FERC. Demand response. Wholesale and retail electricity markets. If names and phrases like these have already made you want to stop reading, then chances are news last week about the Supreme Court hearing oral arguments in Federal Energy Regulatory Commission v. Electric Power Supply Association was not at the top of your list.
That response is totally understandable. This stuff is beyond wonky. It pains even us electricity nerds.
Nevertheless, what’s at stake in the case goes to the heart of the gigantic changes that are now happening in the ways we get electricity — and pay for it. So while this might not sound like it directly affects you, the truth is that we’re all ultimately parties to the transition the grid is undergoing right now.
Indeed, in the long run, our electricity bills are likely to be affected by these transformations — changes so disruptive that they have now landed before the Supreme Court.
Understanding demand response. “Demand response” is at the center of the controversy, and to understand what that means, it helps to start with a simple, easily recognizable fact. Namely this: Even though most of us at home are used to paying the same price on our bills for every kilowatt hour of electricity that we use, the truth is that the actual price of those kilowatt hours on the wholesale electricity market swings wildly depending on when they are used.
At some times, especially on hot summer days, there is much greater demand for electricity, requiring generators to bring more power plants online — and that means that electricity inherently costs more at these times. It’s just that the cost has not been, traditionally, passed on to us everyday consumers — so most of us are blithely unaware of the rapid, complex and constantly changing electricity transactions upon which we and the entire grid depend.
The whole situation has created an economic opportunity for “demand response” companies, like Massachusetts-based EnerNOC, to provide software to big companies that use a lot of electricity, helping them manage when they do so. These big users can then potentially shift around how much electricity they use at certain key times when the rest of the grid needs it — for instance, changing the temperature in a building or dimming lights somewhat — and their willingness to use less at these moments has an economic value because it can blunt the amount of peak demand that there is.
The product that demand response companies are selling has sometimes been called “negawatts” — they give a value to not using electricity at a particular time. Demand response companies then sell these “negawatts” in auctions where grid operators like PJM Interconnection are constantly matching supply with demand to keep the lights on, and return some of the proceeds to the actual companies cutting usage — and overall, it’s been a pretty successful business model. EnerNOC, for instance, said last May that it had received about $ 1 billion in revenue in the prior three years.
Demand response defenders argue that this technology makes the whole grid work better, helping to avoid blackouts, lowers everybody’s bills, and probably also ultimately saves electricity and thus, greenhouse gas emissions.
“During the polar vortex, at least here in Maryland, it was demand response that kept our lights on,” says Malcolm Woolf, a senior vice president at Advanced Energy Economy, a corporate consortium that includes several companies involved in demand response, like EnerNOC and Opower. “The demand response providers were able to send a signal to their customers, and they reduced their load, and they were able to keep the overall lights on in our region.”
Enter the Supreme Court. But there’s a conflict here. If demand response companies can sell “negawatts” on wholesale electricity markets governed by entities like PJM Interconnection, then they enter into competition with companies who generate electricity at power plants — the “supply side” of the market.
And the Federal Energy Regulatory Commission, or FERC, has let demand response providers do just that. In 2011, FERC set up rules to ensure that grid operators compensate demand response in the same way that they would compensate new electricity generation in energy markets. In many cases, explains FERC’s Supreme Court filing, the rules ensure that “a commitment to reduce demand be compensated the same amount as an equivalent commitment by generators to increase supply.” (The energy markets governed by the order aren’t the only markets that use demand response or even the biggest ones – EnerNOC, for instance, makes more revenue in “capacity” markets that are not directly implicated in this case. But some experts say they could be next if the Supreme Court rules against demand response.)
FERC decided to do this, says the agency in its court brief, because it determined that “paying demand response providers the full value of their contribution to the market would help overcome preexisting barriers to demand-response participation and increase the reliability and competitiveness of wholesale markets.”
“FERC has recognized it provides significant value to wholesale markets and ratepayers, and they saw an opportunity to basically save money,” says Steven Nadel, the head of the American Council for an Energy-Efficient Economy.
But there have been many objections to FERC’s rule — and indeed, a lawsuit by the Electric Power Supply Association, which includes a number of generators and marketers of electricity, won out at the D.C. Circuit. That’s the decision now under appeal and before the Supremes.
In particular, the objection before the Supreme Court is that this scheme of compensation gets FERC into regulating retail electricity markets, the ones that you and I are familiar with, because that’s where we buy our own electricity from power providers. And FERC doesn’t govern those — state public utility commissions do.
What’s complicated is that while demand response companies participate and bid into the wholesale markets — governed by FERC — their own clients are companies buying electricity on the retail markets, just like you and me (but generally on a much larger scale). In effect, demand response blurs this distinction between the markets. And thus, before the Supreme Court, this has been framed as a battle over federalism, and whether FERC is going too far and getting into state territory.
“FERC is not free to dictate the levels of retail price or demand,” argue the Energy Power Supply Association and several supporting industry groups, including the utility trade group the Edison Electric Institute, before the Supreme Court. “And it cannot accomplish that end by the convoluted means of ordering wholesale-market operators to compensate retail customers for reducing their retail demand.”
But FERC argues back that this is the only scheme that makes any sense — if it doesn’t regulate demand response, no one can. “No party has contended that wholesale demand-response programs should be left entirely unregulated, and state regulation of the basic rules governing wholesale auction markets would clearly be preempted,” writes FERC in its Supreme Court brief. “The upshot of the court of appeals’ conclusion that FERC may not regulate compensation for wholesale demand-response commitments therefore could be that demand-response commitments may not be used in wholesale auction markets at all.”
Why you should care. Make no mistake — “demand response” at the large grid scale level may be the issue currently before the Supreme Court. But in reality, what’s at stake here is a much more momentous shift in how we use electricity.
After all, “demand response” in the broadest sense is increasingly available to us in our own homes, too — many of us can now use timers and smart thermostats to change when we use electricity and therefore, how much we pay for it. Some day, maybe, demand response companies will be able to aggregate huge numbers of individual electricity consumers and bid their services into wholesale markets, too.
Meanwhile, the growing availability of solar on rooftops and, soon enough, batteries for energy storage will further empower consumers, at both the residential and commercial level, to decide when it makes sense for them to buy somebody else’s electricity, and when it makes more sense to conserve or use their own.
All of this is a very big change to the old way of doing things in the electricity sector. And if anything, that change is speeding up: In-home and commercial batteries will only empower demand response capabilities further, letting companies control even more precisely when they use electricity, and further max out how much they can make and save by shifting that use around.
In a sense, demand response is like a more under-the-radar version of rooftop solar. Rooftop solar is creating conflict in the electricity industry by allowing individual customers to generate some of their own power, and thus pay less on their bills.
Demand response, meanwhile, is further changing things by allowing big electricity users to get paid to use less at key times — and someday, perhaps, smaller users too.
“Our electric consumers are getting more sophisticated, more concerned about costs, and this is one of the tools that they’ve had to move into wholesale markets in a way that they perceive as being of economic benefit to them,” says Thomas Mullooly, an energy lawyer at Foley & Lardner who has watched the case closely.
It all moves us further and further from a world in which there’s one electricity provider, one monthly bill that covers all of our consumption, and relatively little control over how that bill turns out. Suddenly there are tons of options for saving money, and saving electricity or even generating your own, that have been enabled by new technologies, ranging from solar panels to home batteries to demand response software.
Ultimately, this is the way things are headed — and while the Supreme Court could set back demand response considerably, not even it can stop the broader electricity revolution.
Read more in Energy & Environment: