall, ISOs in the east, such as ISO-NE (New England), NYISO (New York) and PJM, seem to have more flexibility in the design of their DR programs compared to the markets in west, such as CAISO (California), where the Western Electricity Coordinating Council (WECC) has more strict standards in terms of requirements for telemetry and disallowance of aggregate loads in the DR programs.

The ISOs also have different attitudes about the role(s) of DR. They promote and integrate it differently. Some ISOs for example, are hands off, others are integrally involved. They also have differing views with regard to necessity and benefits of full telemetry and real time data communication with the ISO.

A second key observation from the study is that most of the DR service providers believe there are no major technical hurdles to DR implementation. DR resources are characteristically different than generation resources due to their potentially larger number, smaller size and wider distribution. They require fundamentally different approaches in terms of hardware and software, telemetry, communication and command and control. However, technology is no longer seen as the critical obstacle it once was, particularly in view of the advent of automatic metering infrastructure (AMI) and Internet-based communication. Today, the more significant challenges to technology implementation arise from standards, certification, issues of transparency, measurement, verification and financial settlement.

A third observation is that a large and growing role for system aggregators who are specialists in the DR business seems to exist. Aggregators serve as the intermediary between the customers who own the end-use resource and the system operator. These companies have the knowledge and experience to integrate a highly diverse customer base, the ability to tailor an emergency curtailment program to each customer’s business environment, and the sophisticated communications and control system that allows them to receive a signal from the system operator to reduce load by a certain number of megawatts, and then to implement the reduction among their portfolio of customers within seconds.

Role of Aggregators

These aggregators typically set up a network operations center (NOC) to act as the gateway between end-use customer assets and the system operator. When the NOC receives a notification signal from the operator during contingency periods, it automatically initiates customized DR protocols at the customers’ sites. The customer can choose to take the required action, or to fully automate their DR participation. Typical action includes reducing a building’s load for lighting and HVAC, or initiating the customer’s existing back-up generation to reduce the load on the grid.

While such a direct end-use customer linkage would be prohibitively expensive for an ISO to establish, aggregators have the know-how and technological sophistication to make it financially viable (the cost for a secure, dual redundant system between the ISO and the aggregator are estimated at about than $25k per aggregator plus $1500 per month). In sum, aggregators are able to create value for both customer and operator alike, facilitate the capture of those benefits, and distribute the benefits so that all parties win.

For reliable and secure dispatch of DR resources as operating reserves, the communication between the ISO and the dispatching entity for the aggregator must be more direct and robust. The system does not need to be as extensive as those systems required for dispatching generation resources, but improvements over the present system are necessary. The present system employed by ISO-NE for dispatching DR resources in their reliability programs involves the use of the Internet and e-mail for the activation of DR resources by the dispatching entity of the aggregator.

Major DR providers and aggregators have adopted a common technical approach, using the NOC as the brain and the cortex, the data depository and communications network used to command, control and communicate with multitudes of individual DR resources, as well as serving as a gateway to the grid operator. Most such systems appear to be based on Internet protocol (IP) based networks with open source solutions. As a general rule, greater security is required for the link between the NOC and the systems operator than between the NOC and individual customers.

Attributes of DR as Operating Reserve

One of the most intriguing attributes of DR is that it can improve the reliability of the electric power system. It can do this in two ways: first, increasing the probability that sufficient reserve will remain available to the grid operator, and second, by increasing the response time under emergency conditions. As to the first, it is the sheer number and wide dispersion of the DR resources that make it a more reliable reserve (in aggregate) than a single generator of equal size. Even though the failure rate of individual end-user curtailments is higher than that of a generator, the aggregated DR resource ends up with a higher probability of being available for the desired level of response. Therefore in theory, once the aggregated DR resource becomes fully integrated into the regional operations, the overall system reliability should improve.

