Navigant Research Blog

U.S. Supreme Court Brings Closure to FERC Order 745 Saga

— January 26, 2016

Control panelThis is a bittersweet moment. The Federal Energy Regulatory Commission’s (FERC) Order 745 legal case has provided me with consistent blog fodder for the past year and a half, ever since the U.S. Court of Appeals overturned the order in May 2014. Every few months, I could count on a new development and twist in the plot to pontificate upon. Now, the end has come.

On January 25, the U.S. Supreme Court reversed the lower court’s decision on both parts of the case, meaning that demand response (DR) does fall under the FERC’s jurisdiction, and that the payment of the full locational marginal price (LMP) in the wholesale energy markets is just and reasonable. The DR community could not have asked for more, while the generators must acquiesce and learn to live with the competition.

After the Supreme Court hearing in October 2015, many pundits felt that the court was close to being split 4-4 (Justice Samuel Alito recused himself), which would have meant that the lower court’s ruling would stand. The final tally was 6-2 in favor of the FERC, with the swing vote of Justice Anthony Kennedy and the somewhat surprise vote of Chief Justice John Roberts going to the majority side. Chief Justice Roberts had some harsh questions for the FERC in the hearing, but perhaps he was just trying to make sure there weren’t any holes in his mind.

Status Quo

So what does all this mean? In reality, this decision just ensures the continuation of the status quo, since all the regional transmission organizations (RTO) under the FERC’s jurisdiction have been operating under the existing rules all along. There was much more downside risk to the alternative outcome than upside to this conclusion. DR has had little participation in the day-ahead and real-time energy markets lately, mostly due to historically low natural gas and electricity prices. In the capacity markets, resource performance requirements have become more stringent in many regions, so DR will likely struggle to see significant growth. This was really just a defensive battle for DR rather than an effort to gain more ground in the markets. However, the California Independent System Operator (CAISO) is in the midst of major enhancements to DR participation, so that is one area with growth potential.

Industry Reactions

How did the industry players react? PJM, which runs the largest DR market in the world, stated that “Although PJM will have to study the court’s decision, the ruling supports the continued participation of demand response in competitive wholesale markets. We’re pleased with that outcome. Certainty and continuity are important in markets. Demand response brings value to competitive wholesale markets and is a component of electric system reliability.”

In an interview, David Brewster, president of EnerNOC, said that there were no wild celebrations in the office after the decision was made, just a lot of high fives and sighs of relief that a major distraction of the past 2 years was over. The company had playbooks ready for whatever scenario prevailed, but this was definitely Plan A, rather than having to go state-by-state to develop new DR programs. Brewster wouldn’t say how much EnerNOC spent to fight this legal battle, but it hired one of the top lawyers in the field to represent it and had a monumental internal team effort to support the case every step of the way. The stock market liked the outcome as well, as EnerNOC’s stock jumped almost 70% on the day of the ruling (although it has come back down somewhat from that high).

In a statement to me, CPower’s Chief Sales and Marketing Officer Chris Cantone said “We are very happy to see the Supreme Court decision to uphold FERC 745. It is a clear reflection that demand response is a valuable and cost-effective resource keeping the energy market competitive and fair. We were privileged to participate in the arguments in this case and to help our customers continue their participation in DR and allow their communities to see the benefits of their efforts.”

“We are pleased the Supreme Court ruled in favor to allow FERC Order 745 to remain in place, thus securing the true value of demand response within wholesale energy markets,” said Terrill Laughton, Vice President and General Manager of Integrated Demand Resources for Johnson Controls. “This outcome ensures that demand-side assets can contribute to both the competitiveness of energy markets and enhance the reliability of the nation’s electrical grid.”

Now that the extraordinary saga that brought DR to the legal forefront is over, it can now return to obscurity, buried deep in the RTO’s market rules. I guess I’ll have to turn my attention to something more mundane this year—perhaps how the presidential election will affect the energy industry.


CES Lessons for Utilities from the Auto Industry

— January 12, 2016

CarsharingstandortI read a lot of news from the Consumer Electronics Show (CES) in Las Vegas last week about automakers embracing disruptive technologies like ridesharing and hailing, self-driving cars, and digital applications in vehicles. For instance, General Motors (GM) announced a $500 million investment in Lyft, Uber’s little sibling in the ride-hailing space. Some analysts wondered why a behemoth like GM would make such a move in a space that could ultimately eat into its sales. I doubt the company would invest that much just to try to ultimately torpedo the trend, so GM must feel like it’s better to be a part of the change in the industry than to fight it. Utilities should take notice.

Parallels at Play

There are a number of parallels between the utility and auto industries and the types of disruptions they are facing. Both sectors started over 100 years ago and enjoyed ever-rising demand for their products until the last few years, when, due to economic and technical reasons, demand growth has slowed and even stopped or declined in some localities. Daniel Ammann, president of GM, said “We think there’s going to be more change in the world of mobility in the next 5 years than there has been in the last 50. From a GM perspective, we view this as much more of an opportunity than a threat.” The same could likely be said for the energy industry.

