Last December, we got it right when forecasting demand response trends for this year -- particularly when it came to our prediction that DR would be increasingly important year-round. Just a few weeks later, the polar vortex proved that to be true.
But we did not foresee one major hit to the market: the decision by a U.S. Court of Appeals to vacate FERC Order 745.
In this year's demand response roundup, we'll look at what mattered this year and how those factors will carry over into next year.
The death of FERC Order 745
There is more money than ever going to demand response, from higher market cap prices in ERCOT to more money for bring-your-own-thermostat residential demand-response programs. And, of course, increased payments for economic demand response in PJM because of FERC Order 745.
In May, the U.S. Court of Appeals in Washington, D.C. vacated the Federal Energy Regulatory Commission’s Order 745 in a 2-1 decision, stating that FERC has gone too far in its authority.
The decision, which the full court panel declined to rehear, found that FERC overstepped it jurisdiction in requiring grid operators to pay the full market price, known as the locational marginal price, to economic demand response resources in real-time and day-ahead markets. They instead tossed the issue to the states.
Although economic demand response is a far smaller portion of the market than capacity demand response programs, the decision could cost the market more than $4 billion in the next decade, according to GTM Research.
Furthermore, it has opened up an avenue for demand response critics (read: generators) such as FirstEnergy to ask the courts to also review FERC’s jurisdiction on capacity markets. As long as demand response continues to be stuck in legal limbo, it creates uncertainty in the markets that could dampen growth for years to come.
For more, read Jeff St. John's piece outlining the implications of Order 745 reaching the Supreme Court.
States rethink the markets
While the court decision brings considerable uncertainty to the demand response markets in the near term, there is some reason for optimism at the state level. If forced to examine the role of demand response, some states may find that it isn’t being valued enough by their utilities, which New York’s Consolidated Edison realized earlier this year.
Pennsylvania has already been in the lead on demand response issues for years with its bill Act 129. Earlier this year, Hawaii’s PUC demanded that Hawaiian Electric Co. develop a more robust demand-response plan.
New York’s “Reforming the Energy Vision” initiative calls for an elimination of electricity peaks in its market, which would open up the market for sophisticated demand-side management programs that go way beyond traditional capacity demand response.
In California, where demand response has lagged, stakeholders came together in 2014 for an agreement that sets the rules for valuing and paying for distributed demand response. Next year will also see the energy market price caps in Texas rise to $9,000 per megawatt-hour when demand outstrips supply. While this does not inherently change the demand response market in the Lone Star State, it does send a price signal that could make it more attractive for demand response participation.
Texas grid operator ERCOT is also rethinking its ancillary services market, and will provide higher compensation to faster-responding resources, such as demand response and batteries.
Of course, it won’t be such a rosy outcome in every state. In Ohio, the state’s utilities are looking for protection as some of their generation assets are increasingly noncompetitive in the capacity markets against cheaper resources such as demand response.
Year-round demand response
Although 2014 is on pace to be the warmest year on record, it’s hard to forget it was so cold last winter because of a weather phenomenon known as the polar vortex.
As frigid temperatures tripped nearly 20 percent of power generators offline in PJM’s territory, demand response came to the rescue with record levels of participation for a winter month.
PJM has pledged it will be better prepared in the future by prosing major reforms to its capacity market that will include incentivizing generators to take steps to ensure they can run during extreme weather events.
Demand response will undoubtedly be an important resource all year long in the years to come if there is a pay-for-performance incentive, as Terry Boston, CEO of PJM, has suggested. Even so, as challenges mount to demand response’s role in capacity markets, PJM may be rewriting the rules for demand response no matter what the season.
Expanding capacity and ancillary services abroad
Last year, we touted the demand response market opening in Japan. But that’s just the beginning.
There are already fairly robust markets in countries beyond the U.S., particularly Australia, but European and other Asian countries are beginning to rethink their demand response services to meet local grid needs.
Many European countries are wading into capacity markets, but are still primarily using demand response resources for grid regulation needs, which are considerable given the large amounts of intermittent wind and solar on most of Western Europe’s electric system.
Germany, one of Europe’s potentially largest demand response markets, is evaluating changes to streamline demand response assets participating in ancillary markets. As of 2014, Belgium, Finland, France, Ireland and the U.K. had demand response products in their energy markets, according to the Smart Energy Demand Coalition, with many other countries making changes in 2014.
The U.K. has expanded its frequency control opportunities for demand response. It also just launched a new capacity market, although there are some challenges to its design. Energy Pool, the dominant player in the French demand response market, expects its capacity to grow from about 1 gigawatt in 2013 to 10 gigawatts by 2018.
It is not just Europe that has evolving demand response markets. Earlier this spring, South Korea established a demand response market, and several large commercial companies, such as LG Chem and Korea Paper, are providing demand response services on the Korean Power Exchange.
Tapping small business
Large commercial and industrial customers have long been players in demand response markets. Residential demand response in the U.S. is expanding with newer programs that rely on technology, including smart thermostats and sophisticated analytics that drive behavioral responses when the mercury rises.
But there has long been an underserved customer base in efficiency and small business programs: small commercial.
This year, we saw some glimmers of hope that this could be a burgeoning frontier. Demand response leader EnerNOC, which is looking to grow its larger efficiency business, acquired Pulse Energy to target small commercial customers.
Two of the biggest players in demand response, Constellation and Comverge, also joined forces this year. Comverge has a substantial residential program, while Constellation has long been focused on the C&I sector. The merger will give the newly formed company an opportunity to combine capabilities to meet the needs of small and medium-sized businesses that could benefit from the demand response markets.
For states and energy markets with huge summer peak electricity demand from the long tail of small commercial and residential customers, such as Texas, aggregating small commercial is an important opportunity in flattening peak demand. Con Ed in New York, for instance, is targeting small commercial customers to join its revamped demand response offerings.
Look for more innovation from utilities and demand response providers in engaging small businesses for both efficiency and demand response in 2015.