Last week, the Supreme Court upheld the Federal Energy Commission’s (FERC) Order 745, which had been effectively in limbo for the past couple of years. This order had been the legal basis for expanded demand response activity. Demand response is the array of programs whereby an end user (me, a business, a factory) agrees to reduce their electricity usage when the system operator needs it. Often, it is matter of cycling groups of users “off the grid” for a short time. Taking groups of users “off the grid” for a few minutes can have a surprisingly powerful impact in terms of stabilizing the electricity marketplace.
In return for NOT demanding electricity at specific times, these end-users get compensated for the amount of electricity they did NOT use. Actually determining how much electricity someone did not use can get a little tricky, but the concept still applies—conservation of power is compensated just as the generation of power is compensated. In fact, it is not uncommon for the unit price of this compensation to be the same in both instances. This unit price is the Locational Marginal Price per kilowatt hour.
My personal image of demand response is the $20 monthly credit I get from PECO in return for allowing them to cut off my air conditioner for up to 15 minutes at a time during the hottest of summer months. My house can heat up, but it won’t heat up that much in 15 minutes. So, I am OK with this. Residences such as mine were about 15% of the demand response activity in 2014 and 2015. Office buildings and schools were each just shy of 10%. The biggest single sector by far was the industrial manufacturing sector, which accounted for nearly half (50%) of 2015 demand response activity.
As it happens, by virtue of my residence near Philadelphia, I am in the PJM Interconnection zone. PJM is one of the more advanced ISOs when it comes to demand response. Depending upon which specific transactions are included, PJM reports in the neighborhood of $8-10 million in demand response activity in 2015, affecting several hundred million megawatt hours. Many methods including HVAC, lighting, manufacturing operations, and using generators are all acceptable demand response tools.
I am glad that the Supreme Court upheld Order 745. It had led to a vast expansion of demand response activity; PJM has stated that within the first market (demand) year after FERC issued Order 745, demand response volume equalled what had been achieved in the previous 5 years combined. That is a big impact. Now that the rules have been settled for demand response moving forward, hopefully it will expand again. Not only will electricity demand be reduced, but price volatility can be lessened if not largely eliminated on excess demand days, which can potentially occur year round.
That is a true economic and environmental win-win.