Commissioner Nora Brownell of the Federal Energy Regulatory Commission (FERC) noted in her keynote presentation at the January 24, 2006, National Town Meeting II on Demand Response (DR) that, in the dozens of standard market design public meetings with hundreds of electric industry stakeholders, DR was the only public policy initiative that was supported by everyone. While stakeholders could not agree on any other initiative that would benefit the electric industry, everyone believed that more DR was a good idea.

Despite such wide interest and support, DR is not even close to reaching its full potential and, in fact, the gap between actual DR and potential DR is widening. In fulfilling one of the requirements of the Energy Policy Act of 2005, a recently issued report by the US Department of Energy (DOE) details the state of DR today in the US (Sec. 1252(d) of EPACT: DOE Report to Congress on Demand Response). The DOE report reveals that in 1996, 15,243 MW of peak load reduction was available. In 2004, however, despite advances in technology that have increased the potential for DR, actual available peak load reduction had fallen by 41% to only 8,976 MW.

Current Situation

So what is happening? Why is the level of DR decreasing despite the common belief that more DR would be better? We believe that there are three reasons that have widened the gap and further, that we are on the verge of reversing this trend.

1. Restructuring has impeded DR's progress.
   Electric industry restructuring has been underway for several decades (Public Utilities Regulatory Policy Act of 1978 marks a beginning and the Energy Policy Act of 1992 a major milestone). In the early 1990's, industry restructuring trends were clear – more competition was expected in almost every segment of the electric industry. However, in the early 2000's, restructuring slowed and even retreated (e.g., California). The number of states where viable competition exists for retail consumers after advancing for several years is on the decline and there is no sign of this trend changing.
   
   Moreover, with the halting regulatory changes, responsibility for assuring that sufficient electric capacity resources are available to meet society's needs has been fragmented. In the traditional vertically integrated industry, resource adequacy responsibility clearly sat with the regulated utility and this responsibility was overseen by state regulators. In today's deregulated states this responsibility is fragmented among a plethora of players, including FERC, DOE, US Congress, ISO/RTOs, state energy regulatory commissions, state legislators, and utilities, among others. All stakeholders have important and valued perspectives, but without a clear roadmap for decision-making, every conversation begins with first principles and progress is slow.
   
   Unclear regulatory change progress and fractured responsibility for resource adequacy have contributed to hindering development of regulations, market rules and policies to enable DR to participate.
2. Generation is overbuilt.
   DOE data shows that we have approximately 1,000 GW of generating capacity to meet our nation's peak demand of 700 GW, providing a 43% reserve margin on a nationwide basis. We responded to a period of minimal investment in generation from the 1980's to the late 1990's by over-investing in generation. According to DOE, the US added 177 GW of generation capacity from 1999 to 2004, as much as it did in the preceding seventeen years. Adding to the problem, the overbuild occurred regionally, leaving much of the country with excessive reserve margins while other locales experience capacity shortfalls.
   
   DR is a better economic option for a portion of our resource needs, but in areas of excess capacity where we have over-invested in generation, this advantage is not valuable.
   
   We see the advantages of DR being increasingly valued to help solve the pockets of capacity shortfalls evident in states such as Connecticut, New Jersey, California, Florida, and Arizona.
3. DR is not well understood.
   There are many myths and false promises swirling around DR, many of which are not helpful. The three most relevant for this discussion are:
   
   
   • Some suggest that DR should be free and that it will come naturally when end users are exposed to real-time prices. This thesis does not appreciate the realities of end users and the many facets of different types of DR. Yes, when people are exposed to high prices they will make whatever economic tradeoffs they deem in their best interest. However, if we want end users to go above and beyond what is in their own best interest and reduce their load even more because we value it as less expensive to our other alternatives (e.g., a new peaking turbine), then we have to find a way to value their contribution on par with our alternatives.
   • Some suggest DR is not reliable. This thesis is debunked every time DR resources are asked to perform in well-designed programs and the performance meets and exceeds expectations – an increasingly common occurrence. DR programs which have the ability to verify performance during events and require penalties for non-performance have been seen to reliably meet system operators' stringent requirements time and time again. While some DR programs have been designed with the idea that participation will be increased if the burden on end users is minimized, these DR programs have not been considered by system operators as equal to traditional generation resources.
   • Some suggest DR will fix everything that ails wholesale and retail electric markets, thus enabling effective, efficient competitive markets. This thesis suggests that DR will prevent market power from being exercised by generation owners and will provide a perfect hedge against price spikes. Time will tell how effective a role DR will play in mitigating price spikes. DR's potential is appealing yet unlikely to be the panacea some envision. More DR will need to be developed before we will see the full power of DR's mitigation ability.

Outlook

Given the current situation, what is the outlook for demand response and what might be the benefits?

• First, DR will provide an increasingly important part of the resource mix for meeting end users' electric needs. As generation surpluses decline in more and more locations, the economic attractiveness of DR will become increasingly compelling and this will spur dramatic growth in DR as a portion of the resource mix.
• We expect the most dramatic growth of DR will be in the end user sector that is least developed and most cost effective – commercial end user DR:
  
  
  • DR with large industrial users (steel mills, aluminum smelters, paper plants etc.) has been actively utilized in electric resource planning in many parts of the country. This sector has reliably provided capacity at attractive costs and while more opportunity exists for DR in this sector, it is the most fully developed DR sector.
  • DR with commercial establishments has only recently been actively enrolled. Commercial sector DR has been seen to be very viable, providing reliable capacity when called upon. Given the widespread nature of commercial establishments, this sector presents an almost ubiquitous resource, lying fallow, able to be tapped with pinpoint accuracy in exactly the areas where we will need the capacity first. The cost per kW enabled is relatively very attractive because incremental metering, control, and communication costs are not significant relative to the kW's enabled.
  • DR in the mass market of residences and small commercial establishments is appealing and largely undeveloped but is more expensive on a $ per kW basis than commercial establishments because it often requires significant spending for both new metering technology and often an ongoing communication link relative to the kW's enabled.
• One possible initiative for FERC to undertake which would assure that DR is given a fair assessment in all regions (and in keeping with Congress's mandate in the Energy Policy Act of 2005) is to ask every utility, state commission, and RTO/ISO to achieve by 2008 a minimum of 5% of peak capacity through DR or explain why this is not possible. This minimum DR portfolio standard would help to assure that the rules, policies, and planning give fair consideration for DR. No incentives would be required. Simply open the market fully to the benefits of DR and allow DR to achieve the level of development that is economically justified.
• Finally, the DOE Report to Congress suggests that the benefits of demand response total between $0.50 and $2.00 per kW of system peak. These direct benefits come from reduced generation, transmission and distribution capacity spending, increased liquidity in markets, reduced energy prices, and reduced ability for any one or set of market participants to exercise market power. EnerNOC has also seen significant indirect benefits from the implementation of DR including increased investment in energy efficiency, enhanced knowledge of energy usage to enable better economical commodity contracting, advanced energy planning, and enhanced equipment management. Directly applying the upper estimate of $2.00 per kW to the US system peak of 700 GW suggests potential direct DR benefits of $1.4 billion per year.

Plainly, there is a lot to be done to achieve the valuable benefits of DR for all. We look forward to continuing to work with our customers, policymakers, friends, and influencers to fully deliver the potential of DR and create a better energy future for us all.

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