Energy Fact & Opinion: Supreme Court Upholds Demand Response
January 26, 2016
- On January 25, in a 6-2 decision, the Supreme Court affirmed the Federal Energy Regulatory Commission’s (FERC) authority to allow electric power market operators to compensate consumers for reducing demand on the electricity grid (during peak times when prices are the highest thereby lowering prices and improving reliability), so-called demand response. The Court also affirmed that FERC could compensate demand response at the same levels as supply resources.
- At issue in the ruling was the scope of FERC’s jurisdiction and the compensation mechanism for demand response. Petitioners, led by independent power producers, argued that FERC had overstepped its authority by regulating retail markets, an area Congress left to the states. The Court found that demand response “directly” affects wholesale rates (by displacing higher-cost generation) and therefore falls within FERC’s authority. The Court also found that the compensation mechanism was reasonable and fair.
- According to FERC , there was 29 gigawatts (GW) of demand response available in wholesale markets in the United States in 2014, equivalent to about 6 percent of peak demand. Greentech Media (GTM) estimates that demand response was valued in the market at $1.4 billion in 2015.
- The Court’s decision does not change the status quo, as the relevant market structure and tariffs had remained in place as the issue was working its way through the courts, but it does provide a degree of regulatory certainty and pricing parity for demand response in the market.
Demand response supporters argue that it is one of several important innovations essential for a reliable, well-functioning market and the integration of intermittent renewable resources. Supporters were worried that if the matter was left to the states (or demand response was not compensated at levels equal to supply resources), the pace and rate of demand response penetration would, at best, be slow and uneven.
This latest decision is a victory for FERC and has been hailed by environmental groups, but litigation about the extent of FERC’s authority over the grid has implications for more than just demand response; it is part of ongoing questions about federal versus state jurisdiction in power markets that impact the overall shape of grid modernization. At the heart of the recent case is the interpretation of the Federal Power Act (FPA), written in 1935 and last amended in 2005. The FPA gives FERC jurisdiction over wholesale energy markets, and leaves to the states any other sale of electricity (i.e., retail electricity), a division of authority that has remained largely unaltered since the law was written. The neat division (sometimes referred to as a “bright line”) between state and federal authority, however, does not reflect the evolving reality of how the grid works. Drawing a line between wholesale and retail markets is a challenging and in some cases arbitrary task. While the “bright line” has blurred as the grid has evolved over the last 80 years, it is blurring at a faster pace in the last few decades as wholesale and retail power markets become more complex and integrated through technology and policy developments—such as the evolution of wholesale energy and ancillary markets, penetration of distributed resources (such as demand response, rooftop solar, and behind-the-meter batteries), the evolution of smart devices like the Nest thermostat, and state regulatory actions such as New York’sReforming the Energy Vision. In some ways, the transitions underway in the electricity system have been impeded by the cumbersome and at times unclear delineation of authority between state and federal regulators.
In its ruling, the Court argued that “transactions…on the wholesale market havenatural consequences at the retail level, and so…will FERC’s regulation of those wholesale matters” (emphasis added). Going forward, however, until and unless Congress clarifies the matter, the Court will have to continue arbitrating what action counts as simply a “natural consequence” and what crosses the line into regulation. Without a clear delineation of authority, FERC and the states are likely to continue along the suboptimal pathway of testing the limits of their authority as they move to implement ad hoc and often uncoordinated reforms.