Demand response could be crucial to the energy transition. Why aren’t we using it more?

Image by Jill Rose from Pixabay

Although demand response programs could likely have significant benefits for the grid, participation remains low across the U.S., which raises the question: what part (or parts) of the approach is falling short, and how can we fix it?

The Energy Systems Integration Group (ESIG) has released a new report, Gaps, Barriers, and Solutions to Demand Response Participation in Wholesale Markets, examining why demand response participation remains limited in wholesale markets, and proposing solutions to unlock its full potential.

“Demand response has tremendous potential to help with long-term reliability needs as well as daily system balancing needs,” said Debra Lew, executive director of ESIG. “This study investigates why demand response today is not achieving that potential and what can be done to help fill these gaps.”

Despite its recognized potential to help manage electricity demand, particularly during peak load periods, the actual deployment of demand response in wholesale electricity markets has stagnated or even declined in recent years, ESIG said.

The analysis draws from interviews with industry stakeholders, including system operators, regulators, aggregators, and consumers, to identify five “critical gaps” that must be bridged to accelerate demand response deployment and targeted solutions to address each gap.

“With new load growth, plant retirements, and a changing resource mix, to manage cost and reliability it is important to look at all options on the table, including demand response,” said Derek Stenclik, lead author of the report. “But despite the promise of load flexibility, our research showed that demand response has been flat or even declining as a resource across much of the country. So we spoke to more than 20 leading experts in the demand response community to learn what they thought were the largest challenges facing demand response and developed a broad set of recommendations to unlock more of its potential.”

The analysis found gaps in experience and knowledge across various stakeholders due in part to fragmentation and inconsistent market rules across the North American markets. According to many aggregators and technology providers, these challenges were amplified by burdensome communication and metering rules, which served as another barrier to demand response participation.

Capacity accreditation was also found to be a barrier, challenged by a lack of detailed, publicly available information on demand response performance during emergency events. Lastly, weak financial incentives further hinder demand response as a resource-driven in part by volatile capacity market prices, but also lack of time-varying electricity rates and utility rate recovery mechanisms that could support demand response investments.

Gap 1: A Lack of experience and knowledge

There is a lack of experience and knowledge about demand response technology and programs among system operators, state regulators, and consumers, the report found. The gap manifests across multiple areas: a lack of subject-matter experts, changing technology and effectiveness, inconsistent definitions, lack of data around demand response participation, and low customer awareness.

ESIG said that feedback it received during interviews suggests that when regions have knowledgeable and passionate champions – whether at the utility, system operator, or state regulator – this is directly linked to higher participation levels.

Regulators and system operators can identify dedicated subject-matter experts and establish working groups responsible for managing market design and demand response programs. Load-serving entities can invest in simplified enrollment processes and easy-to-use platforms that provide customers with clear information about their energy use and potential benefits.

Gap 2: Demand response markets are limited by fragmentation and inconsistent rules

ESIG summarized the demand response market today as a “tale of two options”: loads functioning as supply-side resources in wholesale programs, or load-modifying resources in retail programs. This dual-participation model, with each model operating under different rules and incentives, creates “confusion and inadequate data” on current participation levels and characteristics, the report found.

The study identified 16 different wholesale demand response programs across eight independent system operators, each with its own set of rules and regulations. ESIG argued this fragmentation makes it challenging for aggregators to scale their operators, as they must therefore customize their technological solutions for each program’s specific requirements.

Independent system operators need to work closely with their load-serving entities to clearly and transparently quantify and segment participation in wholesale and retail demand response programs by customer class and end use, ESIG argued. Additionally, Market designers can continue cooperative rulemaking that develops fair, stable, and competitive market structures.

Gap 3: Burdensome communication, metering requirements

Communication and metering requirements can be burdensome, ESIG said, as individual load resources do not need the granularity required of large-scale generation. These requirements were originally designed for large generation resources, and “worked well” when demand response was primarily offered by large industrial customers, ESIG said. But now, they are inhibiting the participation of residential and small commercial customers, where much of the “untapped potential” lies.

For load-serving-entity-specified meters alone, the cost can exceed several hundred dollars per installation, before the cost of additional wiring and labor. This makes it economically unfeasible for many smaller participants to contribute to demand response, ESIG argued.

Embedded measurement devices, such as inverters, can be used as end-use meters, ESIG said. Independent system operators can also implement statistical sampling approaches for aggregated resources rather than requiring direct measurement of each end-use load.

Gap 4: System operators lack detailed, publicly available information on demand response performance during emergency events

The lack of publicly available information on demand response performance during emergency events is leading to inaccurate accreditation and is “eroding confidence” in the resource, the report said. ESIG pointed to Winter Storm Elliott in December 2022, when PJM’s demand response resources were awarded nearly $90 million in positive compliance payments despite actual load reductions reaching only 26-32% of expected levels.

To help alleviate this, independent system operators can conduct detailed forensic reporting after every emergency event, analyzing how demand response resources performed relative to their accredited capacity, and making these reports publicly available.

Gap 5: The ‘weak’ financial incentives for demand response

The report found that there are weak financial incentives, and even disincentives, for demand response at the wholesale market, load-serving entity, and consumer levels. A low price doesn’t indicate a market failure on its own, but they do create disincentives for load-serving entities and consumers to participate, ESIG argued. And unlike other clean energy resources that can benefit from federal tax incentives, state renewable portfolio standards, and long-term contracts, demand response is more exposed to short-term market conditions.

Also, load-serving entities have a financial disincentive to encourage demand response, as it reduces their ability to invest in new infrastructure and generate returns on those investments, the report found. Furthermore, consumers mostly pay a flat volumetric rate for their electricity, and have little incentive to adopt load-control technologies or behaviors in the first place.

Incentives can be created for load-serving entities to enter into long-term contracts for demand response. Rate structures should enable value stacking, allowing demand response to provide multiple services across the grid, ESIG argued. Additionally, regulators can consider allowing demand response to participate as transmission and distribution assets, enabling access to long-term rate recovery mechanisms similar to transmission infrastructure.

Download the full report here.

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