Ruling on Demand Response Compensation Seen as Critical to Advance of Smart Grid

March 25, 2011
Electrical manufacturers are welcoming a ruling this week by the U.S. Federal Energy Regulatory Commission (FERC) on setting compensation for demand response participation

Electrical manufacturers are welcoming a ruling this week by the U.S. Federal Energy Regulatory Commission (FERC) on setting compensation for demand response participation. The new policy is expected to give a significant boost to demand for “smart grid” technologies.

The FERC policy, RM10-17, requires electric utilities and retail market operators to pay participants in demand response programs the market price per kilowatt for reducing electrical loads when those reductions (often called “negawatts”) will balance the grid’s supply and demand and avoid the need for bringing additional generation capacity online.

The new rule will help ensure the competitiveness of organized wholesale energy markets and remove barriers to the participation in demand response programs in those markets, FERC said in a release announcing the ruling. The rule requires organized wholesale energy market operators to pay demand response resources the market price for energy, known as the locational marginal price (LMP), when a “net benefits test” shows the benefits from the reduced LMP that comes from using demand response resources exceed the costs of paying LMP to those resources.

The net benefits tests determining cost-effectiveness will be set by the regional transmission organizations (RTOs) and independent system operators (ISOs) according to formulas they are required to file with FERC by July 22, 2011.

Demand response programs typically pay a large user of electricity a fee for agreeing to reduce its electricity consumption on demand when signaled by the power provider.

The FERC’s policy takes down one of the highest hurdles to getting building owners and industrial plant managers to participate in electric utility demand response programs.

“A lot of the RTOs are engaged in it currently. They could see the benefit from demand response when their wholesale prices were high and demand was high,” says Jim Creevy, director of government affairs for the National Electrical Manufacturers Association (NEMA), Rosslyn, Va. “But the value of the ruling by FERC is that now demand response resources get paid the market price in the wholesale market, so now basically it increases the ability of utilities to buy and sell across longer distances in response to peak pricing, and it puts more players in the market, which makes demand response that much more valuable.”

The move will open up new opportunities for large consumers of power to better manage their power consumption and the revenues to be gained from demand response. As a result, it’s expected to create more demand for intelligent building control systems that can implement load-shaving by reducing lighting, cooling and other building system loads.

Schneider Electric, Palatine, Ill., has been active in advocating that demand response participants be compensated at full price. Ross Malme, director of Schneider’s Demand Response Resource Center, told EM that setting a market price for load reductions will allow utilities to better balance their systems by making adjustments on the demand side — an especially useful option when many states are mandating use of renewable generation resources such as solar and wind that produce unpredictable amounts of energy, and when the market is expecting a surge in peak power demand from widespread adoption of electric vehicles.

“If you’re the operator (integrating renewables), you now have a big problem. You basically have an uncontrolled generation source that you’ve got to balance the grid with, and it’s difficult if not impossible to do that from the supply side. It’s going to have to come from the demand side,” Malme said. “The market believes a kilowatt generated is the same as a kilowatt saved. By paying demand response resources full LMP, the customer is just as good (as a generator) and in some cases better because you don’t need the transmission and distribution lines to deliver it, you don’t have all those losses, and you provide this benefit to everybody on the system.”

Malme sees setting a market price for load reductions as ushering in an era of “demand response 2.0” where electricity consumers can participate in the power market in real time rather than through day-ahead or longer contracts. Manufacturers such as Schneider that make intelligent building controls have focused up to now on controlling what goes on inside the building, but can now also help customers optimize demand response as a revenue stream.

“When demand response starts collapsing into real time – demand response 2.0 – we now have to have fully integrated controls and IT everywhere inside a building, or inside a wastewater treatment plant or inside a factory, because these demand-side assets are going to be connected in real time, 24x7, to the grid, providing services and getting paid for it,” Malme said. Building automation systems will be able “to optimize the building not just for cost and comfort, but also for what’s going on on the grid as well.”

Combined with ongoing work NEMA is doing to establish interoperability standards for communicating demand response signals, the compensation requirement could be an important turning point in development and deployment of smart grid technologies, said Kyle Pitsor, NEMA’s vice president of government relations.

—Doug Chandler