Who Regulates the Smart Grid? FERC's Authority Over Demand Response Compensation in Wholesale Electricity Markets
Joel B. Eisen
University of Richmond - School of Law
April 10, 2013
San Diego Journal of Energy & Climate Law, Vol. 4, Forthcoming
A potentially revolutionary shift is taking place in the wholesale electricity markets that provide power for roughly half the nation’s customers, involving participants offering reductions in demand, or “demand response” (DR) into the markets. DR is a reduction in consumption in response to an increase in the price of electricity or to incentive payments, and can have numerous benefits, such as reducing overall demand for electricity, reducing greenhouse gas emissions and the need for constructing new power plants, and contributing to increased reliability of the electric grid. DR is also is an interactive and dynamic application that can spur the growth of other two-way uses of the Smart Grid, such as greater incorporation of distributed energy resources.
“Order 745” of the Federal Energy Regulatory Commission (FERC) requires DR to be compensated in wholesale energy markets at the same price as electricity bid into the markets. The Article contends that this Order is a building block of a fundamental shift in FERC’s regulatory role from fostering competition in electricity generation and promoting the sale of electricity at its lowest cost, to using the wholesale power system to achieve environmental objectives and other social goals and transform the wholesale market as fundamentally as FERC’s initial restructuring orders that fostered the markets’ creation. A challenge to Order 745, Electric Power Supply Association v. FERC, is currently pending in the D.C. Circuit. This Article contends that Order 745 should be upheld against states’ objections that it impermissibly regulates retail electricity rates, because it fits within FERC’s broad authority to regulate the wholesale power markets under the Federal Power Act, and is essential to ensure the transition to a clean energy future. Also, FERC’s determination that any potential for overcompensation of DR at the full “locational marginal price” prevailing in wholesale electricity markets will be offset by application of a “net benefits” test is entitled to deference, as it represents FERC’s judgment about the importance of DR as a resource in the markets.
Number of Pages in PDF File: 30
Keywords: Demand response, Smart Grid, wholesale electricity market, electricity, energy, climate change, greenhouse gases, locational marginal price, FERC, Order 745
JEL Classification: K00, K20, K22, K33Accepted Paper Series
Date posted: April 11, 2013
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