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

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

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.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 13141.

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Date of creation: 01 Oct 2009
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Publication status: Published in Electricity Journal, October 2009, vol. 22 no. 8, pp. 9-18
Handle: RePEc:isu:genres:13141
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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