Demand Response Via. Hung-po Chao* Harvard Energy Policy Group Meeting Calgary, Alberta, Canada

Transcription

1 Harvard Energy Policy Group Meeting Calgary, Alberta, Canada June , 2013 Demand Response Via Voluntary Demand Subscription Hung-po Chao* * ISO New England. The opinions expressed in the presentation are solely of my own and do not represent the positions of ISO New England or any other organizations. 1

2 Background Texas SMD MISO 2005 Energy Policy Act FERC Orders 745 FERC Order 2000 California, PJM, NE and NY California Crisis FERC Orders 888/ Energy Policy Act PURPA The Negawatt Revolution

3 Energy policy and regulatory rule-making The 2005 Energy Policy Act provides the Congressional mandate to promote demand response in organized wholesale electricity markets o o It directs FERC to work with States, stakeholders and experts to identify and address barriers to the adoption of demand response programs It also encourages States to coordinate, on a regional basis, State energy policies to provide reliable and affordable demandresponse services to the public Issued in 2011, FERC s Order 745 requires market operators to pay locational marginal price (LMP) to demand reduction offered as supply resources into wholesale market. 3 o FERC solution requires administrative i i estimates of what consumption would have been, i.e., baselines.

4 Baseline is essential to measure demand reduction offered as supply resource Demand reduction is estimated as baseline estimate minus actual consumption o Alfred Kahn in support of Order 745: Recognition that t the practical task of ensuring that t a proffered negawatt is actually delivered is beyond the scope of this proceeding, but not I suggest inseparable from a decision on the merits of the proposal. Wholesale markets are leading the way, while retail markets are lagging behind 4

5 Economic Rationale For FERC Order There is over-consumption during the peak period because consumers face a fixed retail rate Price Wholesale l price (LMP) Supply curve Retail rate Peak demand curve Q Too High Quantity 5

6 Questions What are the incentives for consumers? How do consumers behave under alternative baseline designs? How well do the alternative baselines perform? 6

7 Inflated customer baseline Baseline established during similar hours Strategy: inflate consumption in peak hours not called Consumption during peak hours even higher than retail case P Wholesale price (LMP) Supply curve Retail rate Peak demand curve Without Baseline inflation Baseline inflation Q 7

8 Exaggerated demand reduction Welfare loss of over-consumption is replaced by welfare loss of under-consumption Quick fix: Minimum wholesale price threshold for demand reduction payment P LMP+Retail rate Supply curve Retail rate Peak demand curve With LMP payment Absent LMP Payment Q 8

9 Alternative baseline designs Wholesale - only market design 1.5 Wholesaleonly market design 2.0 Coordinated wholesale-retail market design* Efficient market design** Baseline establishment method Estimates based on past consumption Estimates based on share of aggregate demand Consumer pays for baseline Estimates based on share of aggregate demand Consumer subscribes energy services and demand Adverse Inflated customer Exaggerated incentives baseline, Exaggerated demand reduction demand reduction - - Minimum threshold price LMP > 1.5 x Retail rate LMP > 2 x Retail rate LMP > Retail Rate - 9 References: Hogan (2009, 2010), Bushnell et. al. (2009), Borlick (2009), Chao (2010, 2011, 2012), Chao and DePillis (2013)

10 Comparison of alternative baseline designs (20) Wholesale only Wholesale only Coordinated Efficient market Wholesale only 1.5 Wholesale only 2.0 Coordinated wholesale-retail Efficient market design Change in social surplus from the referencee case in the absence of demand response compensation ($Million/year) 10 (40)

11 Efficient market design incorporates both wholesale and retail considerations Wholesale market Energy Ancillary services Capacity Retail Market Unbundled services Full delivery services Differentiation/customization Risk management tools 11

12 Voluntary demand subscription program Voluntary demand subscription is a retail rate design that provides consumers choices of alternative services and rate options other than the default service For example, some consumers may choose to subscribe fixed demand levels opting out the capacity (volumetric) option embedded in the default service and thus save the capacity related costs The subscribed demand d level l can serve as the customer s baseline for the demand response program in the wholesale market Demand reduction below the baseline will be paid the wholesale price Demand increase above the baseline will be charged the wholesale price 12

13 Advantages of voluntary demand subscription program Consumers can choose unbundled services (e.g., energy, reserve, capacity), differentiated attributes or other service innovations customized to individual needs Consumer choice is better than an administrative baseline design Demand response program works on both the supply side and the demand side in the wholesale market 13

14 Coordinated wholesale-retail market design is necessary to fulfill the national policy mandate Demand response payments need to be consistent with the cost causation principle Consumer choices provide clear cost responsibility Cost causation is more efficiently done on the demand side It eliminates the need for complex capacity cost allocation and load reconstitution in a wholesale-only market design LSE needs to be involved in establishing the customer baseline 14

15 To succeed, policy makers must focus on market design including both wholesale and retail a growing concern shared by some leading industry experts is that in many instances, policy makers are pushing their proposals into practice more quickly than policy analysts can provide answers to difficult questions of market design the process may be inadvertently locked into an inferior market design which h will be costly to change. --- Comments t by thirteen t prominent scholars and experts included in the book: Designing g Competitive Electricity Markets (1998) Edited by Hung-po Chao and Hillard Huntington 15

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17 References Borlick, R. (2010). Comments in FERC RM May 13, Bushnell, J., Hobbs, B.F. and Wolak, F. A. (2009). "When It Comes to Demand Response, Is FERC Its Own Worst Enemy?," The Electricity Journal, Vol. 22(8). Chao, H. (2010). Price-Responsive Demand Management for a Smart Grid World. Electricity Journal. Vol. 23(1). Chao, H. (2011). Demand Response In Wholesale Electricity Markets: the Choice of Customer Baseline. Journal of Regulatory Economics, Vol. 39(1). Chao, H. (2012). Competitive Electricity Markets with Consumer Subscription Service in a Smart Grid, Journal of Regulatory Economics, Vol. 41(1). Chao, H. and M. DePillis (2013). Incentive effects of paying demand response in wholesale electricity markets, Journal of Regulatory Economics, Vol. 43(3). Hogan, W. W. (2009) Providing Incentives for Efficient Demand Response, Prepared for Electric Power Supply Association, Comments on PJM Demand Response Proposals, Federal Energy Regulatory Commission, Docket No. EL Hogan, W. (2010). Demand Response Pricing in Organized Wholesale Markets. May 13, Prepared for ISO/RTO Council Comments on Demand Response Compensation in Organized Wholesale Energy Markets Notice of Proposed Rulemaking Federal Energy Regulatory Commission Docket No. RM Kahn, A. (2010). FERC Docket No. RM10-17, Reply Comments Of The Demand Response Supporters, Reply Affidavit of Dr. Alfred E. Kahn, Attachment A. August 30,