FERC to Require Equal Compensation for Demand Response
On March 15, the Federal Energy Regulatory Commission (FERC) approved a rule that will require utilities to pay the same for demand response as they do for electricity generation. Specifically, utilities will pay demand response projects the same locational marginal price (LMP), or market rate at a given location, that they pay for produced electricity.
This rule breaks down barriers to demand response, and is largely in line with recommendations the Alliance made in October 2010 in response to FERC’s proposed rule making.
Demand response (DR) is different from energy efficiency in its traditional sense. DR offers a reduction in energy use at a specific time – generally on the scale of hours or minutes – rather than a general reduction in overall energy use with energy efficiency measures.
Utilities usually use DR when electricity demand spikes (like hot summer afternoons) instead of generating or purchasing additional (often costly) peak electricity. Utilities also use DR during unexpected supply loss, like when a power plant is forced to shut down. It is often cheaper for utilities to pay DR providers to reduce electricity loads than it is to produce or buy additional electricity when demand, and thus the price, is high.
Putting DR on ‘Equal Footing’
This new FERC rule ensures that DR is not disadvantaged in wholesale electricity markets, allowing reductions in demand to compete on equal footing to generation. Moreover, the rule stands to reduce pollution and keep electricity costs down while avoiding electricity generation and reducing energy loads.
For DR activities to be eligible under this rule, they must be cost-effective and produce a net-benefit for customers’ electricity rates in their given market.