With the ability to turn off lights during peak-demand periods, demand-response (DR) programs offer a number of advantages for larger commercial and industrial electric-utility customers. These benefits can include utility incentive payments and, of course, lower electricity bills. Several years ago, the Federal Energy Regulatory Commission (FERC) created another income stream for DR participants, allowing them to bid in the same energy auctions open to electricity generators. However, a May 2014 federal court decision has put that income in question, and it could have an effect on a range of other DR offerings.
DR programs have been a part of electric-utility resource planning since at least the early 1990s, when the concept of “negawatts”—that is, the capacity added to the grid by large users able to reduce their demand—first arose. State-level utility regulators, especially in deregulated electricity markets, embraced DR as a less expensive alternative for meeting growing demand than building new power plants. In 2011, FERC issued Order 745, which provided profitable incentives for DR participants, a benefit that some new equipment-makers, including energy-storage and generator manufacturers, have begun incorporating into their marketing efforts and business plans.
Order 745 requires independent system operators and regional transmission organizations to not only treat DR as a generation resource in their balancing-market auctions but also pay DR participants at the same rate they pay generation companies. FERC overstepped its authority with this order, according to a 2–1 decision from a three-judge panel of United States Court of Appeals for the D.C. Circuit, announced in late May. FERC’s jurisdiction is limited to wholesale electricity generation and sales. The court determined that DR is a retail activity because it involves transactions with individual customers and, as such, should be overseen by state-level regulators.
The initial suit against FERC’s order was filed by the Electric Power Supply Association (EPSA), a trade association for independent power-generating and marketing companies, which view DR as something of an existential threat. The court’s ruling took a number of industry observers by surprise, as many thought EPSA’s case was little more than a nuisance suit.
“The decision by the D.C. Circuit overturning FERC jurisdiction was a bit shocking. I’m not sure many people saw this coming,” said Tanya Bodell, executive director of Energyzt, a Boston-based energy-consulting firm. “Many of the key stakeholders impacted by this lawsuit were not involved in the initial filing and, I suspect, were not monitoring it closely.”
Environmental advocates are among those taken by surprise, including Seth Jaffe, partner and chair of the environmental practice group at the Boston law firm Foley Hoag.
“There are a lot of reasons, from an economic point of view, for someone to be encouraging demand response,” Jaffe said.
The court didn’t disagree with the economic value of demand response, but it questioned who gets to set that value, asking whether this is FERC’s role.
Order 745, as well as this court decision, are related specifically to DR participants bidding into what is called the “balancing” market, which includes auctions intended to match (or balance) anticipated demand with an adequate supply of generation resources. FERC also regulates DR participation in “capacity” and “ancillary services” markets. Capacity markets can be thought of as “just-in-case” fallback options that provide an added margin of safety to be called on during periods of especially high demand. Ancillary services include generation (or DR) resources that can be tapped with very little warning—and often, for a very short period of time—to balance line voltages and provide other operational assistance.
Capacity and ancillary services markets provide the largest portion of revenues earned by companies that aggregate the DR capabilities of numerous individual electricity users into resources sizeable enough to be significant for resource planners. One of the largest of these, EnerNOC, issued a statement soon after the decision noting that the balancing market accounted for only 2 percent of its overall revenues. However, Ohio-based energy conglomerate FirstEnergy filed a suit just hours after the Circuit Court’s decision against its regional transmission organization, PJM, arguing against FERC’s regulation of DR in the capacity marketplace.
FERC has filed a request for an en banc rehearing of its case by the full bench of the D.C. Circuit Court of Appeals, and Order 745 will stay in place until that hearing occurs. But the temporary reprieve hasn’t stopped speculation on what an eventual ruling against the order could mean for the full range of DR offerings—or about just how far both sides in the dispute are willing to take their arguments.
“Every player in the industry who is directly or indirectly impacted is going to have to pull back and look at what this means for them,” Bodell said. “For those who do decide to fight this, I think we could see it going all the way to the Supreme Court.”