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2009 State of the Market Report

VII.

Demand Response Programs

Demand response consists of actions taken during certain hours that reduce consumption from normal levels when the value of consumption is less than the marginal cost to supply the electricity. DR allows for participation in the energy markets by end users and contributes to:

  • Reliability in the short-term;

  • Least-cost resource adequacy in the long-term;

  • Reduced price volatility and other market costs; and

  • Reduced supplier market power.

Additionally, price-responsive demand has great potential to enhance wholesale market efficiency. Even modest reductions in consumption by end-users during high-price periods can significantly reduce the costs of committing and dispatching generation to satisfy the needs of the system. These benefits underscore the need to facilitate DR through wholesale market mechanisms and transparent economic signals.

DR resources can broadly be categorized as either “emergency DR”, which respond to capacity shortages, or “economic DR”, which respond to high energy market prices. Emergency DR resources are callable by the ISO in advance of a forecasted system emergency and thus can play an important role in supporting system reliability. However, emergency DR is not price- responsive and does not participate directly in Midwest ISO markets. Economic DR resources respond to energy market prices not only during emergencies but any time the energy price exceeds the marginal value of the consumer’s electricity consumption.

The real-time market is significantly more volatile than the day-ahead market due to physical restrictions and contingencies that affect the real-time market. Given the high value of most electricity consumption, DR resources will tend to be most valuable in the real-time during abrupt periods of shortage when prices spike. In the day-ahead market prices are less volatile and there is a much wider array of supply alternatives. Consequently, DR resources are generally less valuable in the day-ahead market. On a longer-term basis, however, consumers can make strategic shifts in their consumption patterns in response to day-ahead prices (from the

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