Energy Insider Blog

Economic Demand Response: What It Is And Why You'll Want It

Posted by Dennis Vegas on May 27, 2013 7:15:00 AM

In looking at energy management risks, it is rare to find a scenario where both the supplier and the end user can benefit.  However, with the expansion of demand response programs to include what is called “economic demand response” offers a rare situation where not only do the supplier and end user benefit, but so does society as a whole.

How Economic Demand Response Differs from Demand Response

Most demand response programs, including those administered by the Pennsylvania Jersey Maryland (PJM) Interconnection and the Electric Reliability Council of Texas (ERCOT) provide payments to customers simply to be available to reduce their energy consumption when it is needed to maintain grid reliability. Some examples of these programs include:

  • The participation of demand response in the PJM forward capacity auction known as the Reliability Pricing Model (RPM), which pays an end user to curtail in exchange for capacity payments in the future;  or

  • Load Acting as Resource (LAAR) program in ERCOT where customers agree to be shut-off when necessary and are paid a monthly sum whether they are called upon or not.

Both of these programs are designed to provide additional electric transmission system reliability, which is a  key mission of both PJM and ERCOT.

By contrast, emerging economic demand response programs pay a customer to reduce its load when usage is high and energy prices are high and as well. The idea is that a customer on a fixed price product can sell the lower cost power they purchased as part of their energy contract back in to the grid and receive a portion of the difference between the Real Time or Day Ahead Index Price and the contract price. 

Requirements For Economic Demand Response

Economic demand response programs are evolving and being embraced by prudent energy management practitioners and are mainly done as part of a negotiated contract between the retailer and the end use customer.  A couple of considerations:

  1. Smart Grid Technology With the rollout of smart grid systems and smart meters for businesses, companies can now accelerate their opportunity to optimize their resources to generate income and ensure reliability. The new technology is not that expensive and delivers measurable results.

  2. Determine If Your Facility Can Reduce Enough Electricity to Generate Revenue For a commercial building you should determine if you’re square footage– is at least 300,000 square feet.  If it is a smaller site, you should have at least 100kW of load.  

For industrial facilities, your annual energy spend should be at least $250,000 or your peak kW at least 500kW?

When it comes to commercial or institutional sites or multi-site facilities, you might be a good candidate if you have centrally managed building automation systems.

  1. Confirm Your Facility Is Located in An ISO/utility Area to ensure  based demand response programs are being offered.

  2. Call Your Local Utility, or Your Trusted Energy Advisor  for more information concerning demand response programs and how it may fit in with your energy management programs.


If you have not explored Economic Demand Response you should. It is a great vehicle for a customer to reduce their load at times of high prices and is the next evolutionary step in demand response and for creating a competitive wholesale and retail power market.  This program differs from traditional demand response programs in that they tend to be done on a contractual basis through a supplier rather than through a program administered by the grid operator.  Economic Demand Response is still in its infancy and requires a minimal investment, but offers tremendous upside for end users economically, socially and environmentally.

Download White Paper PJM Capacity and Reliability Pricing Models

Topics: energy risk management, energy management consulting, energy reliability, economic demand response


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