May 4, 2015

Supreme Court to Decide on Demand Response

By Todd Olinsky-Paul

This week, the US Supreme Court agreed to review a ruling by a lower court holding that FERC, the Federal Energy Regulatory Commission, has no jurisdiction to regulate demand response markets run by ISOs and RTOs. Based in large part on FERC order 745, these markets currently support investments in distributed energy resources and energy efficiency measures, such as energy storage.

Because demand response competes with traditional fossil fueled generators, a number of legal challenges have been filed by groups representing generators, disputing the right of demand response resources to bid into energy markets. If the court does not uphold FERC 745, these challenges could move ahead in the New York and New England ISOs as well as in PJM, the territory where the current dispute is centered.

In what many legal observers saw as an odd and too restrictive interpretation of FERC’s enabling law, the U.S. Court of Appeals for the District of Columbia Circuit ruled that FERC did not have authority to regulate demand response markets (see The Obama Administration and a whole host of interested parties asked the Court to review the decision.  Apart from a flawed statutory analysis, the appealing parties argued for the importance of demand response to the energy marketplace. The Court, which takes very few cases, obviously saw the need to resolve this important legal and energy issue.

So what is demand response, and why is it important?  To understand this, we need to understand at a very basic level how our electricity grids function.  Because there is so little energy storage capacity, generators need to supply exactly the right amount of electricity to match demand at any given moment.  When demand falls, generators are turned down, or taken off-line.  When demand rises, generators are turned on.

The problem with this method is that it leads us to build expensive and inefficient “peaker plants” – big fossil fueled generators that exist only to meet an hour of peak demand that generally occurs in the early evening.

Demand response offers a cheaper, cleaner and more rational way of dealing with brief periods of peak demand.  Instead of increasing generation, demand response providers reduce their demand when called upon by the grid operator to do so – either by shedding load, or by using energy resources on the customer side of the meter, such as distributed generation and storage, to self-supply electricity for a short period.  They are paid for this service, since reducing demand has the same effect as increasing generation – it balances supply and demand on the grid.

FERC argues that allowing demand response resources to enter electricity markets results in lower prices for consumers. It makes sense: turning down demand is much cheaper than building, maintaining and running “peaker” plants. Moreover, there is considerable evidence to support this view. Market analysts estimate that demand response participation in markets has resulted in customer savings of $50 billion in the Northeast and mid-Atlantic regions between 2008 and 2013.

Demand response isn’t only provided by big commercial and industrial customers, but also by smaller customers who participate in the market through aggregators like EnerNOC and NRG; and these aggregators are among the entities that would be most impacted if the court allows restrictions on demand response markets. By some estimates, aggregators now supply up to 80% of the Northeast’s demand response capacity. Barring such activity could disrupt grid stability in numerous states, pull the economic rug out from under DR aggregators, and provide a new lease on life for a number of fossil fuel plants currently slated for retirement.

But the Supreme Court’s decision will have impacts far beyond the demand response market alone. Along with frequency regulation, demand response is one of a number of valuable services that can be provided by energy storage and other distributed energy resources.  By supporting such distributed resources, these energy services markets offer a financial underpinning for resilient power projects.

We recently saw evidence of the positive impact of a vibrant frequency response market for resilient power in New Jersey.  The New Jersey BPU offered a $3 million solicitation for energy storage paired with renewables; from this they were able to fund 13 projects, all of which will provide resilient power to critical facilities, and all of which plan to sell frequency regulation into the PJM market.  It’s a good bet that without PJM’s strong frequency regulation market, New Jersey would not have had such good results from a relatively small investment of public funds. (Read our blog post about the New Jersey resilient power program here.)

The legal question before the Supreme Court is only about FERC’s jurisdiction, and that is likely what the court will choose to focus on.  But the real underlying question to be decided is whether big, legacy fossil fueled generators should continue to enjoy a monopoly on the provision of grid support services that can be provided faster and more accurately by smaller, more nimble and cleaner distributed energy resources controlled by consumers.

If our old fashioned electricity grids are to take a step into the modern age, they must embrace a decentralized, distributed, flexible and interactive model, one that rewards performance rather than size. In doing so, they will open the door to resilient power, energy storage, microgrids, and a host of other cleaner energy technologies that enable consumer choice, independence and self-reliance.