By Rich Heidorn Jr.
Having survived a legal challenge that could have crimped its development for years, demand response now has an opportunity to take a central role in combating climate change and reducing energy bills by taking advantage of the growing spread of advanced metering technology.
But the industry still faces formidable challenges due to varying state regulations and consumer resistance to time-of-use pricing, hurdles the Supreme Court’s Jan. 25 ruling upholding FERC’s authority to regulate wholesale DR did nothing to eliminate. (See Supreme Court Upholds FERC Jurisdiction over DR.)
“While the Supreme Court ruling puts federal regulators at the helm of modernizing the electric grid — at least for the 70% of the country operating in deregulated electric markets — individual states can still restrict or set strict criteria for participation in those DR markets, which in some cases are increasingly restrictive,” said EnerKnol policy analyst Erin Carson in a research report released Monday.
Reflecting that sober assessment, shares of DR provider EnerNOC, which jumped 70% on the day of the ruling, retreated soon after, ending the week up 26%.
“Without establishment of price signals to customers, DR cannot fulfill its potential,” concluded a report released a week before the Supreme Court ruling by the Evolution of DR Project (EDP).
“The vast majority of residential customers are not exposed to price signals,” said the report, the result of a “multi-party dialogue” that included utilities, RTOs, state and federal policymakers, DR providers and other stakeholders.
Impact of Supreme Court Ruling
Although the Supreme Court case dealt explicitly with DR in wholesale energy markets, many observers predicted a rejection by the court would also jeopardize the resource’s participation in the capacity markets, where DR earns most of its revenue. (See related story, Clark Calls for New Look at Order 745.)
Kevin Lucas, director of research for the Alliance to Save Energy, noted that DR revenue is essential to justifying investments in data analytics and building controls. “Fair, market-based compensation in competitive wholesale energy markets is a critical step toward increasing the deployment of energy-saving technologies such as whole-building controls and smart-grid-enabled analytics,” he said in a press release. “With major legal questions now resolved, the direct benefits to consumers of these products and services are sure to follow.”
“Business uncertainty about the outcome of the Supreme Court case has held innovators and implementers in limbo for months,” wrote Denis Du Bois, a clean technology consultant and host of the Energy Priorities radio program. “Not only was the future of demand response in question, but similar ideas for energy efficiency markets also had a foggy outlook. By upholding the order, the court has removed that uncertainty for demand response and clarified the future of energy efficiency as well.”
Smart Meter Deployment
If maximizing DR requires exposing consumers to price signals, it also requires smart meters, devices capable of two-way communication and capturing real-time usage.
The Obama administration spent more than $3 billion in stimulus funds on smart meters and other smart grid investments. And while the spread of the technology has been unmistakable, there is disagreement over the current penetration of smart meters.
FERC’s ninth annual Assessment of Demand Response and Advanced Metering report, released in December, cited Energy Information Administration data that put penetration at 30% through 2012. The Edison Foundation’s Institute for Electric Innovation reported that more than 50 million smart meters were deployed as of July 2014, representing more than 43% of U.S. homes.
The EDP report estimates that about 70% of meters have been upgraded to smart meters or are planned for replacement in the near future, in line with projections by research group NPD, which predicted 75% by 2016.
FERC found the Texas Regional Entity leading with penetration of 70%, followed by the Western Electric Coordinating Council at 51%. Bringing up the rear were ReliabilityFirst Corp., which includes portions of PJM and MISO, at 17%, and the Northeast Power Coordinating Council at 12%.
Real-time Pricing
Despite the growing availability of smart meters, EDP noted that “at the residential level, nearly all customers are on retail rates that are fixed and do not vary with time or location.”
“Efficiently integrating new technologies such as storage and electric vehicles may require exposure to time-varying rates/prices to reflect the true marginal cost of power in each interval of time,” it said. “Without such time-varying rates/prices, the customer cannot know when inexpensive electricity should be bought and stored, and when the stored electricity should be utilized to avoid buying expensive electricity.”
But political aversion to price spikes and human nature has made it a challenge to make that vision a reality. Indeed, the FERC report found that enrollment in time-based DR programs dropped by 6.1% between 2011 and 2012.
A Department of Energy report last June looked at customer response to time-based rates based on studies of 10 utilities.
The utilities in the study ran at least one of four types of time-based rate programs: critical peak pricing (CPP), critical peak rebates (CPR), time-of-use (TOU) pricing and variable peak pricing (VPP).
The report concluded that opt-out enrollment rates were about 3.5 times higher than they were for opt-in programs (93% vs. 24%), but there was no significant difference in retention rates (91% for opt-out, 92% for opt-in).
The department report attributed the results to what social scientists call the “default bias.”
“When facing choices that include default options, people are predisposed to accept the default over the other options offered,” the Energy Department report said. The department said the findings indicate cost-benefit advantages to using opt-out approaches.
The Sacramento Municipal Utility District found, conversely, that peak period demand reductions for opt-in TOU customers were about twice (12%) as large as they were for opt-out customers (6%). Peak period demand reductions for SMUD’s opt-in CPP customers were about 50% higher (24%) than they were for opt-out customers (14%).
The study also found that retention rates were higher for critical peak rebates than for critical peak pricing.
This, the researchers said, was consistent with the theory of loss aversion, which holds that, given a choice, people are more likely to seek to avoid a loss rather than acquire a gain. “The risk from nonperformance during critical events under CPP is greater than under CPR, and this could be a motivating factor that decreases enrollment and retention,” the report said.
State Policies
Some states are attempting to overcome behavioral obstacles.
The California Public Utilities Commission is requiring the three investor-owned utilities in the state to establish default TOU rates for residential customers starting in 2019. The Massachusetts Department of Public Utilities is requiring that load-serving entities implement time-varying rates as smart meters are deployed.
Last June, the Michigan Public Service Commission ordered DTE Electric and Consumers Energy to offer opt-in TOU and dynamic pricing rate structures over the next two years.
The EDP report cited complaints of DR providers and multi-state utilities over inconsistencies in DR rules from state to state and the complications of wholesale market programs that “can underlay or overlay” state DR programs.
It recommended that state-level policies on distribution platforms consider how distribution-level DR will be coordinated with regional wholesale DR. It also called for RTOs to participate in the proceedings that develop distribution-based market systems.
Some others say more action is needed to clarify federal and state jurisdiction. “My take is that [the Supreme Court] decision can guide the development of demand response, but we still need congressional action (and perhaps a broader Supreme Court decision) to update a U.S. electricity market framework that is over 80 years old,” wrote Varun Sivaram, an advisor to New York’s REV initiative.
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