Consequences of Demand-Response Win

Publication February 8, 2016

US independent generators lost an effort before the US Supreme Court in late January to prevent demand response companies from bidding into power auctions on the same terms as independent generators offering to supply power.

The case is FERC v. EPSA.

The decision could lead to lower wholesale electricity prices in organized markets like PJM, the regional grid serving the mid-Atlantic states. It could make older, less-efficient power plants less likely to be dispatched. It could also allow businesses to earn money by better managing the electricity they use.

At issue were demand response companies, like EnerNOC, that collect promises from electricity consumers to cut consumption and then bid reductions in electricity usage into hourly auctions run by regional grid operators called RTOs.

Utilities that supply electricity to retail customers tell the RTO each hour how much electricity they will need. The RTO then takes bids from generators and other suppliers and dispatches the generators from least expensive to most expensive until it has all the electricity required that hour. The last megawatts purchased in the hour establish the price for all the electricity purchased that hour. 

The Federal Energy Regulatory Commission issued an order that, as revised in 2011, requires RTOs to pay the same price for demand reductions as for additional electricity, with two exceptions.

The RTO is not required to pay the same price if, under a “net benefits test,” the utilities would end up not saving money by paying the marginal price to reduce load compared to paying for more electricity.

The other exception is the FERC order lets any state public utility commission prohibit consumers in its retail market from taking part in wholesale demand response programs.

The FERC order is Order No. 719. 

To see the potential effect on wholesale power prices, if the last increment of electricity needed in an hour to get to what the utilities want to buy that hour is being offered by a generator at $40 a megawatt hour, and a demand response company is offering to reduce consumption by the same amount that hour for $35, then everyone that hour is paid $35. 

Justice Elena Kagan, writing for the Supreme Court, said FERC found that “heightened demand response participation will put ‘downward pressure’ on generators’ own bids, encouraging power plants to offer their product at reduced prices lest they come away empty-handed from the bidding process.” That also tends to reduce wholesale prices.

The Electric Power Supply Association argued that FERC is effectively setting retail electricity rates by ordering RTOs to pay the same prices to demand response companies and electricity suppliers. FERC has authority to regulate wholesale sales of electricity in interstate commerce. The states regulate retail sales and any wholesale sales that are wholly in-state and do not affect interstate commerce. The Supreme Court said the sales in this case are wholesale sales, even though the wholesale price has an effect on retail rates.

EPSA also complained that consumers who participate in demand-response programs receive a double benefit unless the retail rate they avoid paying is subtracted from the wholesale rate they are offered to cut consumption. The court said EPSA’s approach is unadministrable, since retail rates vary by consumer type, time of day and geographic area. The court also said it had a hard time seeing the double benefit. An airline passenger who pays $400 for a ticket and is offered $300 to be bumped to a later flight is not paying $700 to fly, but the $400 he or she actually paid to fly, the court said. 

The decision could open the door for FERC to require RTOs to open participation in hourly auctions to distributed generators and behind-the-meter energy storage facilities.

Although the court’s decision involved a challenge to inclusion of demand response in RTO energy auctions, the court’s holding applies equally to RTO capacity auctions. About 6.5%, or 11,000 megawatts, of the total megawatts cleared in the latest PJM capacity auction were from demand response companies. 

Next up before the Supreme Court is the flip side of the demand response case. The court will hear oral arguments on February 24 in two cases involving bidding programs that Maryland and New Jersey used to direct regulated utilities in those states to buy power from gas-fired independent generators under long-term contracts and pay prices that differed from the prices set in regional wholesale power auctions in PJM. 

The cases will test whether the states crossed the line into regulating wholesale power sales. FERC is siding with the states in the two cases. (For earlier coverage, see the June 2014 NewsWire article State-Mandated Power Contracts, the April 2014 NewsWire article State-Mandated Power Contracts, and the December 2013 NewsWire article Doubts About State-Mandated Power Contracts.) 

The cases may establish law on how far states can go in ordering regulated utilities to sign long-term power contracts with independent generators.

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