The U.S. Supreme Court’s review of a federal rule requiring compensation for those who cut electricity consumption carries major stakes for California and its ambitious climate goals.
The Federal Energy Regulatory Commission’s Order 745 tells grid managers that during periods of peak demand, they must pay those reducing power use the same rate as energy generators. The high court, weighing in on a lawsuit filed by power sellers, will decide whether FERC had the authority to order the mandate.
The Golden State, meanwhile, is attempting to beef up electricity conservation or "demand response" as part of its multifaceted effort to limit climate change. California just enacted S.B. 350, a law requiring the biggest utilities to generate half their power from renewable sources by 2030. California separately has the country’s most ambitious targets for cutting greenhouse gas emissions.
Those policies mean the state will increasingly rely on energy from non-fossil fuels, including demand response, energy experts said.
If the Supreme Court upholds an appellate court’s decision to throw out FERC Order 745, it could significantly hurt California’s climate efforts, former FERC Chairman Jon Wellinghoff said. As an attorney, he now represents EnerNOC, which sells demand response, and has clients selling energy storage.
"If S.B. 350 is actually going to succeed and get 50 percent renewables, demand response is going to be a key component of that, to ensure that those renewables are cost-effectively and reliably integrated into the grid," Wellinghoff said. Squashing the FERC rule, he added, "will severely restrict the ability of demand response in California" and other places "from getting paid its real value."
That will discourage companies from pursuing demand response efforts, he said.
"California will have a very difficult and expensive time in trying to get to its renewables" mandate, Wellinghoff added.
The case came to the high court after grid operators and power providers, represented by the Electric Power Supply Association (EPSA), the American Public Power Association and others, challenged FERC’s Order 745 last year. They argued that demand response can affect retail prices and that FERC only oversees the wholesale market.
The U.S. Court of Appeals for the District of Columbia Circuit agreed and threw out the regulation, saying FERC overstepped its authority. The Supreme Court heard oral arguments in the case Oct. 14 (Greenwire, Oct. 14).
"FERC’s attempt to regulate retail customers’ consumption decisions is foreclosed by the plain language of the Federal Power Act," attorneys representing EPSA said in a brief filed with the Supreme Court. "Congress prohibited FERC from regulating retail sales, and FERC cannot overcome that statutory bar through the expedient of labeling payments made to retail customers to forgo retail purchases a ‘practice’ that ‘affects’ wholesale rates."
EPSA members include power generators that sell in California.
‘Indispensable to grid operators’
Both the California Public Utilities Commission (CPUC) and the state’s grid manager, the California Independent System Operator (California ISO), filed briefs with the Supreme Court in support of FERC overseeing demand response, although the ISO noted that it has some issues with FERC’s Order 745.
Demand response in California for years had been done mostly through contracts with utilities, a process not controlled by FERC rules. It’s been growing recently as part of the wholesale market. The Golden State’s grid manager, to boost levels of demand response, earlier this year approved letting companies aggregate sources to reach the minimum 500 kilowatts of power that the ISO requires.
"Demand-response programs encourage users to limit their electricity consumption when the grid would otherwise have to turn to more costly generating stations in order to meet the current demand, or else curtail the demand involuntarily," the ISO said in its brief.
The CPUC wrote that demand response "provides a critical competitive presence in FERC’s wholesale markets, limiting market power and lowering prices to end-use customers by billions of dollars."
It also contributes to grid reliability, helps balance supply and demand at critical times, and proved "indispensable to grid operation in several recent weather emergencies," the CPUC said.
"Finally, demand response contributes to state policy goals by serving as a substitute for high-cost and emissions-producing peak generators and enabling states to reduce their energy consumption," the agency said. It added that "nationwide, the removal of demand response from all [regional transmission organization] capacity auctions would be staggering."
James Bushnell, associate professor of economics at the University of California, Davis, disagreed that eliminating FERC’s order would hamper California’s climate efforts. He was one of several economists who signed an amicus brief in support of overturning the federal mandate.
