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Category — Demand-Side Management

‘Demand Response’ in Electricity: Economists vs. FERC on (Over)Pricing

“The [Federal Energy Regulatory] Commission’s recent progress in promoting competitive wholesale energy markets has the potential to be undone as a result of this well-meaning, but misguided Rule.”

- FERC Commissioner Philip Moeller, ”Demand Response Compensation in Organized Wholesale Energy Markets,“ Order No. 745 (2011).

Renewable energy subsidies are at the forefront of the public policy debate with constant talk of “green” jobs and the looming expiration of the production tax credit, a familiar subject at this blogsite. But qualifying renewables get other subsidies too, such as accelerated depreciation and state-level must-buy mandates.

The Federal Energy Regulatory Commission (FERC), regulating interstate electricity, is arguably subsidizing another favorite “green” resource – the practice of energy abstinence called “demand response.”

FERC Order Nos. 745 and 745-A established, for the first time, a uniform compensation scheme for demand response in organized electricity markets. Before Order No. 745, each regional transmission organization was free to develop its own compensation scheme, and demand response was already being implemented in organized markets such as PJM. Commenters disagreed with several aspects of the order, including the appropriate level of compensation. When FERC denied rehearing on that issue (and others), protesters sought review by the Court of Appeals (Electric Power Supply Ass’n, et al. v. FERC, No. 11-1486, et al.). The case is at the briefing stage, with oral arguments to be scheduled.

The MasterResource-worthy part of this case is the amicus brief filed by a group of academic energy economists. It takes a lot for economists to agree in the first place, let alone to jointly file a 30-page brief on a nuanced issue in the field of electricity markets. To raise the stakes a bit, I should also note that one of FERC Chairman Jon Wellinghoff’s main priorities, along with integrating renewables, is encouraging demand response. A reversal on this issue would be a big deal.

Background: ’Demand Response’

Retail electricity customers tend to pay a fixed rate for their electricity. However, in organized wholesale markets, the price of electricity at different points in the transmission grid can vary widely between seasons and even throughout the day depending not only on demand and supply, but also on transmission constraints. That wholesale market price is often referred to as the Locational Marginal Price (LMP).

That price structure means there is a disconnect between wholesale and retail electricity markets, and therefore retail customer usage is not responsive to wholesale price fluctuations. This can be troublesome as price-insulated electricity demand reaches the upper limits of the grid’s physical capacity to supply. Grid reliability is threatened, and despite sky-high prices at the wholesale level, retail customers carry on using electricity, blind to the wholesale price signal.

Enter demand response (or imputed demand response to be fair to the electricity nerds out there). The promise of demand response is to bridge the wholesale-retail gap by giving retail customers the incentive to withhold consumption when wholesale prices are high, easing the strains on the system at times of peak electricity usage. This “peak-shaving” effect can strengthen the reliability of the system and put off costly transmission investments. However, significant differences of opinion remain as to the best way to send wholesale price signals to retail customers. This is where the economists and the FERC majority are at odds.

The FERC Majority: Pay Demand Responders Full LMP

In Order No. 745, FERC reasoned that, “when a demand response resource has the capability to balance supply and demand as an alternative to a generation resource,” the demand response resource should be paid the full LMP. Some commenters agreed – some not so much. As FERC stated: [Read more →]

September 13, 2012   13 Comments

Daylight Saving Time: Arrogant Central Planning

Although smart phones and computers make it easier to remember, last month Americans endured the semi-annual hassle of changing their clocks an hour. “Daylight Saving Time” (DST) was originally started during World War I to allegedly save energy. Jimmy Carter gave it to us in peacetime as part of his National Energy Plan. In practice, DST causes needless headaches—and even heart attacks!—and arguably doesn’t even save energy.

Chalk it up to yet another failed government intervention.

 The Hubris of DST

Joe Romm is not afraid to recommend society-changing government intervention in order to achieve a conservation goal, and he proposes drastic carbon legislation to prevent what he sees as “hell and high water.” Yet even this central planner hit the nail on the head when he complained: “You can’t save daylight by moving around the hands on your clock, of course. So daylight saving time remains as absurdly named as it ever was.”

For those who are skeptical of the current suite of climate models, Romm’s complaint is ironic. The same mindset that led government wartime planners to alter time, leads today’s planners to project what the global temperature will be in the year 2080.

The Harm of DST

There are many harms to DST. Most obvious, there is the hassle every household endures in actually changing the numerous clocks (microwaves, nightstand, watch, car, etc.). Although this doesn’t seem like a big deal, imagine if the federal government mandated that every U.S. citizen sit in a timeout corner for 15 minutes twice a year. Multiplied over hundreds of millions of people, that would add up to a significant waste of time, unless there were some corresponding benefit to the practice. [Read more →]

December 3, 2010   4 Comments

Demand-Side Management: Government Planning, Not Market Conservation (Testimony of Dan Simmons Before the Georgia Public Service Commission)

Editor Note: Demand-Side Management (DSM) is an electric-utility program where all ratepayers subsidize the energy conservation investments of those ratepayers who participate in the program. Dan Simmons, director of state affairs for the American Energy Alliance and for the Institute for Energy Research in Washington, D.C., submitted the following testimony in opposition to Georgia Power Company’s request to implement a DSM program.

Summary from Testimony: Market vs. Non-Market Conservation

Advocates of demand side management frequently overlook the human dimension. People make conservation decisions every day. Families are constantly striving to maximize the benefits they receive from using energy with the cost of using that energy.

Some economic analyses try to argue that ratepayers systematically misestimate the proper discount rate and therefore DSM is required to fix this error. But those analyses fall victim to assuming they know what’s best for ratepayers. The people who know best are ratepayers themselves. Only the individual ratepayer can decide how he or she best allocates their scare resources.

DSM leads to inefficient outcomes. It increases rates for all ratepayers, but only benefits a few of the ratepayers. Because history shows that DSM programs do not typically lead to the demand reductions claimed, they do not lead to lower electricity rates overall.

DSM is not new. It has been tried and studied for years. DSM is subject to the well known problems of the rebound effect, free riders, moral hazard, to name a few. Georgia Power’s 2010 Integrated Resource Plan and Application for Certification of Demand Side Management Programs analysis does not explain how this program will overcome these well-known economic problems nore does it explain how it will overcome the problems with Georgia Power’s DSM program from the 1990s. Without an analysis, it is difficult to believe Georgia Power’s DSM programs will achieve the benefits Georgia Power projects.

TESTIMONY

Q. PLEASE STATE YOUR NAME, TITLE AND BUSINESS ADDRESS.

A. My name is Daniel R. Simmons. I am the Director of State Affairs for the American Energy Alliance and the Institute for Energy Research, non-profit organizations that educate the public on energy policy. Our offices are located at 1100 H Street, Suite 400, Washington, DC 20005.

Q. PLEASE SUMMARIZE YOUR EDUCATION AND PROFESSIONAL EXPERIENCE.

A. I received a Bachelor of Science in Economics from Utah State University in 1998 and a Juris Doctorate from George Mason University School of Law in 2003. In 1998, I moved to Washington, D.C. and worked for the Competitive Enterprise Institute as an environmental policy analyst. In 2000, I went to work for the Committee on Resources of the United States House of Representative as a professional staff member. From 2002 to 2005, I was the Emmett McCoy Research Fellow at the Mercatus Center and from 2005 to 2008, I was the Director of the Natural Resources Task Director at the American Legislative Exchange Council. From 2008 and presently, I am the Director of State Affairs at the American Energy Alliance and the Institute for Energy Research. [Read more →]

May 20, 2010   3 Comments