FERC and the future of energy efficiency

By Kelsey Bagot — Aug. 21, 2013 at 5:10pm

Photo credit: Nixdorf, Wikimedia Commons
Photo credit: Nixdorf, Wikimedia Commons

With U.S. climate-change bills and international climate talks repeatedly facing defeat, one of the main ways for the United States to significantly reduce its greenhouse gas emissions could be through both improving grid efficiency and transmission and integrating renewable energy into the electricity network.  But surprisingly (or maybe not surprisingly), the government agency with the necessary driving force and legal authority to do so is relatively unknown to most individuals.

FERC Jurisdiction

Enter the Federal Energy Regulatory Commission, or FERC – the big bad regulators of the US energy market. Most recently, FERC led the investigation of JP Morgan for its alleged manipulation of California energy market prices through unlawful bidding schemes, ultimately resulting in a $400 million settlement.

Under the Federal Power Act (FPA), FERC has exclusive jurisdiction over the transmission and sale of electric energy in interstate commerce and all facilities for such transmission or sale, which, among other things, includes setting wholesale electricity rates.[1] Under its statutory mandate, FERC must ensure supplies of electric energy at just, reasonable, and not unduly discriminatory or preferential rates.[2]

Under recent leadership, FERC has taken a more aggressive approach in defining its statutory power under the FPA and has begun to play a more prominent role in energy efficient and renewable generation. One of the first, and most significant, ways FERC has flexed its regulatory power with regards to energy efficiency is with the integration of demand response resources into the wholesale electricity market.

Demand Response

FERC defines demand response as a reduction in the consumption of electric energy by customers from their expected consumption in response to an increase in the price of electric energy or to incentive payments designed to induce lower consumption of electric energy.

Retail electricity customers often pay a fixed rate for electricity. However, in organized wholesale markets, electricity prices vary widely between seasons and even throughout the day depending on demand, supply, and other transmission constraints. This price structure creates a disconnect between wholesale and retail electricity markets, and therefore retail customer usage is not responsive to fluctuations in wholesale electricity markets. Demand response promises to “bridge the wholesale-retail gap by giving retail customers the incentive to withhold consumption when wholesale prices are high, easing strains on the system at time of peak electricity usage.” Currently, however, much debate surrounds the question of how best to send wholesale price signals to retail customers.

FERC Order 745

FERC Order 745, issued March 15, 2011, mandated that retail customers participating in demand response programs be compensated for their reductions in energy use at the wholesale market price for energy. Order 745 has been criticized by electric utilities, who claim that it overcompensates demand response participants by providing a double payment: the benefit of avoiding the cost of purchasing electricity and the wholesale price of electricity.  According to the Order’s critics, this will lead to economically undesirable outcomes and inefficient behavior long-term. After FERC denied a request for rehearing on the Order, these objecting parties sought review at the Court of Appeals, where the case is currently pending.

Possible Consequences of Order 745 and Demand Response

Critics of demand response are concerned that rather than causing an overall decrease in energy consumption, these programs will simply shift demand from high-peak to off-peak periods, possibly resulting in even greater energy consumption in total. For example, in a scenario without demand response programs, a business seeking to reduce its electricity costs might install energy efficient equipment to reduce its electricity consumption.  Alternatively, as a participant in a demand response program, the business might shift production to off-peak periods, consuming the same level of electricity while paying lower costs and receiving market-rate compensation.

However, many in the clean tech industry support providing demand response participants with wholesale prices, claiming demand response can act as a cost-effective alternative to building new generation. What this means is that a variety of entrepreneurs and technology solutions start-ups will have a chance to create value for their product, and consumers will have the ability to make choices in the energy markets.

Bottom Line

FERC’s introduction of demand response does not exactly equate to energy conservation. However, it may pave the way for increased participation and generation of electricity by new renewable sources. And with FERC taking a new aggressive stance on its jurisdiction to regulate demand response resources, the agency is showing promising first signs of its willingness to take on reductions in fossil fuel consumption and U.S. production of greenhouse gases.

[1] 16 U.S.C. § 824(b).
[2] 16 U.S.C. § 824d.