The Regulatory Assistance Project

email: rapcowart@aol.comweb: www.raponline.org

50 State Street, Suite 3Montpelier, Vermont 05602Tel: 802.223.8199Fax: 802.223.8172

Demand Response:Turning Theory into Reality

(“This is not your father’s DSM”)

NECPUC Annual SymposiumJune 18, 2002

Richard Cowart

Old Lessons…New twist

• Productivity and environmental quality--still count

• Market barriers and failures -- still real

• Demand-side potential remains very large

• New markets - new challenges and opportunities

Electric RestructuringYear 2000

Electricity: Market Lessons

• Early market problems: price volatility, price spikes, reliability challenges, generator market power

• “Plain vanilla” pricing ignores reality

• Physical reality: electricity has distinctive time and location values

• Policy responses: cost-causers should pay; those providing high-value benefits should be rewarded

State of Energy -- 2002

Wholesale barriers to demand response

• Supply-only bidding• Load profiling by pools and RTOs• Reliability rules and practices excluding

demand-side resources• Historic subsidies for wires and turbines• Transmission pricing and expansion

policies can undercut low-cost demand-side resources

Retail barriers to demand response

• Averaged rates and default service plans block price signals, slow innovation

• Disco rate designs promote throughput• Uniform buy-back rates don’t include premium for

avoided distribution costs• Utility as gatekeeper vs. utility as facilitator

– Can customers or their agents sell directly into wholesale markets?

• Metering traditions, costs and standards

New England Demand Response Initiative

• Goal: balanced energy markets• Breadth: Remove market and policy barriers to

all customer-based resources: load response, energy efficiency, and distributed generation

• Depth: Propose coordinated policies and programs for wholesale, wires, and retail

• Facilitated stakeholder process– ISO-NE, 6 state PUCs, DOE , EPA, state air

directors, market participants and advocates

• New England can lead

Demand Response: Five substantive areas

• (A) Price-response in wholesale markets

• (B) Reliability programs: ancillary services, emergency curtailments

• (C) Retail pricing, advanced metering

• (D) Long-term Demand Response: Embedded energy efficiency

• (E) Transmission -- congestion relief, prices, and expansion plans

The Market Value of Price-Responsive Load

2016

0

20

40

60

80

100

0 5 10 15 20 25 30 35 40

ENERGY AMOUNT (GW)

BID

PR

ICE

S (

$/M

Wh

)

InelasticDemand

Price-ResponsiveDemandBid

SupplyBid

Demand Response (A) Wholesale market features

• Demand-side bidding• Price-sensitive load bids reveal a real demand

curve

• Multi-settlements markets• Day-ahead settlement permits economic

resales of planned load reductions

• Demand release resales• Resales into short-term markets will moderate

price spikes and generator market power

Actual Performance of PRL Programs: Summer 2001

0

100

200

300

400

500IS

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RP

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lass

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NY

ISO

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DR

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PJM

ISO

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MW

Subscribed Load

Actual Average Curtailed Load

• Several programs successfully enrolled ~300-400 MW

• Most PRL programs achieved modest actual reductions (Average = 19 MW)

Demand Response (B) Reliability Resources

• Retail Loads Should Be Able to Participate in All Wholesale Markets

• Day-ahead ancillary services– Spinning reserves– Nonspinning reserves– Replacement reserves

• Real-time (intrahour) energy and • congestion management• Emergency load interruptions

Loads should be able to set prices, not just be price takers!

Can Demand Participate in More Valuable Reserve Markets?

NYISOASPrices

0

1

2

3

4

5

Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01

NY

RE

SE

RV

E P

RIC

ES

($/M

W-h

r)

Spin = $3.0/MW-hr

Nonspin = $2.0/MW-hr

Replacement = $0.9/MW-hr

Demand Response (B)Reliability: Challenges

• Wholesale policy needs:• Needed: neutral terms for bidding reserves• Can system operators rely on sampling, avoid

expensive metering on dispersed DR assets?

• Retail policy issues:• Can end-users and their agents provide ancillary

services, or just utilities/LSEs? • How to lessen burdensome interconnection rules and

standby charges?• How to coordinate RTO-level and utility-run programs?

Demand Response (C)Retail tariffs and meters

• State policy dilemma: • Most customers want uniform retail rates; but• TOU and market-based rates are needed to

improve price response in the wholesale market

• “Push-Pull” on Real Time Pricing– Market reformers: “show them the price” – Consumer advocates: “the ENRON price?”

• Good news - there are lots of options:– Flat -- Block -- TOU -- RTP– California 20/20 ; Puget TOU program

Tariffs and metering Challenges and options

• How can states add TOU prices or price response options to franchise tariffs and default service plans?

• Flat, averaged, or deaveraged distribution rates?• Should standard offer prices track the market?

How closely? • Mandatory TOU or RTP rates for C & I?• Mass deploy advanced metering? Mandatory or

optional? Who owns the meter and its data?

Demand Response (D) Long-term Efficiency

Combined Commercial Cooling and Lighting LoadshapeBaseline and Load Management Compared to Energy Efficiency

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Hour

Wat

ts p

er S

quar

e Fo

ot

Load ManagementBaselineEfficient

Impact of California DSM Programs and Standards

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1975 1980 1985 1990 1995 2000

MW

Public Agency ManagedLoad Mgmt Non DispatchableFuel SubstitutionEnergy EfficiencyBuilding Stds.Appliance Stds.

(D) Investing in Efficiency:Options and challenges

• Can states reform Disco ratemaking to eliminate the throughput incentive?

• Financing efficiency: wires charges and other• Can NE adopt regional codes and standards?• Should the ISO permit “regional reliability

charges” to support cost-effective regional efficiency programs?

• Can the regional value of long-term EE be revealed in ICAP markets?

Demand Response (E): Transmission Policy

• Thinking twice about congestion: LMP reveals value of DR, EE, DG in load pockets

• The rolled-in facilities problem:– generators indifferent to costly locations– undermines load center resources

• Transmission planning:– Transmission AND its alternatives

Load Densities - Southern New England

The geography of congestion

The Challenge of

Transmission Planning

• FERC: RTO has Transmission planning responsibility

• NTGS: “Regional planning processes must consider transmission and non-transmission alternatives when trying to eliminate bottlenecks.”

• Challenges: (a) integrated analysis in a de-integrated industry (b) transmission system is regional, but siting decisions and transmission alternatives are local

• How can the ISOs weigh alternatives?

Transmission expansion-Demand-side issues

• Efficient Reliability Decision Rule -– A least cost “hard look” at proposed socialized costs

• “Open Season” for transmission upgrades and their alternatives– Expose proposed grid enhancements to marketplace

alternatives

• State transmission siting rules– Recognize regional needs , but– Consider demand-side options in determining what

those needs really are

For more information

• New England Demand Response Initiative – web links at www.raponline.org and

www.raabassociates.org

• “Efficient Reliability: The Critical Role of Demand-Side Resources in Power Systems and Markets” (NARUC June 2001)

• “Demand-Side Resources and Regional Power Markets: A Roadmap for FERC” (RTO Futures, January 2002)

• papers posted at www.raponline.org