Article originally published in Electric Light & Power.
Law of Supreme and Demand
02/23/2016
Future of DR Hedged by High Court Win, Market Rules
By Rod Walton, Senior Editor
It may not always seem linear or unidirectional or even make sense to the average energy consumer, but demand response (DR) is a booming business and seen as a growing tool by companies, regulators and now the courts.
The fact that the U.S. Supreme Court has upheld the legality of FERC Order 745-an energy policy focused on wholesale pricing for DR providers-is undeniable proof that the era of peak-load management and energy efficiency has truly arrived. The wave of advanced metering infrastructure is growing nationwide while other tools such as storage and capacity markets are filling out a picture of what the future may look like for utilities, alternative suppliers and the public.
“It is important to recognize that DR is still viewed as an emerging technology by many utilities,” said Mark Konya, principal industry consultant for the SAS Institute. “Aside from the jurisdictional aspect, though, continued advances in advanced analytics will have a huge impact on demand response. These advances, for example, enable utilities to aggregate and stream data in near-real-time to achieve more accurate forecasting and enable dispatch of DR as a reliable resource.”
Navigant Research has predicted that global spending on DR technologies is expected to total $6.2 billion for the 10 years ending in 2024. Utility programs such as Duke Energy Ohio’s HoM Energy Manager and Pacific Gas & Electric’s Supply Side Pilot stood out as finalists for POWERGRID International’s Demand Response/Energy Efficiency Project of the Year. Both projects are aimed at energy and cost savings and deal with peak-load challenges in completely different parts of the country.
“If we’re talking about residential customers then the best way to engage them is to offer comprehensible programs via the marketing channels they prefer, significant incentives to participate in the programs and continued support throughout their participation to help them understand the savings they are accruing,” Konya said.
Yes, a watt saved is a watt earned, no doubt, but what was riveting to DR players and observers lately was the fate of FERC Order 745, riding on the opinions of Supreme Court justices.
(Editor’s Note: This magazine has a long lead time from writing the story to publication, so the Supreme Court ruling had yet to arrive when POWERGRID International was interviewing the sources quoted here; their comments reflect that uncertainty. In fact, this story was already set for page design and had to be adapted when the justices made their ruling. It also should be noted that only eight of the nine justices decided the case; Samuel Alito recused himself due to owning stock in a company connected to the case. The final 6-2 vote reversed the previous appellate court ruling against Order 745.).
The outcome is a huge deal for power generators who opposed it and for the DR markets. Here’s the history: The Federal Energy Regulatory Commission finalized Order 745 more than four years ago. The rule said it sought to ensure “that when a demand response resource participating in an organized wholesale energy market administrated by a regional transmission organization (RTO) or independent system operator (ISO) has the capacity to balance supply and demand as an alternative to a generation resource and when dispatch of that demand-response resource is cost-effective as determined by the net benefits test… that demand resource must be compensated for the service …at the market price for energy.”
Basically, as Navigant authors Stuart Schare and Brett Feldman wrote in POWERGRID International’s December 2015 issue, it required wholesale energy markets to pay the same price for DR resources as the rates for retail electricity generation. Some support 745 as another way to encourage a variety of power players, including storage and independent sources offering renewable energies.
“All of these different rules have opened up markets to innovation,” said Katherine Hamilton, executive director of the Advanced Energy Management Alliance and principal at public policy-focused 38 North Solutions. “Demand side applications could become resources and not just loads. It should not matter where the electrons come from, as long as they are available when the grid needs them.”
Traditional power generators begged to differ on the compensation part of it. In its brief to the high court, plaintiff Electric Power Supply Association and other respondents argued that responsibility for retail markets resided with the states. FERC’s Order 745 tried to circumvent that long-held precedent by “inviting retail customers into a wholesale market,” EPSA alleged in its filing.
“FERC is free to make a contrary judgment about wholesale prices, and to try to persuade state regulators to adopt policies that would make retail demand more responsive to changes in wholesale rates,” the brief read. “But FERC is not free to dictate the levels of retail price or demand. And it cannot accomplish that end by the convoluted means of ordering wholesale-market operators to compensate retail customers for reducing their retail demand.”
