Electricity Markets

Demand response in wholesale electricity markets helps public power save

Demand response plays an important role as an energy resource for both local utilities and regional grid operators. It is a unique resource, as it is created not by construction of a power plant, but instead by a customer agreeing to reduce their use of electricity.

A central advantage of demand response is that it can reduce electricity costs by obviating the need to turn on more expensive sources of generation during peak demand or even avoid the construction of additional power plants over the long run. It is also an important asset for electricity markets, as it can mitigate electricity price spikes and reduce price volatility.

For public power utilities participating in regional transmission organization-operated markets, demand response is an important means to manage costs. RTO market rules and incentives should be designed to allow for and encourage the participation of this important resource.

According to the Federal Energy Regulatory Commission, about half of the demand response in the U.S. is provided through the wholesale markets operated by RTOs, and half comes through utility-operated retail programs. Public power can also offer demand response into the wholesale markets to mitigate the costs and volatility of the wholesale energy and capacity prices.

A key to demand response participation is accurate measurement and verification of when load reductions can be attributed to it. An important component of such measurement is obtaining an accurate determination of a baseline of energy use for a similar time and day.

In the wholesale markets, curtailment service providers, CSPs, or load-serving entities, such as public power utilities, can aggregate the demand response of factories, businesses, and homeowners and can sell that aggregated resource into the RTO markets. Homeowners may participate by allowing the CSP direct load control, such as making small adjustments in air conditioning use. Factories may participate by shifting production to a different time or by turning on behind-the-meter generation to replace the electricity no longer being purchased from the wholesale market. Public power-owned generation can also provide demand response.

Different markets, different incentives

All RTOs allow demand response to participate in the energy and ancillary services markets and in the capacity markets for the four RTOs that operate such constructs (PJM Interconnection, ISO-New England, New York ISO, and Midcontinent ISO). In those RTOs, almost all demand response is sold through the capacity market.

Demand response participation in the energy and ancillary services markets can be on an economic or emergency basis. Economic demand response involves the submission of an offer to reduce consumption when the locational marginal price rises above a selected threshold. Emergency demand response is only called upon during times of system stress, such as extreme weather events or transmission outages. In these markets, payment for demand response only happens if it is called upon and reduces load — and there is no penalty if it does not.

In the capacity market, demand response resources can offer an amount of load reduction for sale as capacity, as do physical supply resources. If the offer clears the auction, then the resource is obligated to curtail if called upon during a given time frame. In exchange, the resource receives a capacity payment regardless of whether it is called upon.

Demand response participation varies by RTO

The table below shows the amount of demand resources available in 2017 in each RTO and as a percentage of peak demand. The amounts are the availability of demand response, not the actual amount curtailed.

RTO/ISO Demand resources (MW) Percent of peak demand
CAISO 1,293 2.6%
ERCOT 2,258 3.2%
ISO-NE 2,657 11.1%
MISO 11,682 9.7%
NYISO 1,219 4.1%
PJM 9,520 6.6%
Total 28,629 6.5%

As shown, there is significant fluctuation in the availability of demand response, and the percentages are higher in the capacity markets. This is logical, as these markets provide payments for availability, not only when load is curtailed.

Other factors that might influence the amount of demand response in the wholesale markets may be the types of end users in the region, the activity of CSPs, energy and capacity prices, and the availability and attractiveness of utility programs.