Daily Rules, Proposed Rules, and Notices of the Federal Government
1. This Final Rule addresses compensation for demand response in Regional Transmission Organization (RTO) and Independent System Operator (ISO) organized wholesale energy markets,
2. We conclude that when a demand response
3. This cost-effectiveness condition, as determined by the net benefits test described herein, recognizes that, depending on the change in LMP relative to the size of the energy market, dispatching demand response resources may result in an increased cost per unit ($/MWh) to the remaining wholesale load associated with the decreased amount of load paying the bill. This is the case because customers are billed for energy based on the units, MWh, of electricity consumed. We refer to this potential result as the billing unit effect of dispatching demand response. By contrast, dispatching generation resources does not produce this billing unit effect because it does not result in a decrease of load. To address this billing unit effect, the Commission in this Final Rule requires the use of the net benefits test described herein to ensure that the overall benefit of the reduced LMP that results from dispatching demand response resources exceeds the cost of dispatching and paying LMP to those resources. When the net benefits test described herein is satisfied and the demand response resource clears in the RTO's or ISO's economic dispatch, the demand response resource is a cost-effective alternative to generation resources for balancing supply and demand.
4. To implement the net benefits test described herein, we direct each RTO and ISO to develop a mechanism as an approximation to determine a price level at which the dispatch of demand response resources will be cost-effective. The RTO or ISO should determine, based on historical data as a starting point and updated for changes in relevant supply conditions such as changes in fuel prices and generator unit availability, the monthly threshold price corresponding to the point along the supply stack beyond which the overall benefit from the reduced LMP resulting from dispatching demand response resources exceeds the cost of dispatching and paying LMP to those resources. This price level is to be updated monthly, by each ISO or RTO, as the historic data and relevant supply conditions change.
5. This Final Rule also sets forth a method for allocating the costs of demand response payments among all customers who benefit from the lower LMP resulting from the demand response.
6. The tariff changes needed to implement the compensation approach required in this Final Rule, including the net benefits test, measurement and verification explanation and proposed changes, and the cost allocation mechanism must be made on or before July 22, 2011. All tariff changes directed herein should be submitted as compliance filings pursuant to this Final Rule, not pursuant to section 205 of the Federal Power Act (FPA).
7. In addition, we believe that integrating a determination of the cost-effectiveness of demand response resources into the dispatch of the ISOs and RTOs may be more precise than the monthly price threshold and, therefore, provide the greatest opportunity for load to benefit from participation of demand response in the organized wholesale energy market administered by an RTO or ISO. However, we acknowledge the position of several of the RTOs and ISOs that modification of their dispatch algorithms to incorporate the costs related to demand response may be difficult in the near term. In light of those concerns, we require each RTO and ISO to undertake a study examining the requirements for and impacts of implementing a dynamic approach which incorporates the billing unit effect in the dispatch algorithm to determine when paying demand response resources the LMP results in net benefits to customers in both the day-ahead and real-time energy markets. The Commission directs each RTO and ISO to file the results of this study with the Commission on or before September 21, 2012.
8. Effective wholesale competition protects customers by, among other things, providing more supply options, encouraging new entry and innovation, and spurring deployment of new technologies.
9. As the Commission recognized in Order No. 719, active participation by customers in the form of demand response in organized wholesale energy markets helps to increase competition in those markets.
10. As the Commission stated in Order No. 719,
11. Congress has recognized the importance of demand response by enacting national policy requiring its facilitation.
12. In Order No. 719, the Commission required RTOs and ISOs to, among other things, accept bids from demand response resources in their markets for certain ancillary services on a basis comparable to other resources.
13. Additionally, in recent years several RTOs and ISOs have instituted various types of demand response programs. While some of these programs are administered for reliability and emergency conditions, other programs allow wholesale customers, qualifying large retail customers, and aggregators of retail customers to participate directly in the day-ahead and real-time energy markets, certain ancillary service markets and capacity markets.
14. To date, the Commission has allowed each RTO and ISO to develop its own compensation methodologies for demand response resources participating in its day-ahead and real-time energy markets. As a result, the levels of compensation for demand response vary significantly among RTOs and ISOs.
15. As noted above, the Commission issued the NOPR in this proceeding on March 18, 2010.
16. After receiving the first round of comments, the Commission issued a Supplemental Notice of Proposed Rulemaking and Notice of Technical Conference (Supplemental NOPR) in this proceeding on August 2, 2010.
17. Based upon the record in this proceeding, the Commission herein requires greater uniformity in compensating demand response resources participating in organized wholesale energy markets. This Final Rule also addresses the allocation of costs resulting from the commitment of demand response, directing that such costs be allocated among those customers who benefit from the lower LMP resulting from the demand response.
18. The NOPR proposed to require RTOs and ISOs to pay the LMP in all hours for demand reductions made in response to price signals. The NOPR sought to provide comparable compensation to generation and demand response providers, based on the premise that both resources provide a comparable service to RTOs and ISOs for purposes of balancing supply and demand and maintaining a reliable electricity grid.
19. In the Supplemental NOPR, the Commission sought additional comments and directed staff to hold a technical conference regarding various net benefits tests. In particular, the Commission sought comment on:
20. Various commenters address the comparability of demand response and generation resources for purposes of compensation in the organized wholesale energy markets. To begin, numerous commenters address the physical or functional comparability of demand response and generation, agreeing that an increment of generation is comparable to a decrement of load for purposes of balancing supply and demand in the day-ahead and real-time energy markets.
