On May 23, a three-judge panel from the U.S. Court of Appeals for the D.C. Circuit vacated FERC Order 745, the regulation issued by the Federal Energy Regulatory Commission that calls for electrical grid operators to pay the market price, known as the “locational marginal price," to demand response resources that curtail their energy consumption in the real-time or day-ahead energy markets.

The evolving energy industry formally voiced its opposition to the U.S. Court of Appeals’ decision, with FERC officially asking that the ruling be reversed. Several states, a number of innovative energy companies, many large business entities, and PJM -- the world’s largest electric grid operator -- also joined FERC in seeking a reversal of the D.C. Circuit Court opinion. Unfortunately, in a very terse rejection, the D.C. Circuit Court of Appeals denied the requests to reconsider its May opinion. It’s not hyperbole to say that these actions could have significant and dire consequences on the United States’ energy initiatives and conservation goals. Simply put, the D.C. Circuit Court’s rulings will result in our nation’s evolving smart grid becoming dumber.

Demand response relieves strains placed on the electrical grid by curtailing energy usage during periods of peak demand. This is a highly valuable resource. By helping to balance supply and demand, demand response drives down energy prices, contributes to the stability of the grid, and reduces our reliance on “peaker” power plants, which are notoriously energy inefficient and costly facilities. Through demand response programs, electric utilities are able to offer financial incentives to customers and then curtail their energy usage in order to maintain grid stability. Demand response provides the greatest financial incentive for individuals and organizations to participate in energy markets, allowing them to manage the demand side of the supply/demand relationship. This approach has worked for decades.

Most importantly, demand response is the market tool that allows evolving technologies to be compensated by market-based forces at market-based rates in energy markets. Energy storage, for example, isn’t compensated for just sitting on the side of a building. That storage device must provide a service (a response) to the market and provide that response when called upon, and the storage device is then compensated for providing the response.

Demand response is also evolving into more of an operational resource that can be used to integrate renewable resources (rooftopsolar wind, and others) into the grid and otherwise modify electricity demand when needed, and it provides a market-based compensation mechanism for those services. It is a comprehensive and valuable resource available in the markets today, enhancing the value of smart grid investments.  

The major problem with the D.C. Circuit’s ruling is that in order for any business or household to actively participate in energy markets and help balance supply and demand, there needs to be an incentive for them to be flexible with their energy usage. The D.C. Circuit has invalidated that incentive. Why would anybody embrace demand response if one of the major motivating factors -- economic compensation -- is removed?

Dueling interests

Energy generation is big business: power companies sell $400 billion worth of electricity a year, mostly derived from burning fossil fuels. In fact, the EIA recently estimated that U.S. coal consumption totaled 920 million short tons in 2013, which was a 3.5 percent increase over 2012. Furthermore, the EIA reported that coal represented 39 percent of the U.S.’ total power generation in 2013 -- a significant number considering that the combustion of coal is the largest contributor to the human-made increase of carbon dioxide in the earth’s atmosphere.

Ultimately, any attempt to disincentivize energy conservation efforts -- which the D.C. Circuit’s ruling essentially does -- is completely counterintuitive and inconsistent with modern-day energy policies being implemented across the United States. Unfortunately, electric generation interests are threatened by demand response and the tools it enables, and they have, at least for the short term, slowed down the innovation to allow us to capitalize on smart grid investments. The generation community has, in essence, asked for and gotten a dumber grid. The dumb grid works well for traditional power plants. 

Our nation’s energy management and conservation options, as well as the opportunities for organizations to participate in energy markets, have never been so abundant. We have widely distributed renewable energy options such as rooftop solar, utility-scale solar and wind power, and advanced storage technologies. Due to social and economic factors, customers are more actively engaged and invested in their energy management than ever before. 

Despite the wrangling in the courts, households, businesses and other organizations across the country are intensifying their energy management, conservation and sustainability efforts, which demand response programs often support. A number of factors are contributing to the implementation of these advanced energy management strategies, including a general desire to control energy costs; the need to keep the power on during and after extreme weather events; consumers’ increasing interest in buying products and services from environmentally conscious companies (as evidenced by these findings); the increased brand reputation from inclusion in reports such as this one; and organizations’ own desires to protect the environment.

As a nation, we’re at a tipping point, balancing energy challenges, environmental issues and grid security, yet this is the precise time that the court decided to invalidate the market-based incentive for demand response resources to participate in energy markets. The D.C. Circuit opinion, if it stands, will swing the pendulum of control of electricity markets completely back to electricity generators.  

The smart grid has come too far to allow this happen. There has been too much human and fiscal investment in energy management for us to change course now and remove incentives and flexibility for organizations’ participation in energy markets. The American Recovery and Reinvestment Act of 2009 alone set aside $11 billion for the creation of a smart grid. The business cases for most, if not all of that $11 billion, included significant demand response benefits. Eliminating those benefits make those smart grid investments look dumber.

Demand response solutions provide real benefits to consumers and valuable reliability tools to grid managers across the country. The change in customers’ energy market behaviors is widely evident. The spike in companies’ sustainability initiatives is real. The EPA’s climate change plan, which includes demand-side efficiency as one of its four building blocks, is now a formal proposed rule.

If and when the courts share the industry’s same confidence and ambition, we can get back to developing a smart grid.

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Frank Lacey is Vice President of Regulatory and Market Strategy at Comverge.

[Editor's note: Late last month, the D.C. Circuit declined an appeal by the commission, which could appeal to the U.S. Supreme Court.]