(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, April 30 Demand response programmes,
where customers are given a financial incentive to reduce power
consumption at times of peak demand, are playing an increasingly
important role in the U.S. power market.
In 2013 and 2014, grid operators called on record amounts of
demand response to cope with first the summer heat wave and then
the polar vortex.
Without the ability to reduce electricity demand
voluntarily, utilities in many parts of the United States would
have been forced to initiate rolling blackouts.
In one instance, regional transmission operator PJM secured
nearly 6,000 megawatts (MW) of demand reductions on a single
afternoon - equivalent to the entire output of five nuclear
More than 8 million electricity consumers in the United
States are now enrolled in some sort of programme to cut their
consumption during periods when the grid is stretched.
Policymakers and regulators have been strong supporters
because demand response can increase electric reliability, lower
customer bills and avoid the need to build lots of costly new
power plants and transmission lines.
But it remains controversial with some power producers and
grid operators, who fear it is undercutting the incentive to
invest in new generating and transmission capacity and could
hurt reliability in the long-term.
GIVING UP CONTROL
Demand response programmes are operated at retail level by
utilities and at the wholesale one by regional transmission
organisations and independent system operators.
The Federal Energy Regulatory Commission (FERC) estimates
total demand response capacity doubled between 2005 and 2011
from 30,000 MW to 66,000 MW. The potential demand reduction from
all sources was equivalent to 8.5 percent of peak load on the
U.S. power network in 2011 - roughly equivalent to the peak
consumption of California.
Of the total, 37,000 MW of demand response capability was in
programmes run by utilities for residential customers and small
businesses, while 29,000 MW was contributed by larger consumers
participating in the wholesale market, according to FERC
("Assessment of Demand Response and Advanced Metering" 2012).
By 2011, about 8.5 million of 131 million retail customers
in the United States (6.5 percent) were enrolled in demand
response programmes run by their utility.
Perhaps surprisingly, at the retail level, most customers
chose to participate in a programme that gave the utility direct
control over their electricity use rather than accepting a
programme in which prices varied but they were left to decide
whether to turn appliances off for themselves.
Around 6 million customers were enrolled in some form of
direct demand control programme that allowed the utility to
remotely interrupt the power supply to one or more electrical
devices such as pool pumps or air conditioners for short periods
lasting from a few minutes up to six hours.
Direct control programmes contributed more than 9,000 MW of
potential demand reductions.
Some larger users agreed to reduce their power consumption
in response to instructions from the grid. Interruptible supply
contracts contributed another 15,000 MW.
Far fewer customers were enrolled in programmes where they
faced steep price changes but retained control over whether or
not to reduce their consumption.
Just 2.2 million retail customers were enrolled in
programmes charging peak/off-peak prices that varied by time of
day, contributing around 7,000 MW of potential demand
Only 20,000 participated in critical peak pricing
programmes, where the utility has the right to declare a power
emergency with 12 or 24 hours notice and can charge very high
prices for electricity consumed during the critical peak.
Similarly, only 20,000 were enrolled in real-time pricing,
where prices vary hourly based on the wholesale cost of
Critical peak pricing and real-time pricing programmes
contributed just 2,000 MW of potential load reduction in total,
according to a report prepared by the Government Accountability
Office (GAO) published on Monday ("Demand response activities
have increased" April 2014).
LIGHTS ON, LOWER PRICES
During the 2013 summer heat wave, grid operators for New
England (ISO-NE), New York (NYISO), the mid-Atlantic states
(PJM) and California (CAISO) repeatedly called on demand
response to keep the lights on and avoid rolling blackouts.
NYISO activated demand response across the entire state on
July 18 and 19 as power consumption hit a new record, according
to GAO. NYISO credits demand response for avoiding blackouts,
especially in the lower Hudson Valley and New York City.
Two months later, on September 11, PJM called on and
received 5,949 MW of demand response, the largest it has ever
received, after hot weather and equipment failures created
emergency conditions across four states. Once again, demand
response allowed PJM to keep the lights on and avoid forced
In January and February 2014, PJM, CAISO and the Electric
Reliability Council of Texas (ERCOT) were all forced to activate
demand response again as the polar vortex plunged the country
into a record cold spell and led to widespread equipment
Activating demand response is often cheaper than calling on
emergency generation from peaking power plants: most peakers
operate just a few hours each year so need to charge very high
prices to recover their capital and operating costs.
By flattening out the peaks in power demand, demand response
can also avoid or delay the need to invest in lots of additional
and expensive generation and transmission capacity that will
only be used a small fraction of the time.
The costs associated with spikes in demand have a
significant economic impact as GAO explained in its report: "10
percent or more of the costs of generating electricity are
incurred to meet levels of demand that occur less than 1 percent
of the time."
According to the Midcontinent Independent System Operator
(MISO), demand response has saved customers across the central
part of the country more than $100 million a year.
FERC ORDER 745
Because of their potential to make more efficient use of
generation and transmission capacity, demand response has long
been popular with policymakers and regulators.
Congress has instructed regulators to report on time of use
tariffs and other demand response mechanisms in several pieces
of legislation (including the 1978 Public Utility Regulatory
Policies Act, the 2005 Energy Policy Act and the 2007 Energy
Independence and Security Act).
The 2009 American Recovery and Reinvestment Act provided
billions of dollars in co-funding to help utilities install
smart meters, which are essential to implementing many demand
Almost 50 million smart meters (out of a total of 151
million) have now been rolled out nationwide.
In March 2011, FERC issued Order 745, which requires that
suppliers of demand response be paid the same for cutting
consumption as generators are paid for providing extra power
output. In effect, FERC requires treats demand response as a
form of extra generation.
Parity is controversial. According to GAO, parity supporters
claim "equal compensation is appropriate because demand response
activities provide a benefit to the market by replacing the need
to have power plants provide additional capacity."
Demand response can also provide localised benefits by
relieving congestion in places such as New York City.
For critics, including many independent power producers and
some officials in regional transmission organisations, equal
compensation is not justified because demand response and
generation have fundamentally different characteristics.
Generators must make long term commitments while most
participants in demand response programmes are only locked in
for a month or at most a year before they can withdraw their
Generators and some grid operators warn that equal
compensation and the increasing reliance on demand response are
undercutting long-term reliability because they weaken price
incentives to install more capacity to meet future needs.
They claim the long-term availability of demand response is
more unpredictable than building new generating plants and warn
of "response fatigue" if customers are called on to cut
consumption too often.
Despite the warnings, demand response seems set to play an
increasingly important role in the power market. FERC has
already accepted plans from NYISO and ISO-NE for compensating
response providers under Order 745. Plans from CAISO and MISO
have also been broadly accepted. Only the Southwest Power Pool
(SPP) has been told to come back with revised proposals.
So to keep the lights on in future, it looks like customers
will have to accept more flexibility in their power consumption.
(Editing by Jason Neely)