On March 15, 2011, the Federal Energy Regulatory Commission (FERC) issued a Final Rule (PDF) in its “Demand Response Compensation in Organized Markets” proceeding in Docket No. RM10-17 (Final Rule). The new rule is intended to assure that demand response resources located in regional electricity markets administered by an Independent System Operator or Regional Transmission Organization (ISO / RTO) will have the ability to receive the market clearing price for energy when capable of being dispatched and when a “benefits” test is met.
The rule sets forth new requirements for compensation paid to demand response resources (resources that can reduce their consumption of electric energy in response to an increase energy price) participating in day-ahead or real-time energy markets administered by an ISO / RTO. Resources can be paid the full market clearing locational marginal price (LMP) when (i) the resource is capable of responding and can reduce its consumption, and (ii) dispatch of the demand response resource is deemed cost-effective under a new “net benefits test.” (See page 2, footnote 5 of the Final Rule for a more detailed discussion of LMP pricing).
The net benefits test is intended to ensure that the overall benefit of a reduced energy clearing price resulting from dispatch of demand resources exceeds the cost of paying such resources the full LMP. To implement the net benefits test, the Commission is directing each ISO and RTO to develop a mechanism to approximate a determination of the price level at which the dispatch of demand resources will be cost effective. ISOs /RTOs are to develop a monthly threshold price (based on historic data and updated to reflect changes in fuel prices and generator availability) corresponding to the point along the supply stack at which the overall benefit from the reduced LMP resulting from dispatching demand resources exceeds the cost of dispatching and paying the full LMP to those resources. The Final Rule also provides for a cost allocation mechanism to socialize the costs of payments to demand response resources to customers who benefit from lowered clearing prices resulting from demand resource dispatch.
FERC Commissioner Moeller submitted a lengthy dissenting opinion arguing that the Final Rule provided “preferential” compensation to demand resources that is economically inefficient. Commissioner Moeller, citing expert economic testimony filed in the rulemaking docket, stated that a double payment effectively will occur because demand resources not only receive payment based on the full LMP, but also retain the economic value of avoided retail generation purchases (the cost savings from not consuming electricity at a particular price).
The FERC has directed ISOs / RTOs to make appropriate tariff changes through compliance filings to implement the new demand resources payment rule, including the net benefits test, on or before July 22, 2011.