Submission to FERC on Demand Response Compensation Rulemaking

This submission responds to a Federal Energy Regulatory Commission proposed rule making on demand response compensation. The proposed rule would require equitable compensation for demand response providers as generation suppliers for managing electrical load at the same time and place.

Our comments support equitable compensation for demand response and address the need for solid and consistent measurement and verification.

Alliance Comments - Full Text

October 13, 2010

FERC Docket No. RM10-17-000

The Alliance to Save Energy (‘the Alliance’) appreciates this opportunity to comment on the Commission’s proposed rule making on demand response compensation. The Alliance commends FERC for its decision to address the issue of equitable demand response compensation; given the many benefits of demand response services, establishing regulations that promote effective demand response is both consistent with and essential to the Commission’s mission to improve grid stability and ensure reasonable energy prices. 

By enabling an effective demand-side response to price signals, and thus reducing prices at times of peak load, demand response programs and activities can have major benefits for grid stability, reducing energy costs to consumers, and reduce environmental impacts from generation and transmission. Action by providers of demand response services – both energy-saving and load-shifting – must be effectively incented through the establishment of appropriate regulations for compensation in wholesale energy markets in order to maximize their benefits in meeting energy needs. As noted in the Notice of Proposed Rulemaking,  denying equitable compensation to demand response resources prevents full participation of the demand side in energy markets, increases wholesale price volatility, reduces reliability, and unnecessarily increases costs for consumers. The Alliance supports the Commission acting to require ISOs and RTOs to pay equitable compensation for demand response based on locational marginal price.

Demand response can be fully equivalent to generation in balancing supply and demand and ensuring consumer energy needs are met, with similar or greater reliability and response times, and reduced (often zero) environmental externalities. As demand response is equal to or better than new generation, it holds that equitable compensation for demand-side resources is necessary.  And, importantly, without such compensation, demand-side resources cannot compete fully or fairly with generation sources. However, we recognize that on the demand side wholesale electricity markets become intertwined with retail transactions, and that the implementation of the rule may need to take into account local retail electricity rate structures and conditions.

Demand response benefits all consumers, even those not directly participating in a demand response program. Such benefits include: 

Reduced costs for all customer classes.

Reductions in peak load due to demand response actions at periods when wholesale energy costs are highest reduces energy costs for all customers as the demand curve is shifted to a lower cost point. For example, the Brattle Group has estimated that a 3% curtailment of super-peak load for five PJM zones during the twenty top five-hour price blocks, which would create a 0.9% reduction in PJM’s load, would result in price reductions of 5-8%, or $5-$25 per MWh. 

The Commission’s March 18th notice offers yet another example of PJM demand response price reductions.  Even consumers who do not participate in a real-time, time of use, or variable pricing program benefit from reduced peak prices as fixed price energy tariffs reflect costs paid by energy providers on the wholesale market. 

Eliminate the need for new generation capacity.

Over the longer term, demand response capability may delay or eliminate the need for the construction of additional generation capacity whose costs would be passed on to ratepayers. Competition in the markets is also improved by the participation of demand response providers, placing pressure on supply-side resources to reduce their own bids in wholesale markets.

Enhanced reliability and power quality.

Grid stability provided by demand response providers during peak events provides a common benefit to all consumers. When peak loads exceed available generation or transmission capacity due to unexpected loads or outages, demand response can avoid voltage problems, brownouts, or rolling blackouts. Although the proposed rule would not apply to programs administered for reliability or emergency reasons,  these benefits remain even when demand response is conducted for price reasons.

Immediate impact.

In many situations, demand response can be deployed more rapidly than supply-side resources, thereby providing a more effective response to unexpected events which might otherwise destabilize grid operation. For example, automated demand response (ADR) systems in some instances provide near-instant load curtailment in response to utility signals. 

We do not believe, however, that demand response participation in the wholesale markets for off-peak periods, when prices are low, will have a large impact on other customers -- positively or negatively -- though it may be appropriate to treat demand response differently off-peak.

Regulations established by the Commission should not be so complex as to create undue additional barriers to entry for entities seeking to become demand-response providers. Implementation of these regulations, as well as application of them to existing and future RTO/ISOs and demand response providers, should be conducted in an efficient manner that does not itself create a barrier to demand response programs. For example, regulatory compliance could overwhelm smaller businesses that would be unable to manage the workforce development or staff time challenges that complying with complicated regulations could create.

Rigorous and consistent measurement and verification (M&V) guidelines should be considered as the Commission implements regulations for demand response in energy markets. Robust M&V is an obvious requirement to ensure that demand reductions from demand response activities are real and additional. M&V can be challenging in any energy markets context, but an efficient and consistent protocol, effectively employed, must ensure reasonable accuracy of claimed demand reductions without excluding demand response programs. Lack of effective measurement protocols could bias demand response programs both relative to each other and relative to supply-side resources, and either prevent development of needed demand resources or waste money and endanger grid stability through purchase of faulty demand resources. 

While it may not yet be necessary or timely to set standardized, nation-wide M&V protocols, the Commission stands in a good position to provide ISOs and RTOs with guidance in developing effective protocols where none currently exist, harmonizing existing protocols, and developing voluntary industry standards and best practices. Some ISOs and RTOs already have well-established M&V programs; others may need to improve their M&V to more effectively manage an expanded demand-side resource presence in their markets. Harmonization of M&V protocols could make the M&V process more efficient for ISOs, RTOs, and demand response providers, allowing collective development, pooling of expertise and a greater knowledge base, ease of movement for trained evaluators and program administrators, and replication of programs across different regions. The Commission has partially addressed some of these issues in docket no. RM-05-5-017, recognizing the work of the North American Energy Standards Board (NAESB) on M&V issues relevant to demand response in an ISO/RTO market context (adopting by reference the Phase I standards). NAESB’s Phase II M&V standards  may be finalized in the coming months with greater technical specificity that will offer additional harmonization opportunities. The Alliance urges the Commission to incorporate these additional standards where appropriate.

In conclusion, the Alliance thanks the Commission for the opportunity to comment on the proposed demand response compensation rule. The Alliance fully supports the Commission’s action to ensure equitable compensation for demand response resources. 

The Alliance also urges the Commission to continue to consider appropriate regulations and assistance to ensure that demand-side resources, including not only demand response but also programmatic energy efficiency, can compete on a level playing field with supply-side resources so that all consumers can experience all of the benefits that these resources provide.  Specifically, the Alliance notes that the economic and reliability benefits of demand-side participation in energy markets, as well as the requirements for equitable compensation and effective M&V for demand-side resources, apply equally to the participation of  energy efficiency programs in capacity markets, and the environmental benefits of long-term efficiency often are clearer.  For this reason, the Alliance respectfully requests that the Commission consider examining compensation for programmatic energy efficiency in appropriate markets in a future rule making to reduce customer energy bills in both peak and off-peak periods and to reduce the need for both baseload and peaking generation capacity. 

Kateri Callahan
Alliance to Save Energy