DEMAND RESOURCES
Demand Resources (DR) takes two principle forms. Passive DR includes measures designed to save electricity use at all times, such as energy efficiency measures like high-efficiency lighting and appliances, and the use of smart appliances to automatically regulate energy use. Passive DR is not dispatchable. A second form of DR, called active DR, refers to energy reduction that can be activated when needed. For example, a large energy user may power down machinery or switch to backup generation when called on to reduce consumption from the electric grid.
DEEP strongly believes that DR can be a cost-effective option to ensure reliability and minimize price increases, especially during peak hours when active DR can be dispatched. The IRP 2014 has identified the need to reduce summer peak demand (still projected to grow at 0.5% annually) and to provide for reliable, affordable electricity during winter periods when natural gas delivery infrastructure is constrained. DR can be an important resource to cost-effectively address both of those peak demand needs.
Connecticut has long been a leader in promoting both types of DR. Connecticut has worked with NEPOOL and ISO-NE to develop DR programs and incorporate DR into the regional electricity markets. In the Forward Capacity Markets, active DR can receive capacity revenues for commitments to reduce load or shift to backup generation during emergency events (i.e., OP4 events). Passive DR can receive capacity revenues based on reduced electricity consumption during peak hours or peak months. Passive DR cannot receive energy market revenues because it is non-dispatchable. Active DR have been allowed to bid into the hourly energy markets, however that may change as a result of recent litigation, discussed below. Connecticut has encouraged DR by supplementing ISO payments, providing capital grants for emergency generators, and providing technical assistance to DR developers through the state’s electric C&LM programs. Connecticut had approximately 800 MW of various types of DR that cleared
in the 2017/18 capacity auction. The loss of these resources could dramatically impact the state’s resource adequacy position going forward.
Over the past few years, DR participating in the ISO-NE program has increased to over 3600 MW in 2015/16 capacity commitment period but declined to 3040 MW in 2017/18, even though capacity prices doubled from $3.43/kW to $7.02/kW. This likely occurred due to market rule changes (such as ISO-NE’s Pay for Performance regime) that have driven up the cost of participation for DR. Even though DEEP expects capacity prices to increase in future capacity auctions, this IRP does not expect DR to return to historical levels during the study period. In Order 719, issued in 2008, FERC ordered ISO-NE and other regional grid operators to allow active DR to bid in to the hourly energy markets, similar to wholesale generators. Subsequently, in Order 745, FERC set the compensation for active DR at the locational marginal price (LMP) for the place and time the active DR is offered. In May 2014, a three-judge panel of the D.C. Circuit invalidated Order 745 on grounds that FERC had exceeded its jurisdiction and interfered with states’ rights to regulate retail rates when it required compensation for active DR from retail customers; and that FERC’s decision to set the level of compensation at LMP was inadequately explained and therefore arbitrary and capricious.157 The D.C. Circuit has agreed to stay its decision while FERC decides whether to petition the U.S. Supreme Court to review the issue. The Department is very concerned that the uncertainties raised by the D.C Circuit and other recent judicial actions have the potential to undermine resource adequacy and drive up energy prices in the near term, at a time when the region is also facing retirements of substantial amounts of non-gas resources. Although Order 745 specifically addressed active DR in the wholesale energy markets, the appellate decision vacating Order 745 is creating uncertainty around the participation of both active and passive DR in the wholesale capacity market, including the capacity auction planned for February 2015. The Department believes that if DR were unable to participate in the forward capacity auction, capacity costs could potentially increase by hundreds of millions of dollars for Connecticut ratepayers.
To avoid such an outcome, DEEP is monitoring the relevant court proceedings and preparing to take action if needed. Specifically, in coordination with PURA, the OCC, and other affected state parties, DEEP is examining ways that Connecticut, ideally in coordination with New England states, can utilize state authority to ensure that DR remains a competitive resource. Such state action could include:
• Extending the state’s authority to direct the electric distribution companies to implement cost-effective active DR programs within their service area and permitting the EDCs to recover the cost of such programs through retail rates.
• Requiring each EDC to submit to PURA an application to implement time-of-use rates for customers that have a maximum demand of not less than 100 kilowatts. Additionally, the EDCs should offer optional interruptible or load response rates and time-of-use rates
157 EPSA v. FERC (D.C. Cir. 2014) 11-1486.
for all customers. The Department notes that some limited legislative clarifications may be needed to reinforce authority to implement such a program, including adequate enforcement authority to ensure that DR can perform as needed to be taken into account in calculating the capcity requirements and to ensure that the state’s EDCs are appropriately motivated to procure demand resources.
Any such state program will help to improve reliability by reducing demand in the event of an outage. To ensure that the program will also achieve economic benefits for ratepayers by avoiding the cost of generation capacity and electric demand, it will be necessary to ensure that ISO-NE reduces the Installed Capacity Requirement for Connecticut and the region by the amount any DR procured through a state program. In fact, the existing New England wholesale market rules provide a pathway to capture demand side resources in the calculation of installed capacity requirements.