by Phil Davis, Schneider Electric

In recent years, the solution for rising energy demand, aging infrastructure, renewable energy sources and the expected proliferation of electric vehicles has acquired a single name: smart grid.

The basic smart grid concept will add a layer of communications technology to the existing electric grid to facilitate real-time energy monitoring and a bidirectional flow of energy and data between electric utilities and end users. Better communications alone, however, cannot fix the country’s energy problems; it only can lay the groundwork to encourage and to facilitate a changing relationship between electric utilities and energy consumers, allowing them to work together to change distribution and consumption patterns.

Demand response (DR) is a key element of that change. Smart grid and DR are intertwined. Smart grid technology is spurring the rapid evolution of DR from an economic and reliability tool to a more active energy management solution. DR is becoming a vehicle that allows sellers and buyers to negotiate terms of use and payment consistent with the operating objectives of each party. As energy consumers learn the benefits of DR, they are demanding ever more sophisticated reports and management tools to make active energy management a site-based reality. A growing number of DR resources want fully integrated controls and information technology inside the facility and connected to the smart grid, allowing real-time communication between the building and the utility or DR aggregator.

In addition to smart grid technologies, the Federal Energy Regulatory Commission (FERC) has issued recent rulings that seek to expand demand-side participation in energy markets. For instance, FERC Order No. 719, which was issued in 2008, eliminated barriers to DR participation in organized wholesale energy markets by opening energy markets to the demand side that had been available only to the supply side.

In March, FERC issued Order No. 745, which stands to have a significant impact. FERC’s Market-Based Demand Response Compensation Rule under RM10-17 establishes that electric utilities and retail market operators will be required to pay DR resources the market price for energy, known as the locational marginal price (LMP), when those negawatts, or load reductions, will balance the grid’s supply and demand as an alternative to a generation resource. This ruling will benefit energy consumers by further eliminating economic barriers to DR participation and improving the operation and competitiveness of organized wholesale energy markets. This ruling is a big step toward putting DR resources on par with other generation resources.

Setting a market price for load reduction encourages a greater number and variety of participants, allowing independent system operators (ISOs) to balance the grid better using demand-side resources. This will be increasingly important as ISOs seek to maintain grid stability as the economy recovers from recession and as more renewable generation comes online. Increasing renewables required by renewable portfolio standards (RPS) mean that new types of fast-acting DR resources will become indispensable to utilities and grid operators for maintaining stability. These regulation services likely will be more effective than traditional generation because they are closer to the points of need and potentially can react more quickly. DR also can mitigate the stress of adding electric vehicles to the grid by managing the timing and amounts of power flowing into and potentially from these devices to use them as energy storage devices.

FERC Order 745 provides a consistent framework and competitive market position within the bulk power system for these and other types of DR resources. At the local distribution level, local distribution companies (LDCs) acting as aggregators have a new marketing tool to increase participation. Though 745 does not have a direct impact on LDCs’ using these resources for local issues, it sets a market precedent that is likely to spread, will increase awareness among energy consumers and provides the consistency necessary for business planning. Those LDCs acting as aggregators also gain a more potent incentive to encourage customer participation.

This FERC ruling will be critical to smart grid development. Setting a consistent pricing rule for negawatts will usher in an era in which energy consumers become more active and aware in energy issues and usage. It will encourage real-time activity, i.e., DR 2.0, with less dependence on capacity or emergency programs. As DR starts collapsing into real time there will be a huge demand for data communications technology, which will allow energy management systems to communicate in real time through electronic signals with the utility or DR aggregator.

Is it hard to imagine the day demand-side resources will appear in grid control rooms as just another, though specialized, resource in the dispatch stack? Order No. 745 initiates that thought process and makes it economically worthwhile for the demand side to use its talents to bring new capabilities to rejuvenate an old and trusted resource.


Phil Davis is senior manager of demand response solutions for Schneider Electric, where he develops strategies for deployment of demand resources and renewable programs for large energy stakeholders. Reach him at


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