Electricity Markets:

Consumers Could Benefit from Demand Programs, but Challenges Remain

GAO-04-844: Published: Aug 13, 2004. Publicly Released: Sep 13, 2004.

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The efficient and reliable functioning of the more than $200 billion electric industry is vital to the lives of all Americans. As demonstrated in the 2003 black- out in the Northeast and the 2001 energy crisis in the West, changes in the cost and availability of electricity can have significant impacts on consumers and the national economy. The Federal Energy Regulatory Commission (FERC) supports using demand-response programs as part of its effort to develop and oversee competitive electricity markets. GAO was asked to identify (1) the types of demand-response programs currently in use, (2) the benefits of these programs, (3) the barriers to their introduction and expansion, and (4) instances where barriers have been overcome. Additionally, GAO examined the federal government's participation in these programs through the General Services Administration (GSA).

There are two general types of electricity demand-response programs in use: (1) market-based pricing programs enable customers to respond to changing electricity prices and (2) reliability-driven programs allow either the customer or the grid operator to adjust electricity usage when supplies are scarce or system reliability is a concern. The federal government's GSA participates in both types of programs. Demand-response programs benefit customers by improving the functioning of markets and enhancing the reliability of the electricity system. Some recent studies show that demand-response programs have saved customers millions of dollars and could save billions of dollars more. The GSA--as only one example of federal involvement in these programs--has reported saving about $1.9 million through the participation of only a few of its buildings in demand-response programs during the past 5 years. However, GAO estimates that GSA could potentially save millions of dollars more with broader participation in these programs. While benefits from demand-response are potentially large, three main barriers limit their introduction and expansion: (1) state regulations that shield consumers from price fluctuations, (2) a lack of equipment at customers' locations, and (3) customers' limited awareness about the programs and their benefits. Regarding prices, customers do not respond to price fluctuations because the retail prices they see do not reflect market conditions but are generally set by state regulations or laws. In addition, in recent years, moderate weather conditions and other factors have kept overall electricity prices low, reducing the benefits of participating in these programs. According to GSA, its participation in demand-response programs has been limited because it lacks specific guidance on participation and tenants have little incentive to reduce their consumption since current leases do not provide a way to share in the savings that might occur. Two demand-response programs that GAO reviewed illustrate how the barriers GAO identified were overcome and also point out lessons on how to cultivate new programs. Lessons learned include the necessity to provide sufficient incentives to make participation worthwhile, working with receptive state regulators and market participants to develop programs, and designing programs to include appropriate outreach materials, necessary equipment, and easy participation. In commenting on the report, FERC and GSA agreed in general with the report's conclusions and recommendations, but GSA expressed concern about one recommendation to share potential savings with its tenants.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: Because demand-response programs offer potential financial benefits to the federal government and to demonstrate the federal government's commitment to improving the functioning of electricity markets, the Administrator of the General Services Administration should, for locations where it has significant energy consumption, require (1) guidance on specific measures that building operators can take to respond to market-based programs, similar to the guidance that they provide for responding to emergencies and (2) training on evaluating how to maximize benefits from participation in these programs.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: To meet GAO's recommendation GSA developed a demand response and energy curtailment desk guide, similar to the guide GSA uses for emergency situations. This guide is intended to explain and encourage the use of available demand response programs for reducing electricity costs and the importance of using these programs. In addition GSA sent out a list of all available demand response programs by state and utility nationwide. During their annual center for energy workshop, GSA included training in demand response and provided the demand response guide to all participants as well as other demand response guidance. All of these actions met GAO's recommendation. (RDJ 08/18/08.)

    Recommendation: Because demand-response programs offer potential financial benefits to the federal government and to demonstrate the federal government's commitment to improving the functioning of electricity markets, the Administrator of the General Services Administration should, for locations where it has significant energy consumption, develop guidance that clearly articulates to the regional offices that participation in demand-response programs should be considered as part of the energy decisions that they make.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: In 2005 GSA sent a list of all available demand response programs available nationally to their regional energy managers. They also instructed them to evaluate the benefits versus risks of participating in available demand response programs. GSA sent clear guidance that demand response programs be considered as part of all energy decisions. In addition GSA instructed and the Chief Architect revised Public Service Bulletin P 100 that new construction and modernization projects should include demand response technology with smart meters that can be activated in the buildings. These actions all met GAO's recommendation. (RDJ 08/18/08)

    Recommendation: Because demand-response programs offer potential financial benefits to the federal government and to demonstrate the federal government's commitment to improving the functioning of electricity markets, the Administrator of the General Services Administration should, for locations where it has significant energy consumption, require regional energy managers to identify what demand-response programs are available to them, require building operators to determine whether they could actively participate in the programs, and quantify the benefits of that participation.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: In 2005 GSA sent a list of all available demand response programs available nationally to their regional energy managers. They also instructed them to evaluate the benefits versus risks of participating in available demand response programs. GSA also sent examples of programs that might lower the risk and could be used. GSA noted for all building managers that GSA on an individual basis would estimate the benefits of participation upon request. These actions all meet GAO's recommendations. (RDJ 08/18/08)

    Recommendation: In implementing these recommendations, it is important that the Commission continue working with system operators, regional entities, and interested state commissions, and market participants to develop compatible regional market rules and policies regarding demand-response. FERC should use these outreach efforts to identify regions of the country where demand-response programs are most urgently needed and where grid operators, state regulatory officials, and market participants are amenable to the collaborative introduction of regionwide demand-response programs. As part of its efforts, FERC should also engage the Department of Energy in its examination of demand-response options and involve the department in its outreach efforts, thus leveraging its expertise in identifying cost-effective technologies and its relationships with state, industry, and consumer groups.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Closed - Implemented

