The Federal Energy Regulatory Commission (FERC) yesterday established a new rule that puts demand response (DR) on a par with power generation. The rule requires organized wholesale energy market operators to pay DR resources the market price for energy, known as the locational marginal price (LMP), when those resources have the capability to balance supply and demand as an alternative to a generation resource and when dispatch of those resources is cost-effective.

The cost-effective caveat was an important aspect of the discussion and decision: “The order finds that it will be cost-effective to pay that market price for energy to demand response resources when a net benefits test shows that the benefits to load from the reduced LMP that result from dispatching demand response resources exceed the costs of paying LMP to those resources. The rule requires RTOs and ISOs to meet specific requirements for the establishment of the net benefits test to determine when demand response resources are cost-effective.”

“Today’s final rule is about bringing benefits to consumers,” FERC Chairman Jon Wellinghoff said yesterday. “The approach to compensating demand response resources as we require here will help to provide more resource options for efficient and reliable system operation, encourage new entry and innovation in energy markets, and spur the deployment of new technologies. All of this contributes to just and reasonable rates.”

The March 15 final rule recognizes that in the Energy Policy Act of 2005, Congress established a national policy to eliminate unnecessary barriers to DR participation in organized wholesale energy markets. In approving the new rule, FERC said it “continues to recognize that markets function most effectively when both supply and demand resources have appropriate opportunities to participate.”

The change won’t happen overnight. FERC’s press release provides the timing details: “Organized wholesale market operators will be required to make compliance filings by July 22, 2011, that include conforming tariff provisions and identify price thresholds to estimate where customer net benefits would occur, and thus above which it would be cost-effective to dispatch and pay demand response resources the market price for energy. By September 21, 2012, each market operator must undertake a study examining the requirements for and effects of directly determining the cost-effective dispatch of demand response resources in both the day-ahead and real-time energy markets, and to file the results of the study with FERC.”

Though the Rocky Mountain Institute’s Amory Lovins coined the term “negawatts” (watts saved, or energy conserved) more than 20 years ago, it has taken that long for policy (and technology) to catch up with the concept’s potential for electricity markets.

The generation industry did not support the FERC decision. Electric Power Supply Association President and CEO John E. Shelk issued a statement in which he said, “While the details of the rule issued today require careful review, we are disappointed that FERC seems to have based the compensation for DR off a fundamentally flawed premise. Payment to DR providers at the full clearing price set by supply resources is simply a double payment subsidy and is likely to have troubling consequences for electricity markets.

“EPSA raised numerous procedural, legal and economic objections to FERC’s proposed rule in extensive comments. Because these concerns do not appear to have been addressed, we preserve our rights to request rehearing of the rule as well as review in the courts. Any final rule close to FERC’s initial proposal is unacceptable.”

On the other hand, many see formal recognition of demand response as essential to maximizing the value of current and future grid assets. Demand response service providers, including EnerNOC and Viridity Energy, welcomed the FERC decision.

Source: FERC, POWERnews, EPSA, EnerNOC, Viridity Energy