Demand response (DR) can be defined as customer response to an increase in electricity prices by reducing the consumption to induce lower consumption of electricity. The Federal Energy Regulatory Commission (the Commission) considers two general ways whereby customers reduce the demand as a response to price signals: (1) customers reduce demand by responding to dynamic rates that are based on wholesale prices (sometimes called “price-responsive demand”); and (2) customers can provide demand response that acts as a resource in wholesale markets to balance supply and demand. Discussion on this paper mainly is related to the second point treat the demand response as resources in the market.
Demand response is closely related to a negawatt which basically stands for a negative megawatt. Negawatt can be a megawatt of power that is not required to be produced or consumed. Perhaps the simplest way to define it is that a negawatt is a measure of energy efficiency (conservation). When less power is consumed, the demand for energy decreases (conserved). The term negawatt was invented by Amory Lovins which best captured the concept of energy efficiency and then he began to use the term in speeches and lectures.
The Commission considers that demand response helps to improve the functioning and competitiveness of such markets in several ways:
- Demand response can lower prices. This happens when bid directly into the wholesale market, demand response which results in lower demand can result in lower clearing prices. Therefore it reduces the need to dispatch higher-priced generation, or construct new generation, in an effort to satisfy load.
- Demand response can mitigate generator market power. This is because the more demand response is able to reduce demand, the more downward pressure it places on generator bidding strategies by increasing the risk to a supplier that it will not be dispatched if it bids a price that is too high.
- Demand response has the potential to support system reliability and address resource adequacy and resource management challenges surrounding the unexpected generation loss.
The Commission on March 18, 2010, issued notice of proposed rulemaking (NOPR) regarding Demand Response Compensation in Organized Wholesale Energy Markets. Considering that Locational Marginal Price (LMP) represents the marginal value of the resource being used by the RTO or ISO to balance supply and demand, the Commission is proposing that the LMP should be paid to any resource clearing in the RTO’s or ISO’s energy market. LMP refers to the price calculated by the ISO or RTO at particular locations or electrical nodes within the ISO or RTO footprint and is used as the market price to compensate generators. Thus market clearing price reflects the marginal value of resources in that market.
We might have clear opinion if we look at two well known economist opinions ALfred Kahn and William Hogan. In short, it seem that merely pricing negawatt at LMP can be harmfull so it should be modified as proposed by Hogan.
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