Critical research projects sponsored by the California Energy Commission (CEC), and carried out by Lawrence Berkeley National Laboratories (LBNL), showed the incredible speed with which DR resources can respond to control signals. Using controllable air-conditioning units, the LBNL project team measured full-load response in less than 20 seconds, and identified technical opportunities to further improve the time. The feat was significant; the DR response was an order of magnitude faster than the spinning reserve response now provided by thermal generators, which are allowed up to 10 minutes to provide full output. With technical improvements, the project team believes the DR response can be brought down to a level that is essentially instantaneous. The project has gone a long way toward demonstrating the feasibility of using DR resources to provide spinning reserve comparable to that of supply-side resources

The CEC report on the LBNL research may help open the door to a powerful, new tool that California can use to improve system reliability, prevent rolling blackouts and lower system operating costs. Currently, WECC rules preclude the use of DR for spinning reserve, but the LBNL research could help turn the tide. The appropriateness of the DR resource was recently recognized by ERCOT, which now allows load curtailment to supply half of their 2,300 MW of spinning reserve. PJM Interconnection also recently changed its reliability rules to allow load curtailment to supply spinning reserve.

It should be pointed out that there is a second category of DR, involving the demand response to price signals, which does not serve the reliability interests of ISOs directly. However, system operators recognize the indirect benefits that arise from creating price elasticity and system flexibility through market-based functions.


ISO-NE’s programs are marketed by local distribution companies and independent aggregators. The programs can be viewed as either price driven programs or reliability programs. The reliability programs are dispatched during system conditions that might otherwise result in the interruption of firm load. These DR resources receive a capacity payment for being available to interrupt and a performance payment when interrupted. ISO-NE uses automated dispatching software to activate these DR resources and to receive near real-time data regarding the actual performance of the DR resources after activation. However, this software system is not integrated with the other wholesale market dispatching software.

As DR resources become a larger fraction of the installed capacity in the wholesale market place, these resources will begin to displace classic supply-side resources. As this situation unfolds, the reliance on the DR resources to interrupt will increase, and the number of hours of interruption will also increase. The DR resource will no longer be just an extra safety margin for the system operator, but rather will become another supply resource. In this situation, DR resources will no longer be dispatched only on the peak consumption day. Thus the integration of DR resources into the wholesale market, beyond the dispatch of DR resources as a reliability resource, will be required. Under the forward capacity market, ISO-NE could have 1,700 MW of active DR resources to dispatch by June 2010.

The system operator needs to understand specifically where the interruptions are taking place and how those interruptions affect that actual flow of power on the bulk power system. Real-time reliability analysis needs to incorporate the possible location and levels of DR resource interruptions. For example, in an export-constrained area on the bulk power system–areas where there is more generation than load and a limited amount of transmission capacity to carry the excess generation to the remainder of the market place–the activation of DR resources to interrupt load could actually exacerbate a problem.

Further, if DR resources are to participate in ancillary services, such as real-time operating reserves, then the system operator must be able to reliably count on the dispatch instruction reaching the dispatching entity without delay. ISO-NE is presently examining a new communication method for the dispatch of DR resources that is similar to the communication between the system operator and the dispatching entities for generation. The communication includes a more secure transmission medium than the public Internet and the dispatch of aggregated DR resources within a specific geographic area. This system would integrate the real-time telemetry into system-operator displays. The dispatching entity for the aggregator would be able to use any method to communicate with the end customer, so long as it meets the requirements for responsiveness and accuracy.

Daryanian is a senior consultant at R. W. Beck Inc. Gabriel is a vice president and principal at R. W. Beck Inc. Georgis is a project manager at R. W. Beck Inc.

Burke is a markets development principal analyst at ISO New England Inc.

R. W. Beck ( is a group of technically based business consultants serving public and private infrastructure organizations worldwide.

ISO New England ensures the constant availability of electricity by ensuring the day-to-day reliable operation of New England’s bulk power generation and transmission system, by overseeing and ensuring the fair administration of the region’s wholesale electricity markets and by managing comprehensive, regional planning processes.

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