Demand response is used by utilities and grid operators in a variety of ways to improve reliability, increase economic efficiency in regional energy markets, and to integrate renewable generation capacity into their systems. There are three major categories of demand response products: Capacity Markets, Price-Responsive Markets, and Ancillary Services Markets.
Under textbook market conditions, supply and demand levels set prices for goods and services. When supply is limited, prices rise, and, usually, consumers adjust their demand accordingly. However, many electricity markets do not operate in this way. In certain regions, electricity prices are carefully limited and controlled, and as a result, traditional price signals cannot be used effectively to curb demand for electricity. Because the economic consequences of running out of electricity supply are considerable, capacity markets have been set up to ensure that supply will be available when it is needed most. These capacity markets provide an additional incentive for developers and owners of generating capacity (i.e. power plants or demand response providers) to make their capacity available to electric markets where price signals alone would not. Capacity providers are paid on a kilowatt per year basis for the capacity that a power plant can generate or, in the case of demand response, the capacity of power that can be reduced.
Demand response providers work with utilities and grid operators to provide a reliable reserve of dispatchable electricity demand reduction that can be added to overall capacity calculations. Instead of building a costly, greenhouse gas emitting power plant, demand response providers like EnerNOC use demand-side generation and load shedding resources that are already available to ensure that capacity markets operate efficiently, utilities have sufficient supply to meet demand, and that prices stay low for energy users.