Issues in Electricity
As defined in FERC Order 719, demand response (DR) is “a reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy.”
In other words, DR is the process by which customers reduce their consumption during peak load times, reducing the need for additional generation. DR can supplement generation for short- term energy needs. However, in the long run, unless DR can perform on a 24x7 basis, it is not a true replacement for generating capacity.
There are two primary types of DR
- Capacity DR is an event-driven tool used to manage physical reliability issues during peak load conditions or during specific regional congestion challenges that can happen at any time. Under existing market rules in PJM, this type of DR would qualify as capacity if it meets certain performance criteria, and will only be called upon when PJM is in emergency conditions.
- Economic DR is called on only when wholesale energy prices reach a strike price (price at which they agree to interrupt) set by the DR customer. However, it has no obligation to perform when called upon. Therefore, this type of DR product does not qualify as capacity in the PJM market. Economic DR would offer into the PJM energy market on a daily or hourly basis at a pre-determined price, and if the energy price in the market exceeded the DR offer price, the DR customer would agree to reduce consumption or interrupt operations completely. This type of DR is not used very often under current market conditions.
Benefits and limitations
Besides reducing overall energy consumption, a successful DR program offers many other benefits. DR can be used to lower stress on the transmission system, thus improving reliability. It also can delay the need for construction of incremental generation, transmission, or distribution facilities. Additionally, it gives customers more control of their energy consumption and has the potential to lower their energy bills.
However, DR lacks some fundamental capabilities that limit its comparative value in the marketplace. The main shortcoming is that most DR is only available for a limited number of hours during any emergency. In PJM, this is currently six hours per event for most DR products, with a maximum of 10 events in the summer period. Further, DR typically does not provide ancillary services (regulation, voltage support, spinning reserves) that a generator can provide. Therefore, DR is sub-optimal to generation resources. PJM has recently changed its capacity construct rules to require DR to perform on a 24x7 basis in order to qualify (and be paid) as capacity. These rules go into effect in June 2020.
Other demand control mechanisms
DR is one of several tools that offer consumers the opportunity to change their consumption through the use of pricing signals in electricity markets. At their core, the objectives of these mechanisms are to reduce demand at times of system peaks or regional congestion. They also can bring about more economic energy consumption at the margin through the use of a price signal. Other tools include various pricing structures as well as direct control programs that encourage consumers to use their appliances at non-peak times of the day.
Electric utilities have historically offered these programs for residential and small commercial customers to bring about peak demand reductions. Because technology has made communication with customers easier, non-traditional marketing companies have evolved that specialize in helping all customers maximize their DR capabilities. These companies can provide certain aggregation services and potential benefits to customers. AEP believes our customers will receive the most benefit if these new companies and AEP join together to provide such services.
AEP supports the use of DR resources, and believes they can provide real and sustainable benefits to energy and capacity markets.
However, we believe it is in the public interest that regulated cost-of-service retail customers offer DR resources to wholesale markets only through their load serving entities under state jurisdiction. This arrangement allows for the benefits to be shared among all customers served with regulated cost-of-service retail rates