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Electricity: The impact of demand side management on wholesale electricity markets

By Matthew Rose, Enerdynamics Instructor

The debate over the impact of demand response and energy efficiency in the wholesale power markets remains active. On the surface, there is an intuitive belief that if we better manage and even reduce demand, especially at the higher-cost peak periods, then the market will benefit from lower wholesale prices.

An initial effort to demonstrate this idea was attempted in 2007 when the Brattle Group conducted a research study designed to quantify demand response benefits in PJM [1]. The results indicate that a 3% reduction of demand during peak periods translates to wholesale price reductions of 5% to 8% on average, with reductions even greater in some regions within PJM. The study has been held up by policymakers as reason to advance demand side management (DSM) options for customers.


The Federal Energy Regulatory Commission (FERC) has been a strong proponent of advancing DSM as a resource in the wholesale market. FERC has consistently ruled to position DSM as a wholesale market resource competing on a “level playing field” with supply options. A quick scan of the formal ISO/RTO operations indicates a growing number of ISO/RTO-facilitated markets open to DSM resources addressing energy, capacity, and ancillary services opportunities.

DSM programs on the rise
As evidence, throughout the organized wholesale markets there are active programs to include price-responsive demand response and energy efficiency in ISO/RTO markets. Customers, either directly or through a third-party agent (e.g. curtailment service provider), routinely bid customer demand response reductions in the relevant markets to compete through the auction process. If the customer resources are “cleared,” then customers must reduce their loads as bid, similar to conventional supply resources. According to some of the latest data, the role of demand response in ISO/RTO operations remains very strong. The demand response potential at the ISO/RTO level increased 16% between 2009 and 2010. This trend seems to be continuing today.


Demand Response Resource Potential at U.S. ISOs and RTOs


2009 MW

Percent of 2009 Peak Demand

2010 MW

Percent of 2010 Peak Demand

California ISO





Electric Reliability Council of Texas





ISO New England





Midwest ISO










PJM Interconnection





Southwest Power Pool










     2011 Assessment of Demand Response and Advanced Metering
Staff Report-Federal Energy Regulatory
     Commission-November 2011

Measuring DSM’s impact on wholesale prices
The use of demand response including price-responsive demand reduction, direct load control, displacement through on-site generation or active building controls remains a viable resource option in dispatching operations in wholesale power markets. What remains cloudy in these transactions is the direct and explicit impact these efforts have on wholesale prices.

There is general consensus that strategic demand response and even energy efficiency resources result in lower wholesale prices. However, there are still questions about how much, how long, and any variations across regions and locations. There seems to be greater attention on quantifying the benefits and costs of DSM as a resource option including proposed efforts in the Commonwealth of Pennsylvania where distribution utilities are required to reduce demand in their territories by 4.5% for the 100 hottest hours this coming summer. The plan calls for a formal analysis of the demand response efforts and determination of their impacts on ISO/RTO operations and wholesale prices [2].

Energy efficiency in forward capacity markets
One of the recent initiatives in some of the ISOs/RTOs has been the inclusion of energy efficiency as a resource in the forward capacity markets. Energy efficiency differs from demand response as it provides a measurable decrease in consumption over the course of a year rather than just a reduction in consumption for selected hours in a given year. A large commercial or industrial establishment could presumably invest in energy efficiency improvements and bid the savings from the project as a resource in the capacity market. This poses a whole new set of issues for the system operators who are most interested in making sure the capacity reductions are measurable and persistent over the course of a given year in the future.

This opportunity has been in place at ISO-New England for a number of years and became a formal element in the full forward capacity market in 2010. PJM also has offered opportunities for energy efficiency projects and demand response resources to bid into its forward capacity market (i.e. Reliability Pricing Model). In combination with the growth of DSM throughout the PJM region as a result of state mandates, the sample of projects continues to grow. In fact, the most recent PJM Base Residual Auction for its capacity market yielded large increases in DSM projects as part of the pool of resources.  The most recent results follow:


New Generation


Demand Response

Energy Efficiency

2015/2016 Auction





2014/2015 Auction





           PJM: 2015-16 Base Residual Auction Results, PJM Docs #699093, May 2012.

Where all this leads is not entirely certain, but there are signals as to where things are moving directionally.  It appears that the FERC continues to advance DSM in the ISO/RTO wholesale markets.  Additionally, with the growth of advanced meters and alternative rate options being offered at the wholesale and the retail levels, customers will be offered greater opportunity and incentive to participate. Though regional variations will remain, wholesale cost impacts will differ, and year-to-year participation levels will be difficult to predict, the impact of DSM is real and likely to expand moving forward.


[1] Quantifying Demand Response Benefits in PJM, The Brattle Group, Prepared for PJM Interconnection, LLC and the Mid-Atlantic Distributed Resources Initiative (MADRI), January 29, 2007.

[2] The general discussion of the demand reduction requirements are included in Pennsylvania House Bill 2200-Act 129 as passed by the General Assembly in 2008.

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