Will We Have Enough Demand Response for the Next Heat Wave?

By Cynthia A. Arcate 8 August, 2013

The recent heat wave brought a fresh tide of glowing reviews for Demand Response, which pays consumers to curtail electricity use when demand on the grid is nearing its peak. But the positive press belies another still-untold story about demand response – one which raises critical questions policymakers ought to be addressing.

On July 19, the date which will probably set the system peak for the year, Demand Response (DR) delivered 193 megawatts of electricity reduction for seven hours – the longest DR event in ISO-NE history – proving again the well-established benefits of demand response. It is clear DR reduces reliance on more expensive resources, usually fossil-fuel and higher-polluting sources like coal and oil. It also applies downward pressure on the market clearing price of electricity. The DR performance of 95 percent during the heat wave was proof that it can be relied upon to meet its obligations under the rules.

What’s puzzling to close industry watchers, though, is that demand response providers had committed to a reduction of roughly 1,300 megawatts this year. While impressive, the 193 MW reduction leaves a question of what happened to the other 800 or so MW (the 330 MW registered in Maine were not called), and more importantly, what is the future of DR in the region.

I’ve heard that DR providers have terminated contracts with customers for the delivery of DR and literally sold their capacity slots to generators to have the obligations met with conventional generation—which literally means that instead of a reduction during peak times of usage, generators will supply more electricity into the grid. The opposite of DR.

The reason? There isn’t enough money in the market for DR providers to make a profit or break even. The financial assurance exposure if they fail to meet the obligation is too great, and the ISO-NE rules to deliver DR are too onerous to stay in the business. A leading DR provider is terminating contracts for just those reasons.

From a reliability standpoint, all this may not be a problem – the generators are happy for the opportunity to generate and get paid more. But this situation raises serious economic and environmental concerns about the future of DR. Will all of the exhaustive effort to develop rules and opportunity for DR be for naught? What are the long-term effects of losing this resource? Should policy makers take steps to resuscitate the opportunity? These obvious questions just aren’t currently being asked.

The first thing that should happen is for this little-known secret to be exposed beyond the inner circles of the industry. News articles touting the value of DR during the heat wave only tell part of the story. From a policy perspective, the region needs to acknowledge the difficult economics of DR and provide financial support for it. This was common policy in the state before electric restructuring, with one obvious solution to make it part of the utility energy efficiency programs. Doing so would have a further benefit of introducing DR to the residential sector, where a big part of the heat wave load demand lies.

Relying on private market forces to deliver DR is unrealistic. We provide huge subsidies for renewables and energy efficiency but have neglected to see what is happening to one of the most effective tools we have to reduce our reliance on oil generation during times of peak demand in the region.

Congratulations to DR providers who delivered during the heat wave – a job well done. But the dirty little secret which needs to be heard is that this success is a pittance of the potential and a step backward from the high expectations set only a short time ago.

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