Supreme court and electricity, what's the big deal? An intro to the electrical grid, demand response, and the highest court's opinion.

You may have heard about the Supreme Court making a ruling which greatly benefits demand response providers.  It's a very interesting issue, so here's a bit more information.  I'll start with a little background.

Here is a link to the text of the ruling.  It is an interesting read, and incredibly well written.

Background on the grid

The amount of electricity that is consumed has to be met by the power generators; as more power is used, more must be generated.  When the demand for electricity is at a minimum, it is known as base load, and this is the cheapest power to produce.  As the electrical demand increases, more generators must be turned on, and the electricity they produce is more expensive.  When electrical demand is at its highest in the middle of the day, it is known as peak demand.  Generating electricity for peak demand is the most expensive.

To meet peek demand, power plants must be built which can meet the required load, even though they may be rarely used.  This is most common during heat waves in the summer, nonetheless, the station must be built even if it only used a day in a year.  This is one of the reasons peak electricity is expensive.

The issues with matching electrical supply to demand become a bit more complicated when considering renewable technologies.  Unfortunately solar and wind power do not turn on when needed, as a natural gas turbine will.  This makes the problem a bit more tricky, and makes peak demand even more challenging to predict.  Because of this, real time energy monitoring and reduction is an important strategy.

Demand Response

What it is

Since peak demand is so expensive, it seems logical to think that if we could spread out our energy usage more smoothly over the day, we could make it cheaper.  That is the idea for demand response.  From the standpoint of the energy distribution utilities, there are really three options to deal with peak demand.

(1 ) Expensive electricity can be purchased from the suppliers.
(2) Store energy during off peak times and use it during on peak times (smart grids).
(3) Work with consumers to help lower peak demand (demand response).

Currently smart grids can only provide for a small portion of peak electrical needs, so in reality it is a combination of options 1 and 3 (demand response and expensive electricity).

How it works

Demand response plans are carried out on a case-by-case basis.  Every business has a different strategy that is tailor made to suit their needs, while making sure business demands are met.  A hotel may turn off some ice machines, as well as waiting to run dishwashers and clothes dryers.  There are various steps all sorts of businesses can make, and having the real time energy monitoring is the key.

Economics of demand response

To the consumer
The economics of supply and demand do not work with retail electricity in the same way they do with other commodities.  In most markets there is a clear correlation between available supply and demand.  With consumer electricity usage is generally billed with a constant price with different values for peak and off peak usage, which is determined by the time of day.  This model insulates the consumer from the true cost of the electricity.

Demand response is a way of creating more incentive for the consumer to shift their energy consumption away from peak load in real time.  This saves money for both the consumer and electrical utility company, and also aides in stabilizing the balance between supply and demand in the grid.
 
To the utility
When the utility purchases power, the pricing scheme is a bit unusual.  It was explained with great eloquence in the ruling, but I will paraphrase.  When a local utility buys power from a producer, every producer receives the highest bid.  Take an example in the morning on a hot day where a power company receives two bids, which when combined will supply the current power requirements.  The first bid is $30/unit, and the second is $50/unit.  The local utility will then pay $50/unit to both producers.  Then later on this day, the heat spikes and everybody is using air conditioning.  The utility will then have to buy more power at a high rate.  To meet demand the producer has to pay $80/unit for this energy.  Because of the way the pricing works, the utility now has to pay $80/unit for all of the power they are consuming.  This inelasticity in the market adds to instability in the electrical grid.

This strange pricing scheme makes it even more important for the utilities to incentivize reducing load during peak demand.  That is one reason why demand response is a big deal.  Electrical utilities will pay for demand response in the same way they would pay for a bid for power from a producer.  Because of the steep markup on purchasing peak power, it is cheaper for the utility to pay for demand response.  Demand response is considered virtual power because it is effectively the same as more power generation.  So instead of paying for traditional power, utilities will purchase virtual power, essentially paying for electrical reduction.  By doing so, this process creates some level of elasticity in the market

Now the case

These are the parties involved
 
 This case was Federal Energy Regulatory Commission (FERC) v. Electric Power Supply Association (EPSA)

FERC  is a commission in charge of wholesale and interstate power distribution, created by the Federal Power Act.
EPSA represents the companies which produce electricity.

In 2011 a rule was made by FERC which determined wholesale demand response savings should be equal to rates that are paid to companies for the electrical generation.  From the pricing structure the utilities use to purchase power, it is highly favorable for the suppliers to supply the peak load.  When the utilities are not purchasing the peak load, the suppliers are missing out on the highest price paycheck.  Demand response cuts directly into the bottom line.

Arguments

In short, EPSA argued  that FERC overstepped their bounds when they made the rule.  FERC only has jurisdiction in the wholesale market.  It was argued that the rule set in place was illegal on the bounds that it created a retail market, which are regulated to the states.

This case is brought before the Supreme Court, after a D.C. Circuit court ruled in favor of EPSA.  They determined that demand response should be relegated to the states.  The case was appealed, then brought to the nation's highest court and accepted.

Decision

In a 6-2 decision, the court ruled in favor of EPSA.  The court ruled that the regulations set forth by FERC did not directly affect retail rates.  It was discussed how retail rates would be indirectly effected, as they would in any market when wholesale rates changed.  It was stated that not allowing FERC to enact such regulations would be in direct conflict of the Federal Power Act, in which Congress gave power to FERC to make these decisions.

Conclusions

This was a very important case, which will help ensure the viability of demand response programs and providers.  We are now one step closer to having these programs become common in households, empowering families to take advantage of savings, and continually help stabilize the grid.  With the clear energy savings it is only a matter of time until these techniques are brought to the mainstream.  As intermittent renewable energy becomes more widespread, demand response will help ensure the grid is stabilized so that we can maximize our renewable energy production, and continue the trend to rid the need for fossil fuels.