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Major Electricity Sector Associations Express Common Concerns With FERC's Demand Response NOPR

Several national and regional organizations representing the wholesale electricity industry recently submitted comments raising concerns with the Federal Energy Regulatory Commission's (FERC) proposed rule to establish a generic compensation approach for demand response (DR) participating in organized wholesale electricity markets. FERC proposes that Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) be required to pay DR resources the full locational marginal price (LMP) without offsets in all hours in all cases. As highlighted below, the listed organizations share EPSA's serious concerns over mandating a uniform method of compensation across all RTOs. These concerns include compensating all DR resources at the full LMP in all hours without an offset and without clear parameters or requirements to protect against unnecessary subsidies for some customers at the expense of others. It is very significant that this wide range of associations, including many with differing views on other market design issues, share common concerns and wish to work with FERC to address them.

  • "[T]he NOPR fails to explain how the lack of a uniform compensation approach in each RTO-run market is a barrier to demand response. APPA and NRECA members located in RTO-run markets have supported tailored incentives to encourage economic demand response resources. While participation in economic demand response programs in several RTO-run markets has declined in 2009, compared to 2008, this reflects the decline in RTO prices during that timeframe, and it is not, in itself, a reason to prescribe a uniform compensation approach based on paying full LMP to demand response resources." American Public Power Association and the National Rural Electric Cooperative Association (APPA/NRECA), p. 4.

  • "For a balancing authority to meet load requirements and maintain a reliable electric system, a one megawatt reduction in demand is generally comparable to a one megawatt increase in generation. However, that does not mean that a demand response resource is "equivalent" to a supply resource. The generator gets paid LMP for a one megawatt increase in supply, while the retail customer does not have to pay for the one megawatt reduction. While demand response is valuable because of its positive environmental attributes and its salutatory effect on peak usage to avoid investments in new generation, it is not a "resource" like generation, in that it cannot actually power residences, commercial establishments or industrial facilities. It is not unjust and unreasonable to treat demand response resources differently than generators and other suppliers. By analogy to Order No. 890, demand response, generation and transmission are to be treated "comparably," but it does not follow that each of them is "the same" and therefore must be compensated in the same manner." APPA/NRECA, p. 12-13.

  • "EEI is aware that markets are imperfect and that barriers to entry may exist that prevent the realization of all cost-beneficial demand response. However, the best way to deal with such barriers is to specifically identify them and individually address their removal. To impose a standardized compensation scheme for demand response that creates incentives for inefficient customer behavior, the costs of which will ultimately be borne by electricity consumers, is not the answer. Any compensation method that produces such an overly costly end result cannot possibly yield just and reasonable wholesale rates. Edison Electric Institute (EEI), p. 10.

  • "In assessing impacts on economic efficiency the Commission should determine whether these programs have increased the total benefits to all market participants. Lower wholesale prices that merely benefit Buyers at the expense of Sellers are not an economic benefit and may constitute undue discrimination... Absent a finding that there are significant net benefits associated with the discriminatory action that accrue to market participants and/or society overall, the Commission should conclude that the action constitutes undue discrimination." EEI, p. 21-22.

  • "Because generators deliver energy to the market and Demand Response Resources do not, their respective products are not fungible, therefore do not have comparable economic values. Furthermore, because demand response is not energy it cannot be traded in the energy market; consequently, the fact that generators are paid LMP in any given hour provides insufficient information regarding what Demand Response Resources should be paid for reducing load in that same hour." EEI, p. 15.

  • "[T]he Full LMP Approach is inconsistent with economic efficiency, and therefore, skews competitive wholesale markets, is unnecessary and is likely to harm smaller consumers... [I]f the Commission mandates a specific compensation approach for DR in its NOPR for all ISOs/RTOs, such approach should pay DR resources LMP minus the applicable retail rate that would be charged to the DR resource." Independent Power Producers of New York, Inc., p. 3.

  • "Economic demand response, which is the sole focus of the NOPR, is provided when a demand responder chooses to offer it. Economic demand responders are not forced to reduce their load during peak periods or at any other times. Thus, this is not a service that can be relied upon for reliability, planning and operational security purposes by the RTO on an equivalent basis to dispatchable generation. This inferior product from a reliability standpoint should not be paid more than dispatchable generation. Yet, as proposed in the NOPR, it would receive an effective payment higher than LMP if it is paid LMP by the RTO and also receives the benefit of its foregone payment to purchase the power at retail from the LSE. This subsidy is inappropriate. In accordance with comparability principles and to minimize market consequences, a demand responder should never be paid more than LMP minus the generation component of its retail rate (LMP - G) by the RTO." PJM Power Providers Group (P3), pp. 2-3.

  • "There is no need to deduct costs from the LMP payments made to generators, because generators actually incur those costs to deliver power. When they receive LMP, they earn the net amount equal to LMP minus their costs. Demand response providers, in contrast, would be paid, under the NOPR, to not do something - to not consume power. And in the normal course, the reward for not buying something is avoiding paying for what you do not buy... The correct outcome is for an end-user capable of demand response to be given a price signal at the RTO level equal to LMP minus what we will call "C"... We define "C" as the marginal price that the consumer participating in a demand response program pays its load serving entity ("LSE") for power at retail." New England Power Generators Association, pp. 4-5.

Major Electricity Sector Associations Express Common Concerns With FERC's Demand Response NOPR

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EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.