Energy Insider Blog

Demand Response Is Booming: Are You Leaving Money On The Table?

Posted by Dennis Vegas on Sep 11, 2013 7:05:00 AM

Too often, energy risk management professionals focus on one side of the energy equation, specifically the supply contract.  While this is certainly a critical piece of any procurement or strategic energy sourcing approach, it can lead to real value  being left on the table for the end user through too much focus on the supply side.  A thorough energy risk management strategy will account for the possibility of generating additional revenues through participation in various demand response programs.  Of course, the value of those demand response programs will vary based on the type of consumer, their ability to curtail usage,  availability of back-up generation  and which of the  various demand response programs   they choose or are  able to participate in .  With these factors in mind, it is important to evaluate the options for demand response based on each customer’s unique profile.

Basics of Demand Response

Demand response programs will pay an end use customer to reduce their energy consumption at times of high power demand or when the conditions in the wholesale power market are such that there is a potential for price spikes due to the loss of either generation or transmission elements.  When such a situation occurs, end users  reduce their demand and essentially become virtual power plants  by providing energy back to the grid via reduced consumption.  Historically, these demand response programs are administered by the independent system operator which is responsible for balancing supply and demand of electricity in real time.   

Demand Response Options in PJM

The most utilized demand response programs are available in the Mid-Atlantic States, where the wholesale power market is managed by the Pennsylvania, New Jersey, Maryland (PJM) Interconnection.  Customers in PJM have the option to participate in demand response programs in 2 different ways. 

  • Demand response in capacity markets.  Like most wholesale power markets in the U.S., PJM administers a capacity market.  The capacity market is designed to provide sufficient revenues to generation and transmission owners to encourage them to build the infrastructure needed to maintain reliability of the electrical grid.  In PJM’s version of a capacity market, known as the Reliability Pricing Model (for more information on the PJM capacity market structure, click here), customers offering to curtail their load are treated just like a generator.  They can participate in the PJM administered auction for capacity and agree to reduce their demand and be paid a sum per megawatt day if their overall demand is reduced by the amount they offered to PJM.  Accomplishing this reduction in demand can be done either through energy efficiency which lowers overall demand  or utilization  of back-up generation which can be used to reduce the amount of power pulled from the grid system. 
  • Responding to peak power demand needs.  The other option available to customers in the PJM footprint is akin to traditional demand response programs.  Participating in these programs entails reducing power consumption in a timely manner when the demand for power is approaching the total available supply and the power grid is under strain.  Unlike participation in the capacity markets, this program is a real time program that end users can take advantage of on any given day.

ERCOT Demand Response Options

While not as fully utilized as the PJM market, demand response programs in the Electric Reliability Council of Texas (ERCOT) are making a difference in the management of the wholesale power grid in Texas.  Customers receive a payment for being willing to curtail usage from ERCOT the system operator and can also get paid in the event they are called upon based on the prevailing market price.  The two programs that are currently in the market are LAAR and ERS but many more options are developing in the energy only Texas market. 

  • Load Acting as a Resource (LAAR).  Customers participating in the LAAR program are paid a fee per megawatt of ancillary services, specifically what is known as Responsive Reserve Service.  This payment is made to end users regardless of whether ERCOT actually calls upon them to curtail their load and can be quite lucrative.  However, due to the extreme interest in this program, customers participating in LAAR are paid a reduced amount because there are more loads  willing to participate in the LAAR program than ERCOT needs for grid reliability.  While this program has the benefit of providing a relatively stable income stream, the fractional payments as well as the fact that loads can be curtailed with minimal notice may make this option less than attractive for some consumers.
  • Emergency Responsive Service (ERS).   Unlike the LAAR program, the ERS program is designed to be used only when there is an imminent threat of a blackout in parts of ERCOT.  Under this program, customers agree to be available during certain hours and for a period of 4 months at a time if there is a need for ERCOT to reduce demand to maintain system integrity.  The value of participation in the ERS program varies greatly depending on when the load is willing to curtail, with higher payments typically available to customers  willing to curtail during the traditional peak hours of 4-6 p.m. during the summer months.  This program is administered by ERCOT through a formal Request for Proposal (RFP) process.  Customers submitting responses to the RFP can designate when they are available, giving them more control over when they may be called upon to reduce their consumption.


Today, demand response programs are growing as utilities and grid operators in the U.S. turn to demand response as a means of increasing reliability and reducing costs. The load reductions are coming from a variety of facilities, from single compressors cycling off  to the shutdown of entire manufacturing plant. As demand response continues to gain momentum in the evolving smart grid, commercial building owners and operators have an opportunity to monetize their “negawatt” contributions in many new and innovative ways.

Again, the most effective energy risk management strategies evaluate not only the impact of the supply options available to a customer, but also consider whether participation in one or more demand response programs makes economic sense.  When evaluating different options, the size of the load that can be curtailed, the speed to curtail and the location of the client may impact what demand response programs are available and which ones make the most economic sense for your business.

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Topics: ERCOT, energy risk management, demand response, energy reliability, PJM


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