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Restructuring Roundtable: Integrating Demand Response in New England’s Energy Markets

This roundtable discussion from October 30, 2009, explores the integration of Demand Response (DR) in New England's energy markets. Key topics include the Efficient Wholesale Market Price, Diminishing Returns of Consumption, DR as a Conceptual Property Right, and Dynamic Retail Rate Designs.

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Restructuring Roundtable: Integrating Demand Response in New England’s Energy Markets

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  1. Restructuring Roundtable:Integrating Demand Response in New England’s Energy Markets Dan Allegretti October 30, 2009

  2. Price Responsive Demand • Diminishing Returns of Diminishing Consumption • The Efficient Wholesale Market Price • DR as a Conceptual Property Right • Dynamic Retail Rate Designs

  3. Diminishing Returns of Diminishing Consumption • Reduced consumption lowers aggregate demand, driving marginal cost down and lowering prices for all. • Reduced consumption reduces environmental externalities. • Reduced consumption improves reliability. • BUT • Economic and social welfare are reduced when consumption is foregone. • DR is not substitutable across the whole supply curve.

  4. The Efficient Wholesale Market Price = LMP - G • DR can not clear the same as supply because there are fewer MWH of purchases across which to settle (missing money). • DR can best be thought of as a re-selling of energy back into the market. • Question for the customer is not whether the marginal value of consumption is greater than their retail price (G) but whether it is greater than the wholesale price (LMP). • Compensating reductions at LMP- G avoids the need for uplifts or subsidies and produces optimal consumptive behavior. 4

  5. DR as a Conceptual Property Right • Unlike electricity, DR is not a good. It is a service in the form of a promise not to consume. • A promise not to consume has no value without a concomitant right to consume. • Customers do have a right to consume, but it exists only by virtue of an obligation to serve that arises out of a tariff or contract. • Compensation at LMP- G recognizes not only the value provided by the customer’s promise but also compensates the LSE for their obligation. 5

  6. Dynamic Retail Rate Designs • Dynamic pricing is a retail rate design issue which should be established by retail tariff or by retail contract, not at the RTO level. • Dynamic pricing is neither appropriate nor necessary for every customer. It should be an option, not a mandate. • Role of Third Party Service Providers and Role of ISO. • Dynamic pricing as self-compensating DR. • Non-firm dispatchable demand as a capacity-exempt load. 6 6

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