Obstacles to Demand Response in NYC
In late January 2016, the Supreme Court upheld a Federal Energy Regulatory Commission (FERC) rule enabling a practice known as demand response, which allows utilities to compensate customers for reducing consumption during hours of peak demand. Opposed by energy producers who benefit from selling electricity to the grid during these peak hours, demand response has the potential to reduce energy costs, cut pollution, and open the door for smart technologies such as demand-sensitive appliances, smart metering, and small-scale solar and wind power.
While the Supreme Court upheld the legality of demand response, the practice still faces obstacles here in New York City. In 2015, demand response’s share of the in-city wholesale energy market was only 4%, down from 5% in 2011 and miniscule compared to the 54% percent met by the city’s top three conventional generators. The share is unlikely to grow in New York because of a separate FERC decision prompted by the energy producer NRG.
The issue stems from a feature of New York’s wholesale energy market that was designed to promote fair competition among energy producers. The market is essentially run as a competitive auction, and bidders (conventionally, energy producers) must prove that the revenue they gain from an agreement does not exceed the market price. This rule is meant to prevent anticompetitive behavior that would allow a firm to corner the market.
Until recently, demand response incentives were exempt from this test. However, after a filing by NRG, FERC has ruled that New York State demand response incentives (i.e. rebates and other benefits) must be included in the market manipulation test. This has significantly reduced the value of the incentives and deterred new investment in demand response strategies.
Diffuse by nature, it seems unlikely that recipients of demand response incentives could actually corner the market in wholesale electricity — though they could reduce demand for expensive generator-produced energy during peak hours. On the other hand, these incentives could reduce construction and maintenance costs of a larger grid, as well as the negative externalities associated with generator production. FERC’s decision to characterize demand response as potential market manipulation benefits energy producers while harming consumers and the general public, and should be reversed immediately.