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FERC Orders Payment of Full LMP for Demand Resources When Net Benefits Exist
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March 16, 2011
FERC issued an order yesterday directing that demand response providers be paid the full Locational Marginal Price when such payment is "cost effective" based on a net benefits test (RM10-17).
FERC agreed that the so-called "billing unit effect" associated with dispatch of a demand response resource in an energy market must be taken into account in compensating demand resources. In short, because the use of demand response reduces the load which is paying the market price for energy, selection of the demand response resource increases the total cost per unit to remaining load, and thus it would not be cost-effective to dispatch the demand response resource, even when the resource otherwise appears cost competitive in the dispatch order.
A net benefits test shall determine whether the reduced LMP that results from dispatching demand response resources exceeds the cost of dispatching those resources. Where net benefits exist, the full LMP shall be paid to demand response.
Noting that some RTOs have expressed cost concerns with altering their dispatch models to include a net benefits test, FERC initially directed each RTO to undertake an analysis, on a monthly basis based on historical data and the RTO's previous year's supply curve, to identify a price threshold to estimate when customer net benefits would occur. The RTO should determine the threshold price corresponding to the point along the supply stack for each month beyond which the benefit to load from the reduced LMP resulting from dispatching demand response resources exceeds the increased cost to load associated with the billing unit effect, and update the calculation monthly.
RTOs shall also study a dynamic approach to determine when paying demand response resources the LMP results in net benefits to customers, which would integrate the billing unit effect into the RTO's dispatch algorithms.
"[E]ach RTO and ISO allocate the costs associated with demand response compensation proportionally to all entities that purchase from the relevant energy market in the area(s) where the demand response reduces the market price for energy at the time when the demand response resource is committed or dispatched," FERC said.
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