AEE to U.S. Supreme Court: DR Works

Advanced Energy Economy (AEE), a national business association, today released a new report, "Peak Demand Reduction Strategy," showing that states that implement peak demand response (DR) policies or programs can significantly reduce costs for customers, strengthen reliability of electric service, and ease compliance with EPA's Clean Power Plan.

The report is being released while the U.S. Supreme Court is hearing oral arguments on a related case about whether the Federal Energy Regulatory Commission (FERC) has the authority to determine pricing for demand response services in the wholesale capacity market (FERC Order 745), which some contend is a retail service and up to individual states to regulate.

Demand for electricity can spike during just a few hours a year, and typically 10 percent of our electric system capacity is built to meet demand in just 1 percent of hours during the year. This comes at a significant cost to consumers. The report, prepared for AEE by Navigant Consulting, finds that for every $1 spent on reducing peak demand, at least $2.62 can be saved by ratepayers in Illinois and $3.26 by ratepayers in Massachusetts.

A proven tool for reducing peak demand is demand response (DR). DR enables grid operators and electric utilities to relieve stress on the electricity distribution system by compensating commercial, industrial, and residential customers for curtailing electricity use at times of peak demand or system emergency.

Companies such as Boston–based EnerNOC and Arlington, Va.–based Opower provide DR services to electric utilities and grid operators across the world, including in the New England and Midwestern region. Despite DR’s proven reliability and cost-effectiveness, it remains underutilized in these regions.

“By passing peak demand reduction mandates into law or creating peak demand reduction programs, policymakers and utilities in Massachusetts, Illinois, and neighboring states could significantly reduce costs for ratepayers, strengthen reliability, and facilitate compliance with the Clean Power Plan,” states the report.

“Demand response reduces peak demand while saving consumers money. As states plan for their energy future, demand response can and should be a go-to option for legislators and regulators,” said J.R. Tolbert, Senior Director of State Policy for Advanced Energy Economy.

The report evaluates the benefits and costs of reducing peak demand in two states, Illinois and Massachusetts, and the feasibility of utilities to procure the resources to meet demand reduction goals over 10 years. In each of three scenarios, the cost-benefit ratio is highly positive, with the ratio of benefits to cost increasing as the standard rises. The paper also highlights the importance of continued DR participation in wholesale markets, as many of the benefits of peak demand reduction policies are realized through wholesale market participation.

This month, the Massachusetts Department of Public Utilities (DPU) will receive final three-year energy efficiency plans from the Commonwealth’s investor-owned utilities. These plans, and the approval process of the DPU, will determine the size and design of the DR market moving forward.

“This analysis shows that reducing peak demand is a key strategy to meeting New England’s energy and environmental goals,” said Janet Gail Besser, Vice President of Policy and Government Affairs for the New England Clean Energy Council. “NECEC urges policymakers and regulators throughout the region to encourage utilities to make use of demand response and other peak-demand reduction strategies to further reduce costs for all customers and strengthen reliability of the electric grid.”

For the past year, policy makers in Illinois have been considering comprehensive reforms to the state’s energy policy including changes to the state’s energy efficiency and renewable energy programs. While Illinois is a state with a wholesale market structure that accommodates DR, as well as overall energy efficiency measures that can lower demand overall, it has not yet set a meaningful standard for demand response.

“Reductions in peak demand through demand response programs save Illinois businesses and consumers money and strengthen grid reliability,” said Amy Francetic, CEO of Illinois-based Clean Energy Trust.

Utilities can achieve reduction in peak load through a variety of technologies in the commercial, industrial and residential sectors. Historically, demand response has been used in the commercial and industrial sectors. Peak load reduction measures are customized for each facility and can include turning lighting, air conditioning, pumps and other non-essential equipment down or off without affecting business operations, comfort, or product quality.

“This report underscores the fact that not all kilowatt-hours are created equal,” said EnerNOC President, David Brewster. “Managing how much energy is used – and, as importantly, when it is used – can drive significant value for consumers. Policymakers and utilities searching for ways to quickly bring down electricity costs in their jurisdiction should consider these findings and implement policies and programs that reduce peak demand.”

More recently, technological advances have opened up opportunities in residential demand response. Advanced metering infrastructure and two-way communicating load switches and smart thermostats are now facilitating effective demand response programs for participating residential households.

“Residential demand response gives utility customers an innovative new way to manage their energy use and save money,” said Opower CEO Dan Yates. “This report demonstrates that by adopting a regulatory framework that encourages investment in demand response programs, states can empower their residents to lower their monthly energy bills, help utility companies cut operating costs, and support a cleaner and more resilient energy grid.”