FERC Approves Market-Based Demand-Response Compensation Rule

The Federal Energy Regulatory Commission (FERC) established a new rule intended to benefit customers and improve the operation and competitiveness of organized wholesale-energy markets by establishing the approach to compensation for demand-response resources in those markets. This rule also will remove barriers to the participation of demand-response resources.

The new rule requires organized wholesale-energy market operators pay the market price for energy—known as the locational marginal price (LMP)—to demand-response resources, when those resources have the capability to balance supply and demand as an alternative to a generation resource and when dispatch is cost-effective.

The rule finds that it will be cost-effective to pay that market price for energy to demand-response resources when a net-benefits test shows that the benefits to load from the reduced LMP that result from dispatching demand-response resources exceed the costs of paying LMP to those resources.

The rule requires regional transmission organizations and independent system operators to meet specific requirements for the establishment of the net-benefits test to determine when demand response resources are cost-effective.

“The approach … will help to provide more resource options for efficient and reliable system operation, encourage new entry and innovation in energy markets, and spur the deployment of new technologies. All of this contributes to just and reasonable rates,” said Jon Wellinhoff, FERC chairman.

FERC’s rule recognizes that, in the Energy Policy Act of 2005, Congress established a national policy to eliminate unnecessary barriers to demand-response participation in organized wholesale-energy markets.

Organized wholesale market operators will be required to make compliance filings by July 22, 2011, The filings must include conforming tariff provisions and identify price thresholds to estimate where customer net benefits would occur and the price above which it would be cost--effective to dispatch and pay demand-response resources the market price for energy. Each market operator must undertake a study examining 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. Each operator must file the results of the study with FERC by Sept. 21, 2012.

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