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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. David P. Brown & David E. M. Sappington, 2016. "On the optimal design of demand response policies," Journal of Regulatory Economics, Springer, pages 265-291.
    2. 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).
    3. 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.
    4. 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.
    5. David P. Brown & David E. M. Sappington, 2016. "On the optimal design of demand response policies," Journal of Regulatory Economics, Springer, pages 265-291.
    6. Zhao, Huan, 2011. "Four Market Studies for the Beef and Electric Power Industries," ISU General Staff Papers 201101010800001360, Iowa State University, Department of Economics.
    7. Nolan, Sheila & O’Malley, Mark, 2015. "Challenges and barriers to demand response deployment and evaluation," Applied Energy, Elsevier, pages 1-10.
    8. 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.
    9. Hung-po Chao & Mario DePillis, 2013. "Incentive effects of paying demand response in wholesale electricity markets," Journal of Regulatory Economics, Springer, pages 265-283.
    10. 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, pages 526-536.
    11. 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.
    12. Hung-po Chao, 2011. "Demand response in wholesale electricity markets: the choice of customer baseline," Journal of Regulatory Economics, Springer, pages 68-88.
    13. 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.
    14. 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.
    15. 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, pages 642-654.
    16. Aoki, Masahiko & Rothwell, Geoffrey, 2011. "Coordination Under Uncertain Conditions: An Analysis of the Fukushima Catastrophe," ADBI Working Papers 316, Asian Development Bank Institute.
    17. Hung-po Chao, 2012. "Competitive electricity markets with consumer subscription service in a smart grid," Journal of Regulatory Economics, Springer, pages 155-180.
    18. Masahiko Aoki & Geoffrey Rothwell, 2011. "Coordination Under Uncertain Conditions : An Analysis of the Fukushima Catastrophe," Governance Working Papers 23220, East Asian Bureau of Economic Research.

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