Demand Response “Negawatts” Getting a Pay Day

The Federal Energy Regulatory Commission — the agency that regulates the grid — gave the demand response industry a key victory on Tuesday, issuing a rule that says that “negawatts” produced by turning down power use can demand the same market prices as real megawatts of generated electricity. The ruling is important because it could open up broader and more lucrative markets for demand response companies, which have developed businesses around helping building owners turn down energy use, as long as demand response providers can deliver their negawatts at competitive prices.

Next comes the complicated task of making the nation’s power markets meet the rule. FERC’s order (PDF) will require wholesale energy operators to pay demand response resources the market price for energy, known as the “locational marginal price,” or LMP, as long as they can balance supply and demand as well as a generation resource. The rule applies to the Regional Transmission Operators (RTOs) and Independent System Operators (ISOs) that manage about two-thirds of the nation’s grid.

It’s early yet, but you can expect a slew of announcements today from big demand response providers like EnerNOC (s ENOC), Comverge (s COMV) and Constellation Energy praising FERC’s decision. Right now most of the demand response capacity in the country is managed in a piecemeal fashion, with many different prices paid for participation in different programs, most of them separated from the markets where energy is traded.

Even when demand response is permitted to participate in these more lucrative energy markets, it tends to receive less money per “negawatt” than does generated energy — usually by subtracting some portion of the power reduction’s retail price if the customer had used it. Power generators have supported these arrangements, arguing that giving full market price of negawatts constitutes double dipping — not only are utility customers saving money on power bills, they’re also getting to earn money by bidding that energy savings into the market.

But FERC’s order calls for a wholesale change to all these programs, by requiring all RTOs and ISOs to set up new tests to determine when demand response will be cheaper than generation to accomplish the same grid-balancing tasks.

It won’t happen right away. RTOs and ISOs have until July 22, 2011 to file compliance statements that set tariffs and threshholds for the new rule, FERC stated Tuesday. By September 21, 2012, the RTOs and ISOs will be required to submit results of studies that demonstrate “the requirements for and effects of directly determining the cost-effective dispatch of demand response resources in both the day-ahead and real-time energy markets,” FERC’s order states.

That makes sense, given the complications involved in adding a whole new class of participant to the confusing array of programs that buy and sell energy to balance grid frequency and voltage, supply emergency peak power and perform other functions.

But FERC has long held that these kinds of market changes will be needed to help demand response realize its full potential. FERC Chairman Jon Wellinghoff has called it the “killer app” of the smart grid. Indeed, in a recent dispute over demand response market rules between Mid-Atlantic grid operator PJM and demand response providers including EnerNOC, FERC ruled in demand response’s favor — an indication of where the commission’s sympathies lie.

Image courtesy of Matti.Frisk via Creative Commons license.