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The Winners In FERC's Demand Response Ruling: Batteries and Software, Not Utilities
A three-judge panel tossed out a rule promulgated by the Federal Energy Regulatory Commission that has been instrumental in reducing peak power consumption on a nationwide basis.
And, while supporters and critics agree that the decision is a setback for demand response providers and a boon for utilities, the setback may prove to be only temporary. In fact, the biggest beneficiaries could be the developers of energy storage systems and building management software that effectively accomplish what demand response programs do without the regulatory overhead.
Demand response is the clunky term for one of the biggest innovations in the power industry in the last several decades. Under demand response programs, utilities contract with a third party provider to get end-users to turn down their power during hot summer days when a power outage looms. For many utilities, it’s cheaper than trying to buy power on the spot market. End-users like it because they get a pretty sizeable payment every month for agreeing inching down their thermostat a couple of degrees. Over time, demand response programs can also help utilities reduce the number of emergency power plants they have to build.
EnerNoc, one of the pioneers of demand response, had quite a bit of difficulty getting investors when they founded the company. But since then, EnerNoc has gone public, many other companies have developed demand response offerings, and the concept has been adopted in China, Japan, Australia, Europe and elsewhere. It’s truly an American success story started by two guys with a phone.
In 2011, FERC further expanded the market for demand response with Rule 745, which essentially said that people who reduced power consumption under demand response programs would get paid as much as utilities would get for supplying power. If a utility charged 8 cents a kilowatt hour, for instance, a company or possibly a homeowner could get paid the same amount for turning down their lights. Wal-Mart, Alcoa came out in support of Rule 745 when it came out because it would potentially save millions.
“FERC went far beyond removing barriers to demand response resources. Instead of simply ‘removing barriers,’ the rule draws demand response resources into the market and then dictates the compensation providers of such resources must receive,” the court stated.
Critics fear that the decision will make demand response less attractive and hence curb its growth.
The court’s decision, however, does not regulate two very important factors: spite and technology. First, spite. Large power consumers hate demand charges, those supplemental fees tacked onto utility bills to cover their potential peak power consumption. Demand charges can account for 20% or more of a monthly power bill.
Second, technology. Battery systems and software can be used to automate peak power reduction. The Mark Hopkins Hotel, for instance, is using a system from Stem to help reduced its monthly demand charges of $30,000. Sustainability measures like this now account for 7% of the hotel chain’s profit, according to Harry Hobbs, area director for engineering.
The best part about these systems for regulating power building-by-building is that you really don’t need regulatory approval. You can just install them. The disadvantage is that you can’t guarantee consistent savings across the board in an emergency. In a weird way, utilities may be in a worse position if these individual systems take off in the setback for demand response because they will have to still prepare for peak power events, but they won’t be selling as much power.
The decision could also further galvanize support for the overhaul of the utility business model. Critics are no doubt going to point out that their rates of return are regulated. In Florida, utilities can charge consumers monthly fees for nuclear power facilities that may never get built. As Nat Goldhaber, managing director of Claremont Creek Ventures likes to say, there is no such thing as a free market for energy. The prices are always somehow regulated. Why should they get guaranteed returns on their capital projects, critics will ask, but we can’t get technology that helps us reduce the need for those power plants?
Very soon, you could see Wal-Mart, the Sierra Club, car makers and virtually every employer in a region standing on one side of the aisle during hearings on electricity rates and utilities standing all alone on the other.
It will be kind of lonely.
Editor's Note:
Here is what the Court said:
Electric Power Supply Association and four other energy industry associations (“Petitioners”) petition this court for review of a final rule by the Federal Energy Regulatory Commission (“FERC” or “the Commission”) governing what FERC calls “demand response resources in the wholesale energy market.” The rule seeks to incentivize retail customers to reduce electricity consumption when economically efficient. Petitioners complain FERC’s new rule goes too far, encroaching on the states’ exclusive jurisdiction to regulate the retail market. We agree and vacate the rule in its entirety.
Download the order HERE> 11-1486-1494281_Appeal of FERC Order 745