and other stakeholders of the benefits that
district energy can provide. Participation
in the Coalition could lead to demand
response programs that are better tailored
to the unique operational aspects of
district energy systems.
Demand Response
Compensation in Organized
Wholesale Energy Markets
In March 2010, FERC proposed a
new regulation that would standardize
the compensation paid to customers for
reductions of electricity consumption that
are bid into organized wholesale markets.
This proposal grew out of FERC’s concern
that existing compensation structures
may hinder the development and use of
demand response resources.
FERC’s proposal would require
ISOs and RTOs to pay demand response
resources bidding into the day-ahead
and real-time energy markets the full
market price for energy, calculated as
the Locational Marginal Price (LMP), in
all hours of the day. FERC recognizes this
approach has met with some resistance in
past cases. However, FERC believes current
compensation levels are not creating the
incentives to utilize and further invest in
demand response. By treating demand
response resources on par with generating
resources, FERC aims to encourage
competition and maintain just and
reasonable energy prices.
FERC received comments on this
proposal from all sectors of the industry
with views ranging from complete
support to total opposition. In response
to these comments, FERC is holding a
technical conference in late summer or
early fall of 2010 to further examine its
proposed regulation changes. Specifically,
although FERC originally proposed that
payments would be made in all hours
of the day, it now asks whether such an
approach is desirable. Some commenters
proposed a “net benefits test” to evaluate
when demand response should receive
compensation at the full market price. The
technical conference will examine whether
such a test is necessary and, if so, what the
parameters should be.
FERC will also look at how demand
response compensation should be funded.
Some commenters argued about who
should bear the burden of these costs.
Others complained that ISOs/RTOs will
need to revisit the methodologies used
to establish LMPs because they presently
contain cost allocations that do not reflect
the compensation levels contemplated
by FERC’s proposal. FERC recognized
that compensation and cost allocation
issues are inextricably intertwined and will
use the Technical Conference to further
determine whether it should mandate a
single allocation approach for all organized
markets.
We will not know what this new
regulation will ultimately look like until
FERC issues its Final Rule on this proposal
in the coming months. To the extent IDEA
members can reach the markets with
measurable load reductions, this new
regulation, as currently written, could
mean greater financial recognition of
those benefits.
What Is in Store for the
Future?
At first blush, FERC’s proposal on
demand response compensation provides a
more attractive payment structure to those
able to bid demand response resources
into the market. This proposal might get
whittled down in the rulemaking process.
But, at a minimum, FERC recognizes the
need for additional financial incentives to
increase demand response participation.
This new regulation could result in higher
payments for those IDEA members with
access to wholesale energy markets and
the ability to vary electric demand to
support grid operations.
Elizabeth Teuwen
is an energy lawyer
with Jennings Strouss
& Salmon PLC in
Washington, D.C. Her
practice focuses on the
electric and natural gas
sectors of the energy
industry. She represents municipal
utilities, rural cooperatives and end
users before the Federal Energy
Regulatory Commission and advises
clients on electric industry restructuring,
renewable energy development, power
supply arrangements and transmission
issues. Teuwen can be reached at
eteuwen@jsslaw.com.
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