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When It Comes to Demand Response, is FERC Its Own Worst Enemy?

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  • Bushnell, James
  • Hobbs, Benjamin
  • Wolak, Frank

Abstract

The traditional approach to demand response of paying for a customer's electricity consumption reductions relative to an administratively set baseline is currently being advocated by the Federal Energy Regulatory Commission (FERC) as a way to foster the participation of final consumers in formal wholesale markets. Although these efforts may lead to greater participation of final consumers in traditional demand response programs, they are likely to work against the ultimate goal of increasing the benefits that electricity consumers realize from formal wholesale electricity markets, because traditional demand response programs are likely to provide a less reliable product than generation resources. The moral hazard and adverse selection problems that reduce the reliability of the product provided by traditional demand response resources can be addressed by treating consumers and producers of electricity symmetrically in the wholesale market. Several suggestions are made for how this would be accomplished in both the energy and ancillary services markets. A specific application of this general approach to the California wholesale electricity market is also provided.

Suggested Citation

  • Bushnell, James & Hobbs, Benjamin & Wolak, Frank, 2009. "When It Comes to Demand Response, is FERC Its Own Worst Enemy?," Staff General Research Papers Archive 13141, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:13141
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    Cited by:

    1. Muñoz, Francisco D. & Suazo-Martínez, Carlos & Pereira, Eduardo & Moreno, Rodrigo, 2021. "Electricity market design for low-carbon and flexible systems: Room for improvement in Chile," Energy Policy, Elsevier, vol. 148(PB).
    2. Faria, P. & Vale, Z., 2011. "Demand response in electrical energy supply: An optimal real time pricing approach," Energy, Elsevier, vol. 36(8), pages 5374-5384.
    3. Zhao, Huan, 2011. "Four Market Studies for the Beef and Electric Power Industries," ISU General Staff Papers 201101010800001360, Iowa State University, Department of Economics.
    4. James Buthman, 2015. "Institutionalizing renewable electricity: the long-term potential for policy learning," Journal of Environmental Studies and Sciences, Springer;Association of Environmental Studies and Sciences, vol. 5(4), pages 526-536, December.
    5. Hung-po Chao, 2011. "Demand response in wholesale electricity markets: the choice of customer baseline," Journal of Regulatory Economics, Springer, vol. 39(1), pages 68-88, February.
    6. Aoki, Masahiko & Rothwell, Geoffrey, 2011. "Coordination Under Uncertain Conditions: An Analysis of the Fukushima Catastrophe," ADBI Working Papers 316, Asian Development Bank Institute.
    7. David P. Brown & David E. M. Sappington, 2016. "On the optimal design of demand response policies," Journal of Regulatory Economics, Springer, vol. 49(3), pages 265-291, June.
    8. Xu Chen and Andrew N. Kleit, 2016. "Money for Nothing? Why FERC Order 745 Should have Died," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    9. Patrick Ludwig & Christian Winzer, 2022. "Tariff Menus to Avoid Rebound Peaks: Results from a Discrete Choice Experiment with Swiss Customers," Energies, MDPI, vol. 15(17), pages 1-21, August.
    10. Lund, Peter D. & Lindgren, Juuso & Mikkola, Jani & Salpakari, Jyri, 2015. "Review of energy system flexibility measures to enable high levels of variable renewable electricity," Renewable and Sustainable Energy Reviews, Elsevier, vol. 45(C), pages 785-807.
    11. Masahiko Aoki & Geoffrey Rothwell, 2013. "A comparative institutional analysis of the Fukushima nuclear disaster: Lessons and policy implications," Chapters, in: Comparative Institutional Analysis, chapter 8, pages 105-132, Edward Elgar Publishing.
    12. Juliano Camargo & Fred Spiessens & Chris Hermans, 2018. "A Network Flow Model for Price-Responsive Control of Deferrable Load Profiles," Energies, MDPI, vol. 11(3), pages 1-17, March.
    13. Vishal V. Agrawal & Şafak Yücel, 2022. "Design of Electricity Demand-Response Programs," Management Science, INFORMS, vol. 68(10), pages 7441-7456, October.
    14. Nolan, Sheila & O’Malley, Mark, 2015. "Challenges and barriers to demand response deployment and evaluation," Applied Energy, Elsevier, vol. 152(C), pages 1-10.
    15. Walsh, Darragh & Malaguzzi Valeri, Laura & Di Cosmo, Valeria, 2016. "Strategic bidding, wind ownership and regulation in a decentralised electricity market," MPRA Paper 71502, University Library of Munich, Germany.
    16. Hung-po Chao & Mario DePillis, 2013. "Incentive effects of paying demand response in wholesale electricity markets," Journal of Regulatory Economics, Springer, vol. 43(3), pages 265-283, June.
    17. Xiao, Jingjie & Liu, Andrew & Pekny, Joseph, 2012. "Quantify Benefits of Home Energy Management System Under Dynamic Electricity Pricing," MPRA Paper 58781, University Library of Munich, Germany.
    18. Tim Schittekatte & Valerie Reif & Leonardo Meeus, 2021. "Welcoming New Entrants into European Electricity Markets," Energies, MDPI, vol. 14(13), pages 1-20, July.
    19. Masahiko Aoki & Geoffrey Rothwell, 2011. "Organizations under Large Uncertainty: An Analysis of the Fukushima Catastrophe," Discussion Papers 11-001, Stanford Institute for Economic Policy Research.
    20. Xiao, Jingjie, 2013. "Grid integration and smart grid implementation of emerging technologies in electric power systems through approximate dynamic programming," MPRA Paper 58696, University Library of Munich, Germany.
    21. Jiang, Bo & Farid, Amro M. & Youcef-Toumi, Kamal, 2015. "Demand side management in a day-ahead wholesale market: A comparison of industrial & social welfare approaches," Applied Energy, Elsevier, vol. 156(C), pages 642-654.
    22. Claire Bergaentzlé, 2013. "From smart technology to smart consumers: for better system reliability and improved market efficiency," Post-Print halshs-01011169, HAL.
    23. Faruqui, A. & Hajos, A. & Hledik, R.M. & Newell, S.A., 2010. "Fostering economic demand response in the Midwest ISO," Energy, Elsevier, vol. 35(4), pages 1544-1552.
    24. Hung-po Chao, 2012. "Competitive electricity markets with consumer subscription service in a smart grid," Journal of Regulatory Economics, Springer, vol. 41(1), pages 155-180, February.

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