On May 23, 2014, demand response (DR) resources received a significant setback when the U.S. Court of Appeals for the D.C. Circuit Court issued a decision vacating and remanding the Federal Energy Regulatory Commission’s (FERC) Order No. 745. The order, which was issued in 2012, expanded the role of DR in energy markets controlled by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). The premise of the order was to establish a framework to compensate DR when called upon to replace more expensive generation.
Although many questions remain unanswered as a result of this decision, it is clear that DR will continue to play an important role in how electricity is produced, delivered, and consumed. Additional background on the order, the court’s decision, and implications for DR in the future are summarized below.
DR resources are essentially retail customers, often aggregated by third parties, who are able to reduce their consumption of grid-provided electricity at specific times when called upon to offset the need for additional generation to meet demand. This may be by reducing load (e.g., turning off equipment) or by self-generating (if they have on-site generation). In return for reducing consumption during critical times, retail customers are compensated for their actions. To increase the penetration of DR in organized markets and provide alternatives to expensive generation sources, FERC issued Order No. 745. The order as originally issued stated that:
When issued, Order 745 had many supporters and detractors. Those opposed to the Order included Commissioner Moeller, who dissented from the order arguing that standardized compensation for demand resources would undermine existing markets. He also held that the rule would overcompensate DR resources relative to traditional generation resources. His rationale was that DR resources would benefit from both the savings of the avoided cost of purchased power and full LMP payment.
Subsequent litigation paralleled Commissioner Moeller’s arguments. In the end, the ruling by the D.C. Circuit Court to vacate Order No. 745 in its entirety was based on a different set of arguments. In its ruling, the court held that:
The ultimate effect of the court’s majority decision on DR resources is not likely to be known for some time. As expected, FERC has taken action and on June 11, 2014, indicated their intention to seek a rehearing of the court’s decision. Regardless of the outcome, the door has not shut completely on DR.
Some interesting points to consider:
If the court’s decision stands, the most significant outcome could force state regulators to address DR and recognize its importance as a part of the energy mix. Similarly, if Order 745 is struck down, it will not preclude RTOs and ISOs from establishing their own compensation structures for economic DR, outside of FERC’s oversight. However, parties such as the Advanced Energy Management Alliance contend that the outcome of the decision will lead to significantly higher energy costs for consumers.
SNL News Article: http://www.snl.com/interactivex/article.aspx?id=28203434&KPLT=2
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