Demand Response Wins: U.S. Supreme Court Upholds FERC Order 745

On Monday, the United States Supreme Court (SCOTUS) ruled in a case that has had the clean energy community biting its nails since 2014. In October 2015, the court heard arguments about how demand response—a mechanism by which electricity customers earn revenue for reducing use during peak times—is compensated in wholesale electricity markets. This week, SCOTUS ruled in favor of the Federal Energy Regulatory Commission (FERC), deciding that demand response should be regulated at the federal level and ensuring that the U.S. demand response industry can continue its impressive progress. (According to GTM Research, demand response was a $1.4 billion market in the U.S. in 2015.)

The case is a near-term victory for clean energy and consumers, but it also highlights the ongoing evolution of the electricity industry in the U.S., namely how “wholesale” and “retail” aspects of the market are coming closer together. The court itself noted in its opinion that “It is a fact of economic life that the wholesale and retail markets in electricity, as in every other known product, are not hermetically sealed from each other.” To wit, RMI’s October 2015 report The Economics of Battery Energy Storage noted how customer-sited, multi-use batteries could provide up to 13 services for customers and the grid, spread across retail and wholesale market participation. The same is true of demand response and many—arguably most—other distributed resources.

Complementary capabilities: demand response and demand flexibility

The SCOTUS affirmation of demand response as a federally regulated wholesale market tool retains its place alongside less-mature, retail-side demand flexibility, which RMI analyzed in its August 2015 report The Economics of Demand Flexibility. Like demand response, RMI analysis of demand flexibility showed great potential to reduce customers’ peak demand (up to 50 percent, with a 41-percent net bill reduction, in the case of a hypothetical Arizona customer). But unlike wholesale demand response, demand flexibility interacts with granular retail rate structures (such as real-time pricing and demand charges) and leverages simple technologies such as smart thermostats and grid-interactive water heaters to shift demand across the hours of a day. Having both options available—demand response allowing customer resources to participate in the wholesale markets and demand flexibility allowing customers to respond to retail rates—is likely to lead to the lowest-cost outcomes for customers and the grid.

A victory for clean energy and customers

The court’s decision is undoubtedly a victory for clean energy. It sets up FERC jurisdiction to regulate both the demand and supply sides of wholesale energy markets (i.e., interstate trade of electricity between utilities and generators), even when those markets touch on the actions of retail customers (i.e., American homes and businesses). This means that the environmental benefits of flexible demand will remain supported by federal authority, instead of being left to a patchwork of state regulations.

The decision is also a victory for consumers, because by allowing compensation for DR customers at wholesale rates, DR saves money for the grid as a whole as well. From the court’s opinion:  “[demand response] will put ‘downward pressure’ on . . . the rates wholesale purchasers pay. Compensation for demand response thus directly affects wholesale prices. Indeed, it is hard to think of a practice that does so more.” And those wholesale purchasers (i.e., the utilities that sell electricity) pass these savings on to their customers.

Financial markets immediately took notice of the impact of this decision on the business opportunity for clean energy; EnerNOC, an established DR company, saw its stock price rise 65% in the day following the court decision. It has come down some since, but still remains more than 25 percent above its one-month average prior to the SCOTUS ruling.

As wholesale and retail markets converge, new opportunities for an integrated grid

Even as the clean energy industry hails the Supreme Court decision, the ruling also highlights the changing nature of the electricity industry and the markets we use to run the grid.

As RMI has explored recently, customer decisions to invest in distributed energy resources—many of which are driven by utility-specific, retail tariffs—can have big impacts on the wholesale market as well. Aforementioned demand flexibility from residential customers, in response to retail rates, can save $13 billion each year in wholesale market-level costs. And as previously noted, batteries installed to reduce retail demand charges and provide backup power can earn significant revenue in wholesale markets as well.

Increasingly, service providers are finding opportunities to harness these customer-sited resources to earn revenue in wholesale markets as well. For example, water heaters are providing wholesale market services in Texas, behind-the-meter batteries and aggregated loads are bidding into California’s wholesale energy market, and energy efficiency projects earn revenue in wholesale capacity markets [PDF] in the Eastern US.

These innovations in technology and business models make it clear that the line between retail and wholesale markets is getting blurry as the grid better integrates central and distributed resources. As the exciting developments in New York and California highlight, there’s a lot of work to do—including at the state level—to get this right. While the Supreme Court has reaffirmed the role of federal regulators, there is undoubtedly a lot more exciting news to come in how customer-sited resources are integrated with the broader grid.