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2009 State of the Market Report

Demand Response

D. Conclusions

With more than 12,500 MW of existing potential DR capability, the Midwest ISO has significant potential for more fully integrated DR. The Midwest ISO’s existing programs and proposed initiatives address many of the barriers to DR. One change that will be particularly important is a modification to the price-setting methodologies to allow emergency actions and all forms of DR to contribute to setting efficient shortage prices in energy and AS markets. Failure to set efficient shortage prices when DR resources or other emergency actions clear the market under shortage or near shortage conditions can serve as a material economic barrier to the development of new DR resources.

This report raises the potential that the EDR initiative could be expanded to include economic DR resources, which would address the regulatory/economic barrier posed by fixed retail rate regimes at the state level. However, substantial work would need to be done to determine whether this kind of initiative would be feasible and beneficial.

Finally, we believe the stakeholder process that the Midwest ISO has established to identify and respond to more specific barriers related to market rules, settlement provisions, and operating requirements will be an effective means to address these barriers. In developing the new rules and requirements, however, it is important to adhere firmly to sound principles of economic efficiency. One area where this is particularly important is in the area of compensation for DR resources when they curtail in the energy market. Real-time economic DR resources should be provided the same incentives that they would have under a dynamic retail pricing regime. This can be accomplished by structuring the energy settlements to pay the wholesale LMP at the DR resource’s location less the retail rate they save by not consuming. This is consistent with the settlement procedures proposed for ARCs that are currently pending at the Commission. However, it is not consistent with the current settlements for other DR resources, which the Midwest ISO should consider revisiting. The Commission has been considering these issues more broadly in its recent Notice of Proposed Rulemaking on compensation for DR resources.

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