Last year, at about the same time the U.S. Supreme Court decided it would consider the case of FERC Order 745 and the commission's authority to regulate demand response, a broad group of stakeholders began discussing how to help the spread the resource. But given the uncertainty in the industry, the first question which had to be posed was: Should the group even continue?
“We asked each other if we should proceed or wait, and the unanimous decision was to move forward,” said Wedgemere Group President Dan Delurey, who organized the effort. “Demand response has changed a lot, in many ways and places, and it was time to really look at how it has evolved and how it should evolve, regardless of the Supreme Court.”
The group's efforts wrapped up last week, culminating with a report titled "The Road Ahead for Demand Response.” It broadly calls for policies which incorporate demand response (DR) into Distributed Energy Resource (DER) plans, and it was serendipitously followed by the Supreme Court's decision just a few days later to uphold FERC's authority, giving a much stronger sense of how the resource will participate in wholesale markets.
“They made the right call,” Delurey said of the court's decision. “I think the 6-2 decision points to that. The ship has been righted here, with respect to FERC and wholesale demand response.”
The Evolution of Demand Response Project
“This is not research, in the traditional sense,” Delurey said. “It was a dialogue, which took place over many months.”
On the team were utilities and state regulatory bodies, researchers and power companies. The American Public Power Association played a role, as did Lawrence Berkeley National Laboratory, PJM Interconnection and ISO New England. FERC and the White House both monitored the project, though their input was restricted.
The idea, Delurey said, was to put together a team large enough to draw in a broad range of ideas, but small enough to allow for real debate. The participants were not always in agreement, he said, particularly on areas of “visibility” and how demand response shows up to grid operators. But opposing ideas reflect the complicated topic, evolution of the industry, and need for players across all parts of the sector to understand how demand response works.
Ultimately, the group put out a report calling for expansion of time-variable rates and policies which consider demand response as a distributed resource. It also called on grid operators, utilities and demand response providers to develop proposals addressing the “visibility issue.”
“The duality of demand response is that it can be a load modifying resource, or it can be a supply resource, and because it has that duality, like few others out there, it has always made it a little more challenging to understand, even to the point of enacting policy,” Delurey said.
Duality, Visibility & Value
Explaining that duality was the report's first objective, and possibly most challenging.
“No topic associated with DR took up more time during the EDP project than duality,” the group said in the report. “It was one of the first to be discussed and one of the last to be debated. It was an issue on which the participants could not reach consensus.”
Discussion surrounding demand response's dual role was closely intertwined with visibility and valuation.
“Some people would say demand response should be included in short- and long-term planning and forecasting, and other look at it predominately as something you deploy,” Delurey said. “And what is challenging with demand response is the duality and the design of markets that can appropriately account for that duality.”
Ultimately, the group made four recommendations aimed at explaining the dual role of demand response, how it should be incorporated into markets, and what types of policies should be enacted around it:
- Demand response should be considered a resource that can be fully incorporated into market forecasts and planning, including load forecasting, transmission planning and security constrained dispatch, at both the wholesale and distribution levels;
- Each demand response product or service should receive compensation, as either a payment or avoided cost;
- Prices for resources, products and services reflective of marginal costs should determine which resources ought to be used to achieve a least-cost objective;
- The total compensation for demand response must equal the marginal value of the products or services avoided and/or provided by the resource. A MW of DR sold must entail the purchase of the same MW by the customer offering the reduction.
As to the visibility issue, the report points out that operators of regional systems, distribution systems and distribution platforms must be able to "see" the demand response as an asset. But integrated distribution resource platforms that create a new, plug-and-play capability at the distribution level for demand response "complicate the proper valuation of DR," the report said.
The group recommended that grid operators, utilities and demand response providers "develop proposals for how to ensure that DR visibility is addressed in the development of DER policy and operational rules, both at the bulk power level and at the distribution level."
And as the spread of advanced metering continues, Delurey said penetration how now reached about 70% and the more granular data is helping to grow the market for demand response. The number of smart meters installed around the United States surpassed older models two years ago, and according to the EIA, five states have AMI penetration levels above 80%.
"Price signals have been understood for years to be that backbone of demand response," he said. "Time-based pricing, dynamic pricing, that's the fertilizer that is going to let demand response bloom as a distributed resource."
"The other thing we highlighted was the move towards optimizing the distribution system and the distribution management platforms," Delurey said. "There is a lot more dispatch at the distribution level that needs to be coordinated with the dispatch at the wholesale or regional level. That's something policy makers need to think about."