[Demand response] is in all essential respects economically equivalent to supply response * * * [so] economic efficiency requires * * * that it should be rewarded with the same LMP that clears the market. Since [demand response] is actually—and not merely metaphorically—equivalent to supply response, economic efficiency requires that it be regarded and rewarded, equivalently, as a resource proffered to system operators, and be treated equivalently to generation in competitive power markets. That is, all resources—energy saved equivalently to energy supplied—* * * should receive the same market-clearing LMP in remuneration.
21. Viridity states that attempts to distinguish the physical characteristics of generation and demand response ignore bid-based security-constrained economic dispatch as the foundation for LMP and are based on the assumption that the value of load management on the grid is limited to periods when the system is stressed,
22. At the same time, other commenters argue that generation and demand response are not physically equivalent, pointing out that demand response reduces consumption, whereas generators serve consumption.
23. Some commenters who argue that the physical characteristics of demand response are not comparable to generation frame their arguments in terms of the ability of the system operator to call on demand response and generation resources to provide balancing energy. They argue that generation resources provide superior service to demand response providers, positing that demand response is not intended for long periods of balancing needs,
24. Numerous commenters also address the comparability of demand response and generation in economic terms. For example, EEI states that, in finance terms, the demand response product is, unlike generation, essentially an unexercised call option on spot market energy, and the value of that option is well-established in finance theory as the value of the resource (LMP) minus the “strike price,” which EEI contends in this case is the retail tariff rate.
25. ISO-NE argues that paying full LMP to demand response providers without taking into account the bill savings produced by demand response provides a significant financial incentive to dispatch demand response with marginal costs exceeding LMPs. By dispatching higher-cost demand response, ISO-NE asserts, lower-cost generation resources are displaced.
26. Dr. Hogan further disputes arguments equating a MW of energy supplied to a MW of energy saved on economic grounds. Dr. Hogan draws a distinction between reselling something that one has purchased, and selling something that one would have purchased without actually purchasing it. Dr. Hogan argues that from the perspective of economic efficiency and welfare maximization, the aggregate effect of demand response is a wash producing no economic net benefit. Dr. Hogan asserts that Commission policy citing the benefits of price reduction in support of demand response compensation would amount to no less than an application of regulatory authority to enforce a buyers' cartel. He states that the Commission has been vigilant and aggressive in preventing buyers and sellers from engaging in market manipulation to influence prices, and it would be fundamentally inconsistent for the Commission to design demand response compensation policies that coordinate and enforce such price manipulation.
27. Dr. Hogan argues that the ideal and economically efficient solution regarding demand response compensation is to implement retail real-time pricing at the LMP, thereby eliminating the need for demand response programs. Realizing that this is unattainable at the present time, Dr. Hogan goes on to propose a next-best solution, which he believes is to pay demand response compensation in the amount of LMP-G, or some amount that simulates explicit contract demand response (such as “buy-the-baseline” approach discussed below). These options, he argues, more than paying LMP, better support notions of comparability between demand response resources and generation.
28. The New York Commission, however, argues that requiring payment of LMP-G would result in an administrative burden of tracking retail rates for the multiple utilities, ESCOs and power authorities and create undue confusion for retail customers and administrative difficulties for State commissions and ISOs and RTOs.
29. Consistent with Dr. Hogan's arguments, some commenters assert that demand response providers should actually own or pay for electricity prior to, what commenters characterize as, an effective reselling of the electricity back to the market in the form of demand response. For example, these commenters suggest that the demand response provider purchase the power in the day-ahead market and resell it in the real-time markets.
30. Viridity, on the other hand, argues that forcing customers to buy and then resell electricity will lead to too little demand response and that adopting a “buy-the-baseline” approach would constitute an inappropriate exercise of Commission authority to effectively force parties into contracts. Viridity and DR Supporters state that any characterization of demand response as a purchase and then resale of energy is erroneous
31. DR Supporters further argues that, despite claims to the contrary, paying full LMP to demand response providers does not constitute a subsidy for demand response any more than the remunerations of generators for the power that they sell. As Dr. Kahn states:
Does this plan involve double compensation, as [Dr.] Hogan asserts, at the expense of power generators—of successful
32. Viridity further disputes Dr. Hogan's argument that payment of LMP for demand response will distort an otherwise optimal market. Viridity posits that such arguments ignore dislocations in the wholesale power markets, the existence of market power that must be mitigated, imperfect information available to customers, barriers to entry and uneconomic resources dispatched to fulfill must-run requirements.
33. In addition to physical and economic comparability, some commenters contrast the environmental effects of generation and demand response resources. EDF notes that current market prices fail to internalize environmental externalities—including toxic air pollution, greenhouse gas pollution, and land and water use impacts—and other social costs. EDF asserts that the social impact of these environmental externalities is especially acute at peak times, positing that generation sources used for marginal supply at such times (“peaker plants”) are among the oldest, dirtiest, and most inefficient in the fleet.
34. Taking the opposite view concerning environmental externalities, EPSA states that paying LMP for demand response will merely encourage load to switch to off-grid power (or behind-the-meter generation), while still being compensated, and that such behind-the-meter generation produces more greenhouse gases and other air emissions than electricity from the regional energy market.
35. Some commenters discuss comparability of generation and demand response in terms of the market rules that apply to each resource, arguing that both resources should be comparably compensated only if the same rules for participation apply to both resources, and both resources are held to the same standards for dispatchability.
36. Some commenters address the comparability of demand response providers and generators in terms of maintaining system reliability. PIO argues that reductions in consumption provide additional reliability.
37. On the other hand, PSEG argues that a MW of demand response does not make the same contribution towards system reliability as a MW of generation, because demand response committed as a capacity resource is only required to perform for a limited numb