Late last month, the U.S. Supreme Court opted for a cleaner, more affordable energy future. Its decision, in Federal Energy Regulatory Commission v. Electric Power Supply Association, upheld a federal rule requiring wholesale electric markets to value demand response -- a range of technology-agnostic programs in which users commit to ramp down electric consumption when the grid is strained -- on par with conventional generation. The ruling trumps an appellate court decision widely viewed as protecting power industry interests at the expense of the public. Utility grids around the country can be cleaner, cheaper and more reliable as a result.
But don’t expect the Supreme Court decision to change much in New York City, where a separate federal order has severely limited new in-city demand-response assets’ participation in the state’s wholesale capacity markets -- a change that roughly halves revenue for prospective participants. This order, which has gotten little attention, plainly serves incumbent power producers to the detriment of the public interest.
New York City boasts some of the most expensive electricity in the country, as growing density and a burgeoning services economy have compounded the need for air-conditioned space. For less than a week a year -- the doggiest days of summer -- we need about 20 percent in additional grid capacity, increasing the risk of blackout while adding hundreds of millions of dollars to our annual utility bills. Erecting more conventional generation and transmission to meet steadily rising demand is even costlier and often physically infeasible.
Demand response is a small but invaluable piece of the city’s electric power puzzle. Last year, over 1,800 local commercial, office, and industrial users enrolled in wholesale demand-response programs, committing to quantity-certain reductions in utility power consumption when signaled by the network operator. Many of these same assets also participate in demand response at the distribution utility level, aiding reliable and resilient electron delivery across Con Edison’s wires.
More than just switching off the lights, demand response provides among the most promising use-cases for batteries, advanced power electronics, and other emerging energy technologies that seamlessly shift energy load off the grid to ease peak congestion. Sudden and poorly explained rule changes don’t just cramp business models in the immediate term; they can rattle investor confidence for years, stymying innovation and scale.
Unfortunately, this is today’s reality. Despite an upward trend to wholesale electric capacity prices -- reflecting the city’s mounting power challenges -- demand response’s share of the in-city wholesale market has stagnated, from 5 percent in 2011 to 4 percent last year. By contrast, the city’s three largest conventional generators control some 54 percent of the zone’s capacity requirement.
Though it has flown under the radar, the issue here is straightforward. A federal order has twisted a market rule -- intended to encourage fair competition -- to bar demand response from competing as wholesale capacity, thereby protecting the position of local power plants.
New York’s wholesale capacity market (also known as ICAP) is fundamentally a piece of policy, designed to ensure adequate power resources exist to meet peak demand. In hopes of encouraging cost efficiency and innovation on the part of suppliers, the capacity market is structured as a competitive auction, segmented by geographic zones, of which New York City is the largest. To stave off possible market abuse, rules were established to control who participates and at what price.
The abuse-prevention rule in question is meant to address the fear that players could artificially subsidize capacity bids to temporarily suppress prices, discouraging broader participation and thereby cornering the market. As a proxy for such manipulative subsidy, the rule requires all new entrants to compare their total expected revenues against the market price for capacity; if total revenues are higher, the unit is barred from the auction, or “mitigated.”
Policy-driven state incentives, clearly not intended to corner markets, were excluded from this test. At least, until last year.
In response to a filing by the independent power producer NRG, the Federal Energy Regulatory Commission (FERC) abruptly re-characterized state demand response programs as anticompetitive manipulation of New York’s wholesale capacity market. Now, “unless ruled exempt by Commission order…all rebates and benefits from state programs must be included” in the market manipulation test for demand response in New York City and the flanking downstate corridor.
At least one commissioner, now-Chair Norman Bay, found this result highly questionable. In a partial dissent appended to the ruling, he declared the commission’s justification unpersuasive, a sudden and cryptic about-face on a standing rule five years on the books. And yet, pursuant to a promptly filed complaint by the State of New York, FERC upheld its reversed ruling last October, and summarily denied rehearing this month. There was no further dissent from Chairman Bay.
New demand response assets now fail the market manipulation test based on their receiving local utility payments for functionally distinct, distribution-level demand response and New York state incentives promoting more diverse, innovative, resource-efficient, and generally cleaner sources of peak energy capacity. Neither furnishing additional, legitimate services separate from wholesale capacity, nor compensation for limiting harmful market externalities, are in any way manipulative. That such a small and diffuse resource as demand response could possibly corner markets also seems fairly far-fetched.
Regulators should be encouraging these valuable resources in line with the public interest. Instead, they have perversely narrowed market access for demand response precisely because of its complementary systemic benefits. The end result is protection of incumbent suppliers. This is regulation gone wrong.
Behind the sudden rule change, federal regulators and market participants may be wary of a progressive governor (Cuomo) set on transforming the electric power system through his Reforming the Energy Vision platform. Indeed, observers have noted the increasingly porous and conflicted border between wholesale and retail electricity. Reading the New York issue in this light, investment-friendly demand response policy won’t be granted by a single judgment (like the Supreme Court’s 745 ruling), but rather will face repeated challenges across the electric system’s often-Byzantine layers of regulation and market.
In the meanwhile, New York suffers an intellectually dishonest, regressive repurposing of the rules that denies new demand-response assets fair compensation, undermines investor confidence, and betrays the public interest.
Federal regulators should take advantage of the momentum afforded by the Supreme Court’s 745 decision to correct this injustice and encourage demand response in our nation’s largest, most capacity-constrained city. The most straightforward approach? With all deliberate speed, re-reverse this arbitrary rule reversal -- and this time, make it permanent.
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Ben Pickard is an investment, strategy, and policy professional focused on coupling distributed energy with conventional utility resources. His advisory vehicle, Peak Power LLC, was originally formed to invest in demand response assets in New York City.