The Supreme Court Sides With Consumers in Ruling for ‘Demand Response’ in Electricity Markets

The U.S. Supreme Court long-awaited decision yesterday affirming a place for demand response in wholesale energy markets is good news.

We wrote previously about the case of FERC vs. EPSA, in which the Electric Power Supply Association (EPSA) was challenging the Federal Energy Regulatory Commission (FERC)’s authority to allow demand response a place in wholesale energy markets.

Demand response refers to the practice of electric customers curtailing their energy use during times of peak electricity demand. Currently FERC allows customers to bid these energy savings into the wholesale electricity markets, recognizing that curtailing demand is an equally valid way of meeting the peak electricity demand as generating more electricity. In fact, FERC specifically requires, through its Order 745, that grid operators pay demand response providers the market price of electricity when demand response is cost-effective.

Because demand response providers receive compensation from the electricity markets for the savings they generate, demand response has taken off in wholesale electricity markets like PJM. This has helped to keep power prices down because it is cheaper to save a unit of electricity than to generate that same unit of electricity at a power plant. EPSA, whose members include the largest merchant generation companies in the country, sought to have Order 745 overturned, which would have led to higher power prices and therefore higher profits for its members.

EPSA’s challenge in this case would have greatly restricted demand response. Indeed, the uncertainty created by this case has already harmed the demand response markets. But the Supreme Court found, contrary to EPSA’s claims, that FERC does indeed have jurisdiction over demand response and can force grid operators to recognize it as a cost-effective resource for meeting peak electricity demand. T

The ruling will help put demand response on a solid footing, allowing ratepayers to continue to benefit from this cost-effective resource.

Cathy Kunkel is an IEEFA energy analyst.

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