Ford announced a partnership with Amazon to include the online retailer’s Alexa speech-control technology in Ford’s Sync vehicle voice control system. This would allow a driver to remotely communicate with his home, turning up the heat or opening the garage door. Ford has also started its own pilot ridesharing program, in which owners of Ford vehicles can rent their cars out for short periods to preapproved drivers. Ford CEO Mark Fields said his company was moving to become “an auto and mobility company.” Instead of just making cars, he said, Ford plans to offer transportation services for a generation of customers who may prefer to borrow vehicles rather than own them. “Those two companies (GM and Ford) are signaling that they understand that it’s not about moving metal anymore,” said Frank Gillett, an automotive technology analyst for Forrester Research. “It’s about having an ongoing relationship with the customer.” Ring a bell?

Alexa could be compared to devices like smart thermostats, which allow remote control of energy usage. Ridesharing is similar to community solar programs, where multiple people pool their funds together to share a common resource rather than everyone buying their own. Autonomous vehicles are analogous in some ways to energy storage, where consumers can start to be energy self-sufficient and let software automatically balance and optimize their usage of the energy highway.

Navigant just launched a new Utility Technology Disruption Report series to explore these and other trends that will affect the traditional utility business model. Change is never easy, but if the auto industry is a portent, it may be better to embrace change than wait to be left in the rear-view mirror.


Bridging the BYOT Gap

— January 6, 2016

As 2016 begins, we are thinking about improving utility business models, including new ways to engage customers and take advantage of the developing trends in energy usage and resource transformations. To that end, Navigant Research is unveiling a new research service called the Utility Technology Disruption Report series. The intent of this new service is to look at emerging concepts that provide both threats and opportunities for utility executives to be aware of and to address either from a defensive posture or from an aggressive position.

The first installment in the series focuses on Bring Your Own Thermostat (BYOT) demand response (DR) programs. The residential DR program model of offering one thermostat model to customers is not sustainable due to ongoing technology advancements and the integration of more software with the hardware. Today’s consumers want more choice in how they participate in DR programs and what devices they use to participate with the features that they desire.

BYOT can be less expensive than traditional direct install DR programs by lowering customer acquisition and device incentive costs. It can also increase energy efficiency program participation, enable dynamic pricing adoption, and engender greater customer engagement and satisfaction. However, BYOT gives less operational control of DR resources to the utility, so control room operators must get comfortable with dispatching it. Furthermore, new DR program management processes and systems will be required in order to optimize new program designs and minimize customer complaints, avoiding the disruption of existing program offerings and any negative repercussions.

Pilots Underway

BYOT projects are in the pilot phase right now at utilities like Con Edison and Austin Energy and are expected to be ready for larger deployments in the near future after initial evaluation results are known. Approximately 50,000 U.S. customers are presently engaged in BYOT programs, representing an estimated $12.5 million market. However, BYOT customers present a potential target market of about $1.4 billion and could reach 10% of the residential DR market over the next several years.

In order to promote the release of this new report series and to dive deeper into the BYOT concept, Navigant Research will host a free webinar on January 19 at 2:00 EST. I will be joined by two other Navigant experts on DR and consumer trends: Stuart Schare, Managing Director, will discuss how BYOT fits into a utility’s DR program portfolio; and Neil Strother, Principal Research Analyst, will explain how the expansion of the Internet of Things (IoT) plays into electricity customer engagement.

Navigant Research is excited to announce this new service offering and looks forward to providing more value to utilities as they explore new growth opportunities in 2016 and beyond.


A New Era of Demand Response

— November 9, 2015

Tightrope_webWhat does the future of demand response (DR) look like? Hawaii is now a test bed, guinea pig, and innovator, as you can hear during a free 30-minute discussion this Thursday.

The amount of DR capability in North America has grown considerably in the past 5 years, both at utilities and within competitive markets such as PJM. However, DR technologies and policies have generally relegated DR to a minor role as a last-called resource. DR has typically been slower to respond than combustion turbines, and the load relief it provides has been difficult to assess precisely (if at all) in the real-time operating environment in which control center staff operate. Furthermore, regulatory policies in support of DR have generally focused on the magnitude of megawatts achieved at the expense of the quality and usefulness of those megawatts. However, slowly but surely, this trend is changing.

The use of DR in grid planning and operations has solidified as utilities increasingly rely on DR to meet installed capacity requirements and sometimes even operating reserve requirements. Furthermore, independent system operators led by PJM have incorporated DR into procurement mechanisms for capacity, energy, and ancillary services. Industry acceptance of DR as an integral part of the future grid continues to grow, with states like California and New York rolling out major regulatory initiatives and utility Hawaiian Electric issuing a request for proposals to DR aggregators for the provision of grid services, including ancillary services, from demand-side resources. So which technologies and policies will drive DR into the future as a more integrated and valued resource?

The Peak Load Management Alliance (PLMA) is hosting a free webinar on November 12 at 12:30 EST to highlight the significant regulatory and utility strategy initiatives taking place in Hawaii, where massive customer investment in behind-the-meter PV is encouraging Hawaiian Electric to develop innovative uses for DR to help manage the grid in real time. This could be the future for many utilities that are only now seeing the first effects of customer investment in renewables, storage, and other distributed energy resources.

This is a follow-on discussion from a Power Engineering article by Navigant regarding how a new era of DR is blurring the lines between generation and demand-side resources in Hawaii and elsewhere. The article covered some of the emerging DR technologies that are allowing DR to be viewed more on par with generators and reviewed new applications that are raising DR’s prominence as a valued resource alternative for utilities and system operators. Looking ahead, emerging state policies and utility initiatives are driving DR to a heightened prominence that would have been difficult to envision just 5 years ago.


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