    Comments: Over the last four years FERC has worked extensively on demand response policies with system operators, various regional entities, state commissions, market participants and the Department of Energy, as recommended in our report. In the fall of 2006 FERC initiated a collaborative with the National Association of Regulatory Commissioners (NARUC)to provide a forum for federal and state regulators to discuss demand response issues and explore coordination of wholesale and retail demand-response policies. FERC has worked directly with the various regional transmission organizations through various cases to implement more demand response. FERC has also held technical conferences in 2006, 2007 and 2008 providing opportunities for outreach, information sharing and discussion of demand response. In 2007 FERC created within the Office of Energy Market Regulation an Energy Innovation Sector (EIS)charged with fostering outreach in a number of areas including demand response As this office is key to getting the word out on demand response we consider that in 2007 FERC has met the key elements of this recommendation. FERC is working with DOE's Smart Grid Task Force to include the development and incorporation of demand response in markets through enabling technologies. FERC is also working with DOE to issue a joint report to Congress on demand response action plan. (RDJ 08/22/08.)

    Recommendation: Because the development of demand-response programs depends upon there being markets where these services can be sold, the Chairman of FERC should encourage, where reasonable, equal consideration of supply and demand when approving or changing market designs.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Closed - Implemented

    Comments: Current FERC policy promotes comparable treatment of demand resources in organized wholesale markets as recommended in our report. As noted in earlier recommendations implemented by FERC from our report, the agency issued Order 890 which requires regional transmission organizations to treat demand resources comparable to generation resources in procuring certain ancillary services. In regional planning demand resources are also to be considered on a comparable basis. In response, various regional transmission organizations have proposed and been granted approval by FERC for tariff changes when they have provided in their market design integration of demand resources in various aspects of their markets. FERC currently has a notice or proposed rulemaking up for final consideration that includes provisions for market procured services under which demand response would receive comparable treatment and enable third party demand response service providers to aggregate small demand response for wholesale market participation. Due to all of these actions FERC has met GAO's recommendation. Based on Order 890 as a key order passed in 2007 we consider this to be the date that this recommendation was met. (RDJ 08/22/08.)

    Recommendation: In reporting to Congress, the Chairman of FERC should identify the options that may have potentially large benefits and are cost-effective for achieving consumer response, as well as statutory or other impediments to putting these options into practice.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Closed - Implemented

    Comments: FERC has issued annual reports to Congress in 2006 and 2007 and is preparing its 2008 annual report that addresses the GAO recommendation on Demand Response. The 2006 report was based in part on a nationwide survey of demand response and automatic metering technologies deployed by utilities. The report addressed potential and realized benefits and discussed key barriers to achieving more. In addition, this report identified various types of barriers to expanded demand response. By providing Congress with these annual reports and noting benefits and barriers, FERC has met the requirements of implementing this recommendation. (RDJ 08/22/08)

    Recommendation: Because the lack of demand-response can result in wholesale prices that are not consistent with competitive outcomes and may not be "just and reasonable," the Chairman of the Federal Energy Regulatory Commission should consider the presence or absence of demand-response programs when: (1) determining whether to approve new market designs or approve changes to existing market designs, (2) considering whether to grant market-based rate authority, and (3) determining whether to allow some buyers to participate in wholesale markets. As part of this process, FERC should consider its authority to use this information in making decisions on these matters. If there is inadequate demand responsiveness and FERC determines that it has authority, it should not approve these designs, authorities, or participation until such time as there is some combination of price and/or reliability based demand-response to assure that prices will be just and reasonable. If FERC determines that its authority is not sufficient to take such action, it should seek this authority from Congress.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Closed - Implemented

    Comments: FERC has already taken a number of actions, and is currently undertaking additional actions, in response to the GAO recommendation. This is an ongoing process but can be closed because of the following key actions taken by FERC. First, FERC issued Order 890 in 2007 that requires regional transmission organizations to treat demand resources comparable to generation resources in procuring certain ancillary services. FERC has implemented this policy from Order 890 in over 40 cases. Second, in February 2008 FERC issued a proposed rulemaking to improve the use of demand response in RTO and ISO organized markets. This order is scheduled to be finalized in 2008. Third, in 2007 and 2008 FERC has taken specific actions in the following organized markets, Midwest, New York, California, Southwest, PJM and New England in considering use of demand response. For example in the Midwest market design approved by FERC provides for the integration of demand response resources into reserve markets and includes scarcity proving provisions that should encourage demand response to participate. In each of the proceedings FERC has evaluated how demand response can be effectively integrated into these markets. Due to these actions and ongoing activities, GAO believes that FERC has effectively met the requirements for implementing this recommendation. (RDJ 08/21/08.)

    Recommendation: Because demand-response programs offer potential financial benefits to the federal government and to demonstrate the federal government's commitment to improving the functioning of electricity markets, the Administrator of the General Services Administration should, for locations where it has significant energy consumption, clarify the incentives for participation by defining how the GSA, its building operators, and its federal agency tenants will share the benefits and risks of participating in these programs through its leases.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: GSA provided clarification for participation in their demand response programs by informing regional directors and building owners the risks and benefits of the programs. Because for many leases the cost of utilities is included in the lease, GSA has emphasized energy efficiency in its leases and solicited offers for efficient windows, daylight dimming and lighting controls. GSA has encouraged lessors to include shared savings as a result of energy upgrades. Additional energy efficiency saves electricity and makes use of demand response less necessary. By informing lessors of the risks and benefits of both energy efficiency and demand response programs, GSA allows the lessor the opportunity to achieve more cost effective leases by agreeing to these activities. (08/21/08.)

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