"It is true that real and cost-effective demand response can be a very useful tool in handling all sorts of sources of variation in grid supply and demand — including those caused by renewable generation," Bushnell said in an email. "However, FERC’s 745 initiative created the prospect of large amounts of expensive and non-performing demand that would be ‘response’ in name only."
Demand-response programs suffer from the same challenges that carbon offsets do, he added, in that it’s hard to measure whether the lack of consumption is additional.
"Killing 745 would not kill demand response, only a very flawed approach to achieving it," Bushnell added. "Hopefully we can move on to developing effective ways to achieve truly cost-effective and real demand response."
Partner for renewable power
Making demand response financially attractive is needed as California looks for ways to deal with the intermittency of renewable power, said Steven Weissman, lecturer at the University of California, Berkeley’s Goldman School of Public Policy. The traditional method to cope with downtimes for green energy has been to run natural gas "peaker plants" that can ramp up and down quickly, he said.
"The problem with that is in the long run, we cannot meet greenhouse gas reduction goals and rely on natural gas generation," Weissman said. "The two things are not compatible."
California seeks to cut greenhouse gas emissions to 1990 levels by 2020 and 80 percent below 1990 levels by 2050.
California ISO has tried to deal with renewable intermittency through an "energy imbalance market." Renewables across the state are used to back up drop-offs from other renewables, with adjustments made on a five-minute basis.
But that’s only going to accomplish part of what needs to be done, Weissman said.
"The policy directive has to be that renewables have to be supportive by means other than fossil fuels," he said.
That means working to shape the load, he said, to lower peaks and shift demand to places where it’s lowest.
"You have to really rethink the process of managing the grid in order to be able to accommodate a high level of renewables without relying on fossil fuels," Weissman said. "Demand response, time-differentiated rates, these are all extremely important factors."
Demand response works with renewable power, Wellinghoff said, by motivating people to use power when the sun is shining or the wind is blowing and cut back when those aren’t available.
A person could pre-cool his or her building from 2 to 6 a.m. when there’s wind power, he said, then not have to run air conditioning as much during the day. Or, he said, when the air conditioner goes on, an ice maker in a home can be programmed to go off.
Other distributed power at risk?
Wellinghoff said the appellate court decision was very broad. If the Supreme Court upholds that ruling, he said, it will open the door for power sellers to challenge other parts of the power market that to the grid look like demand response. Those includes energy storage or even use of locally based wind or solar power, he said.
"Demand response is no different than a battery on a solar system on your house," Wellinghoff said. "Those things to the grid, to the other side of the meter, to the Cal ISO all look the same, depending on what they’re doing. … They’re taking away load in some way."
Ted Ko, director of policy at Stem Inc., a Millbrae, Calif.-based company that sells energy storage, said there are two categories of Supreme Court rulings that would be negative. In the one that’s less severe, the court would order FERC to rewrite its rule.
"That’s actually not horrible," Ko said. "It still allows resources like ours to participate in the wholesale market. It just says FERC can’t set the pricing."
Depending on what the court said in its decision, states could then craft their own rules, he said.
Former FERC Chairman Wellinghoff, however, said the California grid manager cannot craft its own demand response rules for the wholesale market, because it’s interstate and therefore controlled by FERC.
If there were a broad rebuff of the rule, Ko said, that could potentially affect storage, rooftop solar and other energy sources that are a growing part of California’s energy mix.
"Even in that worst-case scenario, we in our business model, what we’ve been doing, we still have several paths forward for lucrative business models," Ko said.
One of those is to contract with the utilities for energy storage with demand response. Stem already has an 85-megawatt storage contract with Southern California Edison Co.
But storage and demand response providers working with just utilities is not ideal for California, he said, because "the S.B. 350 targets are statewide targets, throughout the whole system." As such, he said, they have the potential to cause issues that the wholesale market is trying to address by seeking different kinds of backup energy sources.
The other path Stem is looking at, Ko said, is what’s happening in New York. The Empire State is considering starting a distribution system provider, which would act as a grid manager but at the distribution level. Because the distribution grid does not cross state boundaries, it would not be regulated by FERC.
However, Ko said, "California’s not there yet" in looking at launching a distribution system provider.