After the FERC 745 ruling: Strategies for optimizing demand response

By Frank Lacey

Editorial note: The opinions expressed in the following guest blog are the author’s and do not reflect the views of either the Solar Electric Power Association (SEPA) or its board of directors in general.

The U.S. Supreme Court decision in the FERC 745 case, officially FERC v. EPSA, issued earlier this week settled one big question — that the Federal Energy Regulatory Commission (FERC) has legal jurisdiction over demand response in interstate wholesale electricity markets.

Stronger than Snowzilla: The U.S. Supreme Court issued its decision in the FERC 745 case on Jan. 25, as D.C. was digging out from its weekend blizzard.

But resolving that one issue opens up many other, equally complex questions about demand response, and other distributed energy resources, that will need to be explored amid the shifting grounds and definitions of our evolving energy system.

In a previous blog, I wrote about the background and importance of the FERC 745 case — specifically the negative impact on demand response and other distributed technologies, such as solar and storage, if the Supreme Court had upheld an appeals court decision overturning FERC’s authority.

In this blog — consider it FERC 745, Part 2 — I will highlight key points in Justice Elena Kagan’s opinion for the 6-2 majority in the case and explore unresolved questions and possible solutions that will be critical for realizing all the benefits demand response can provide going forward.

These issues were the focus of a cross-industry group — the Evolution of DR Project (EDP) — which also issued a report this week, entitled “Demand Response: The Road Ahead.” I was a part of the EDP group, which came together late in 2014 in response to the lower court ruling on FERC 745.

Although not explicitly stated, at the core of the case was the issue of the duality of demand response. As the EDP report notes, demand response resources can either modify load, reducing consumption at times of peak demand, or be as dispatchable as other forms of generation on the supply side. Further complicating the situation, demand response also has uses and impacts in both wholesale and retail electricity markets.

Find out why SEPA joined forces with the Association for Demand Response and Smart Grid here.

While not denying this complexity, Justice Kagan provided a useful delineation of federal and state authority. FERC’s actions affecting interstate wholesale electricity markets can and often do have impacts in local retail energy markets, which are under state jurisdiction, she wrote, but “(t)hat is of no legal consequence.”

“When FERC regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs, then no matter the effect on retail rates, (state authority to regulate local retail electricity markets) imposes no bar. And in setting rules for demand response, that is all FERC has done.”

She also recognized the evolving nature of the U.S. electricity market as a “competitive interstate business” and FERC’s evolving role in it.

The compensation component of the decision is no less important. FERC Order 745 requires that cost-effective demand response bid into wholesale markets be paid the same rates as other forms of generation, a policy which the Electric Power Supply Association (EPSA) had challenged as “arbitrary and capricious.”

Justice Kagan stressed that the Supreme Court’s role on this issue was not to rule if FERC was correct to set those specific rates, but only if the commission had “weighed competing views, selected a compensation formula with adequate support in the record, and intelligibly explained the reasons for making that choice. FERC satisfied that standard.”

Preparing for the many uses of demand response

The duality of demand response gives rise to much discussion about the resouce, but is also the basis of the tremendous value it brings to a grid operator. Its growing role in wholesale and retail electricity markets mean valuation and pricing will be a critical issue going forward, particularly ensuring that compensation in one market do not result in over- or undervaluations in another.

Published by the Wedgemere Group, a D.C.-based consulting firm, the EDP report addresses all these issues — duality, the relation of wholesale and retail markets, pricing and the various interconnections between them. A few of the main points — and the challenges and recommendations discussed on each — are particularly relevant to the Supreme Court ruling.

♦ The duality of demand response — generally referred to as DR in the report — goes beyond its load-modifying and supply-side functions. Demand response is an increasingly fluid component of the energy system; depending on context and market, it can and must be viewed within the continuum of both distributed energy resources and energy efficiency.

The growing use of demand response as a distributed energy resource — what the report calls DR/DER — should result in it being seen as an effective resource for grid reliability, the report says. The same may hold true for its integration into energy efficiency.

Grid transformation is on the agenda at the Solar Power PV Conference & Expo, Feb. 24-25 in Boston. Find out more here.

Demand response “is simply a different type of energy efficiency — a more dynamic and controllable type,” the report says. “The new term intelligent efficiency may begin to serve as a blending agent that integrates traditional efficiency with DR.”

♦ Optimal use of demand response, whether in wholesale or retail markets, will require effective price signals — and in particular, time-variable or time-of-use rates — the report says.

“Absent price signals that reflect actual grid conditions at the retail level, optimal decision-making by the retail customer is hindered. Absent dynamic price signals, it is challenging to locate and optimize deployment of DR/DER and integrate it with conventional supply resources into a market in locations where the resource can be most beneficial to the grid.”

♦ One of the recurring themes in the report is that the use of demand response in all its roles is only going to increase, which will require a range of supporting technologies.

For example, the report envisions advanced metering and communications will be developed to provide improved visibility to grid operators, utilities and third-party vendors who may serve as aggregators of demand response. Plug-and-play products for consumers will also be part of the mix.

The report’s recommendations on this front include the development of open, interoperable standards for the new technologies that will come online to support and integrate demand response into retail and wholesale markets. Policy makers will also “need to ensure that policy and market rules that affect DR/DER are developed with respect to how wholesale and retail markets will operate in concert.”

In other words, the strategies for energy system transition now being developed must include a strong foundation for incorporating demand response, which in turn will require better coordination and planning between wholesale and retail markets.

The Supreme Court decision on FERC 745 has answered a lot of questions and set positive paths forward for a plethora of policy determinations. Within those paths, however, the industry still has a lot of work to do to determine how to maximize the value of demand response and other distributed energy resources.

Frank Lacey is President of Electric Advisors Consulting and a member of the Board of Directors of the Solar Electric Power Association (SEPA).  He can be reached at [email protected].