Demand response was dealt a blow on Friday when the U.S. Court of Appeals in Washington, D.C. vacated the Federal Energy Regulatory Commission’s Order 745 in a 2-1 decision, stating that FERC has gone too far.

On the surface, the ruling in the multi-year legal battle is a win for the Electric Power Supply Association, an organization of power generators that includes Entergy, NRG Energy and PSEG Power. But for incumbent power producers, overturning Order 745, if it stands, may not be enough. Demand management and energy efficiency are being valued more and more by utilities and state and federal regulators, and are expected to grow in coming years. 

FERC’s Order 745, approved in 2012, calls for grid operators to pay the full market price, known as the locational marginal price, to economic demand response resources in real-time and day-ahead markets as long as dispatching DR is cost-effective. The ruling found that FERC overstepped its jurisdiction and that the decision of payments should lie with states.

“In Order 745, however, FERC went far beyond removing barriers to demand response resources. Instead of simply 'removing barriers,' the rule draws demand response resources into the market and then dictates the compensation providers of such resources must receive,” Judge Janice Rogers Brown wrote in the majority opinion.

The issue at hand was not just whether the payments were too high, but rather who has the authority to set those payments. Judge Harry Edwards, who wrote the dissent, disagreed strongly with the majority’s finding.

“FERC had jurisdiction to issue Order 745 because demand response is not unambiguously a matter of retail regulation under the Federal Power Act, and because the demand response resources subject to the rule directly affect wholesale electricity prices,” the dissent stated.

Beyond economic demand response

Although this is a setback, the fight over Order 745 certainly is not over. A FERC spokeswoman said in an email that the agency is considering its next steps. Even if the ruling stands, however, it may not slow down the role demand response plays in energy markets, such as PJM.

In a statement, EnerNOC, the largest demand response provider in the U.S, noted that economic demand response, which is what is covered under FERC Order 745, makes up only 2 percent of its revenue.

The bulk of demand response in PJM Interconnection, the country’s largest energy market, is in the capacity market. That too is shifting, but not because of lawsuits.

On Friday, PJM announced the clearing for its most recent capacity auction. The role of demand response is similar to what it has been in recent years, with more than 10,000 megawatts procured. What has changed is that more demand response is being procured year-round, rather than just for summer-only programs. Demand response is becoming an increasingly important resource in all seasons.

As far as economic demand response, FERC's Order 745 has not galvanized the market for everyone in PJM, at least not yet. Instead, it did raise payments considerably, but only for the large commercial and industrial customers savvy enough to play in the economic DR market. 

In a webinar two years agoPaul Centolella, VP of Analysis Group and former commissioner of the Public Utilities Commission of Ohio, argued that Order 745 was not necessarily effective for unlocking demand response from utility customers of all sizes.

Other changes are underway, as well. Companies such as Stem and Greensmith have started selling battery systems so that they can cut demand charges and play in ancillary markets.

Some states are taking matters into their own hands. New York’s REV proposal would likely value energy efficiency and demand management even more aggressively than FERC Order 745 could.

While Texas’ ERCOT will not have a capacity market anytime soon, it is rethinking its ancillary services market and is pushing spot prices so high that more demand response services could be inevitable. ERCOT is not subject to Order 745, and yet it is looking at ways to unlock demand response in the face of a changing energy mix and capacity limitations.

But supporters of FERC and Order 745, such as EDF, were disappointed despite the changes coming to energy markets that could benefit demand response irrespective of Order 745.

“As the U.S. advances into the clean energy economy, demand response should play an increasingly larger role in how our electricity is produced, delivered, and consumed,” EDF wrote in a statement. “This order stymies that growth.”

The ruling may stymie some growth, but perhaps not as much as some reports have suggested. The result could mean that state regulators are forced to address demand response, and some could find that the resource is a valuable part of the energy mix, as many states have already found. Even without regulatory oversight, some utilities are changing payments for demand response. Consolidated Edison, for instance, just doubled its payments because it changed its method for calculating the value of demand resources. 

“The issue being addressed here is a question of jurisdiction, and however that is ultimately resolved, EnerNOC is confident that demand response will continue to be a vital and important part of our nation's energy markets," Tim Healy, Chairman and CEO of EnerNOC, said in a statement.

Utilities that have mandates from their states to reduce peak demand, or which are looking to delay new generation, such as Oklahoma Gas & Electric, are not usually relying on Order 745 to entice customers to cut energy use.

As noted, many utilities use demand charges for commercial and industrial customers, and others are increasingly offering peak-time rebates or other pricing plans to get customers to shave electricity use.

As automation technologies -- from smart thermostats to sophisticated battery systems -- proliferate, the landscape for demand management will change in ways that go far beyond Order 745. Even David Crane, CEO of NRG Energy, a member of EPSA, sees the writing on the wall for making money from peak hours.

“As demand flattens,” Crane said at the ARPA-E Energy Summit in February, “we’re going to stop making money, and that sucks.”