Regulatory Changes to Impact Demand Response Compensation in Organized Wholesale Energy Markets
Customers and aggregators that act as demand response resources in organized wholesale energy markets should take notice of the Federal Energy Regulatory Commission (FERC)’s Order 745, issued on March 15, 2011. FERC Order 745 directs each organized market operator (ISO) to institute incentive payments for demand response resources that curtail energy consumption during certain hours that would confer a “net benefit” to purchasers of wholesale supply by reducing price volatility during those hours.
The incentive payment structure provides that demand resources will be paid the prevailing locational marginal price (LMP) at the wholesale market location at which the curtailment is instituted. This incentive structure permits demand resources to avoid the generation component of the bill during curtailments and, at the same time, to get paid that same generation component of the bill for such periods. FERC issued Order 745 with the intention of removing barriers to the participation of demand response resources while trying to maintain the competitiveness of organized wholesale energy markets.
Order 745 states that, in order to receive the full LMP, a demand response resource must be able to balance supply and demand and the resource must be cost effective. FERC directed each market operator to establish a “net benefits test” to determine when the demand response resource will be eligible for incentive payments. In order to comply with Order 745, generally each ISO will publish a price threshold for each month. When prices rise above the threshold, demand response activity is deemed to provide a “net benefit” and can be paid the LMP. As a result of the order, energy suppliers, such as Constellation Energy, will have a new cost associated with serving load. The FERC order also indicates that customers benefiting from a reduced LMP as a result of demand response should be allocated the costs of the increased compensation to demand response resources. The order provides that benefits may occur on a broader zonal basis, and that the costs should accordingly be allocated to customers within all appropriate zones.
Various ISOs, including CAISO, MISO, ISONE, NYISO and PJM, submitted compliance tariff revisions to the FERC in August and September. However, FERC has not issued comments or approved these filings at this time.
To provide our customers with as much information as possible, below please see the implementation dates, which vary by ISO.
ERCOT is not under FERC jurisdiction with respect to this FERC order, which means that requirements of FERC Order 745 do not apply to customers in that area.
We are following the order closely and will continue to notify our customers regarding future developments. To view Order 745 on FERC’s website, go here.