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Janet Gail Besser, Vice President, Lexecon Boston, MA March 24, 2001

Building a Sustainable Demand Response in New England: The Theory and Policy Framework for the Massachusetts Electric Restructuring Roundtable. Janet Gail Besser, Vice President, Lexecon Boston, MA March 24, 2001. TODAY’S “HOT” ISSUES. Reliability Electricity Prices Competition.

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Janet Gail Besser, Vice President, Lexecon Boston, MA March 24, 2001

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  1. Building a Sustainable Demand Response in New England: The Theory and Policy Frameworkfor the Massachusetts Electric Restructuring Roundtable Janet Gail Besser, Vice President, Lexecon Boston, MA March 24, 2001

  2. TODAY’S “HOT” ISSUES • Reliability • Electricity Prices • Competition

  3. SEARCHING FOR SOLUTIONS • Additional Capacity • Price Regulation • Monitoring and Mitigating Market Power • Load Response

  4. THE VALUE OF LOAD RESPONSE • Enhances reliability by providing equivalent of additional megawatts • at peak times • all the time • Moderates electricity prices • Reduces costs for responding load • “System benefits” • Provides the demand response needed to equilibrate the supply/demand balance

  5. LOAD RESPONSE AND PRICE • The need for efficient price signals • The value of price-responsive load • Connecting wholesale and retail markets

  6. WHY EFFICIENT PRICE SIGNALS? • To protect system reliability, by properly reflecting its value • To induce efficient levels of investment in new capacity • To equip customers with accurate information so they can choose whether to consume or to limit demand

  7. IMPORTANCE OF PRICE SIGNALS • Customers who see only average or capped prices have no incentive to reduce demand when electricity prices are high. • Customers who can see spot prices have an incentive to provide demand side response (i.e., bids that give the amount of electricity to be purchased as a function of the price of electricity). • With demand side bidding, demand function for electricity becomes downward sloping (elasticity increases). As price increases, the quantity demanded declines. • The more elastic the demand curve, the less volatile electricity prices will be.

  8. WHO NEEDS TO SEE SPOT PRICES? • Some customers are very inflexible • less capability to reduce load • transaction costs (metering, real time communications) • time constrained usage • budget effects (cash flow and total budget level) • Others have more flexibility • productions processes that can be cancelled or rescheduled on short notice • back-up generation • Most efficient alternative: give customers choice whether to see spot prices

  9. LOAD RESPONSE CAN LIMIT PRICES • Load response limits prices by • creating demand-side sources of capacity • reducing scarcity • Voluntary load reduction will • be compensated (I.e., receive payment or pay lower rate) • free up capacity at price level less than “value of lost load” • Efficient price signals in spot markets are needed • to stimulate investment in demand-side capabilities • to signal customers who may choose not to consume

  10. PRICE EFFECT OF LOAD RESPONSE Simulated Price Spike Scenarios: An Example Source: Caves et al. Mitigating Price Spikes in Wholesale Markets. The Electricity Journal, April 2000.

  11. PRICE EFFECT OF LOAD RESPONSE What Does This Market Simulation Tell Us? • A mere 5% market share with a 0.1 elasticity of demand facing spot prices would have reduced $10,000 prices spike by almost 40%. • It is not even necessary that 5% of industry load be purchased at spot prices • Only need customers representing 5% of load to perceive marginal prices that are close to the wholesale spot price

  12. TOOLS TO ENHANCE LOAD RESPONSE • Advanced metering • Load management technologies • Flexible end-use technologies • Energy efficiency measures and technologies Technologies will become more widespread as opportunities for customer to see spot prices increase

  13. CONCLUSION Load response is needed • To enhance reliability • To moderate prices • To fill in the missing piece of the supply/demand equation BUT… • Load response is inhibited by reluctance to let customers see spot prices

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