The D.C. Court of Appeals sided with the plaintiffs, temporarily striking down Order 745 in a May 2014 split decision by the three-judge panel. Judge Janice Rogers Brown, writing for the majority, seemed to criticize FERC for going beyond the role of encouraging unimpeded markets.
“Instead of simply removing barriers, the rule draws demand-response resources into the market and then dictates the compensation providers of such resources must receive,” Brown wrote.
Konya conceded, prior to the Supreme Court decision, that vacating Order 745 would have removed a significant incentive for expanding DR programs and treating it on equal footing with generation in the RTO and ISO markets.
“That’s not say that DR programs don’t have intrinsic value outside of wholesale markets,” he said. “If the order (was) vacated then I expect demand response (would have continued) to thrive under state control. In this scenario utilities (would have) more flexibility to design and implement programs which are tailored to their local environment.” He predicted, correctly, the FERC ruling would be upheld. It could undergo changes before it is fully implemented.
“The conflict as I see it is that DR usurps the very basis for pricing-existing generation-and it therefore has an impact on retail rates,” Konya added. “FERC tried to address this by requiring DR dispatch when it makes economic sense, but the levels of compensation may not be acceptable to all parties under the current form of the order.”
It’s no doubt that companies like Comverge Inc., the New-Jersey-based demand management solutions firm, have a dog in the DR hunt. But what they really wanted, either way, was a clear and quick decision so they can figure where to hunt from there.
“We would of course like to see FERC Order 745 continue in its original form because it is beneficial to aggregate investment in demand response as a viable and valuable component of the wholesale market,” Matthew McCaffree, senior director of regulatory strategy for Comverge, said in an emailed, pre-ruling response to POWERGRID International.
“But regulatory and legal uncertainty leads to delays in investment, and we would prefer a quick resolution more than anything else as the long process to finalize the decision has been the source of regulatory headwinds in several states,” McCaffree added. “Only a very small portion of our overall portfolio would (have been) impacted if the order (was) vacated, but the bigger risk for us is that new opportunities for mass-market demand response will be delayed until the court makes its ruling, regardless of the outcome.”
The truth now is that demand response marches on and would have with or without 745’s affirmation. Hamilton, of the Advanced Energy Management Alliance, pointed out that the carbon-emissions reductions required by the federal Clean Power Plan-which, of course, will undergo its own litigious challenges from numerous states-encourages DR to aid in compliance and as a reliability measure against voltage disruptions and other issues.
“Demand response has been around for the decades, but it used to be analog-turn the AC off or down on the hottest days,” Hamilton recalled. “In the future, we’ll see that it’s about a bunch of different choices; it will be so much more interactive. I think the technology is there, but not all the markets are there.”
Hamilton looked to the future potential of a flexible capacity market.
“Capacity could come from all kinds of resources: distributed solar, energy storage, demand resource, efficiency. If the grid needs a resource, and you can provide it, you should be allowed to do so and be paid for the value of that resource to the grid. No matter what changes end up happening in the market structure, it’s a really exciting time to be in this business.”
The penetration rate for advanced metering is now close to 40 percent of all meters nationwide, according to FERC’s year-end 2015 staff report on DR and AMI. The Texas Reliability Entity system has the highest rate of smart meters among regions at about 80 percent of overall metering systemwide. The Western Electricity Coordinating Council is about 62 percent, according to FERC’s report.
Ten years ago, California research consultant Roger Levy wrote an article called “A Vision of Demand Response – 2016” for the Electricity Journal. In his article, Levy asked some critical questions about fledgling DR.
“So what happens when demand response is fully integrated into the utility planning and operating structure? What happens when demand response is actually supported by pricing, operating policies and building and appliance standards? What happens if demand response, like energy efficiency, becomes a condition of service?”
Levy goes on to describe fictional scenarios in 2016 in which peak-load and DR challenges play out. Smart meters, appliances and analytics work together. “Information tells you where you’ve been, where you are and where your journey might take you,” he concludes. “Advanced metering and SCADA are the keys to better information.”
DR’s promise has not fully played out, nor seen where it fully does or doesn’t work, but it’s getting closer.