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Restructuring Roundtable: Integrating Demand Response in New England’s Energy Markets

Restructuring Roundtable: Integrating Demand Response in New England’s Energy Markets. Dan Allegretti October 30, 2009. Price Responsive Demand. Diminishing Returns of Diminishing Consumption The Efficient Wholesale Market Price DR as a Conceptual Property Right Dynamic Retail Rate Designs.

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Restructuring Roundtable: Integrating Demand Response in New England’s Energy Markets

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  1. Restructuring Roundtable:Integrating Demand Response in New England’s Energy Markets Dan Allegretti October 30, 2009

  2. Price Responsive Demand • Diminishing Returns of Diminishing Consumption • The Efficient Wholesale Market Price • DR as a Conceptual Property Right • Dynamic Retail Rate Designs

  3. Diminishing Returns of Diminishing Consumption • Reduced consumption lowers aggregate demand, driving marginal cost down and lowering prices for all. • Reduced consumption reduces environmental externalities. • Reduced consumption improves reliability. • BUT • Economic and social welfare are reduced when consumption is foregone. • DR is not substitutable across the whole supply curve.

  4. The Efficient Wholesale Market Price = LMP - G • DR can not clear the same as supply because there are fewer MWH of purchases across which to settle (missing money). • DR can best be thought of as a re-selling of energy back into the market. • Question for the customer is not whether the marginal value of consumption is greater than their retail price (G) but whether it is greater than the wholesale price (LMP). • Compensating reductions at LMP- G avoids the need for uplifts or subsidies and produces optimal consumptive behavior. 4

  5. DR as a Conceptual Property Right • Unlike electricity, DR is not a good. It is a service in the form of a promise not to consume. • A promise not to consume has no value without a concomitant right to consume. • Customers do have a right to consume, but it exists only by virtue of an obligation to serve that arises out of a tariff or contract. • Compensation at LMP- G recognizes not only the value provided by the customer’s promise but also compensates the LSE for their obligation. 5

  6. Dynamic Retail Rate Designs • Dynamic pricing is a retail rate design issue which should be established by retail tariff or by retail contract, not at the RTO level. • Dynamic pricing is neither appropriate nor necessary for every customer. It should be an option, not a mandate. • Role of Third Party Service Providers and Role of ISO. • Dynamic pricing as self-compensating DR. • Non-firm dispatchable demand as a capacity-exempt load. 6 6

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