In the Wake of Court Ruling, What’s the Future of Demand Response?

supreme courtOn September 17th, the D.C. Circuit Court of Appeals declined en banc review of Federal Energy Regulatory Commission (FERC) Order 745, dealing a blow to FERC’s regulation on demand response. This sounds complex, but behind these technical terms, hidden in plain sight, is a monumentally important and unfortunate legal outcome: we’re likely about to see an unnecessary rise in electricity prices and increase in new polluting power plants. This is bad news for the consumer, bad news for efficiency, and bad news for the environment.

First, a bit of background…

FERC Order 745, issued in 2011 by the federal agency that regulates electricity throughout the United States, has successfully allowed demand response to fairly compete in the electricity marketplace with more traditional energy resources like coal and natural gas.

Demand response is an important clean energy resource used by utilities and electric grid operators to balance stress on the electric grid by reducing demand for electricity, rather than relying on dirty “peaker” power plants or new infrastructure. It pays people to conserve energy during periods of peak or high demand in exchange for their offset energy use. This makes our grid more efficient, reduces harmful air emissions from fossil fuel plants, and keeps electricity prices lower.

In the wholesale energy market, when the electric grid is stressed by demand (like during a heat wave or cold front), energy resources such as coal and demand response are invited to duke it out in the competitive, open marketplace for a chance to “fill the energy capacity gap.” Whichever combination of energy resources is the most readily available at the best price is delivered to homes and businesses. The inclusion of demand response in this wholesale energy market created a level playing field for the resource – a logical and important step taken by FERC.

By giving a clean energy resource equal footing with traditional sources of power, FERC was merely allowing an additional option into the marketplace. More options usually results in more competition; more competition usually results in lower cost to the consumer. And this is exactly what has occurred.

In 2013 alone, for example, demand response saved consumers in the mid-Atlantic region $11.8 billion. These savings are now, however, in jeopardy. By declining en banc review of the Order, the court has said, in essence, that demand response can no longer participate on equal footing in the marketplace.

A look into the future

None of this is good news for demand response, which in turn is bad news for anyone who wants lower electricity bills and cleaner energy.

So where does demand response go from here? None of the options are certain and some overlap, but let’s look at each possibility.

  • FERC can request cert. to the Supreme Court. Certiori is the process that parties use to request Supreme Court review of a prior decision. The Supreme Court has discretion in taking cases, but if granted, the Supreme Court would hear and potentially overturn the lower court’s decision. This would be the most beneficial outcome, but is unlikely statistically: Roughly 75-80 cases are heard by the Supreme Court each year out of the 10,000 petitions that are filed.
  • Demand response could be completely kicked out of the market. This would be the least beneficial outcome, with one study indicating that wholesale capacity prices in the mid-Atlantic region could increase dramatically.
  • Demand response could be allowed to compete, but on uneven footing. This is perhaps a more likely scenario than those identified above, but the final form this would take is unclear. For example, PJM, home of the largest wholesale energy market in the United States, has proposed one possible outcome, but notes that many different alternative approaches are possible.
  • States may (and probably must) take a more active role in promoting demand response, either alone or in coordination. Although perhaps less elegant than what has existed, where demand response is able to compete alongside other resources on a level playing field, state level demand response could help fill the void if the resource is kicked out of the wholesale energy market.

Regardless of the outcome, one thing is certain. The court’s ruling has introduced a good deal of uncertainty as to how demand response will be treated going forward. And this uncertainty, in turn, is bad news for consumers and the environment. It’s too bad, given that demand response has been helping lower energy prices and incentivizing energy conservation as an additional option in the marketplace. Now that demand response could be inhibited in the marketplace, it may need to compete on unequal footing – an unfortunate outcome for people and the planet.

Photo Source: Flickr/Mark Fischer

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